Legal Insider: How the housing market can impact your security clearance

This is a sponsored column by attorneys John Berry and Kimberly Berry of Berry & Berry, PLLC, an employment and labor law firm located in Northern Virginia that specializes in federal employee, security clearance, retirement and private sector employee matters.

By Melissa L. Watkins, Esq.

Just recently in October 2022, the average long-term U.S. mortgage rate topped 7 percent for the first time in more than two decades, a result of the Federal Reserve’s aggressive rate hikes intended to tame inflation not seen in some 40 years.

It is anticipated that rates will continue to rise, at least through the early part of 2023. While the increase in mortgage rates has led to many individuals delaying the purchase of homes, some have opted to move forward with home purchases, accepting the higher rates. Unfortunately, with the housing market tightening in terms of inventory, home prices have not fallen commensurate with the increase in rates.

This means that buyers purchasing now are often accepting higher monthly payments than they would have been only a year or two ago. While the future is impossible to predict, some economic forecasts are suggesting that a housing market crash, or a broader recession, could be forthcoming. If this does happen, we could see homeowners forced into circumstances similar to those that were occurring in 2008 and the years thereafter, mainly foreclosures or short sales of their homes.

While there hasn’t been a significant jump in foreclosures to date, foreclosure starts have been on a steady quarterly rise since the federal government ended the Covid-19 foreclosure moratorium in September 2021. However, a key difference now compared to the last housing crisis is that many homeowners, and even those struggling to make payments, have had a large boost to their home values in recent years. That means they still have equity in their homes and are not underwater — when you owe more than the house is worth.

However, if home prices continue to decline, as has been the trend in recent months, homeowners could start to face a decline in home equity, bringing us back closer to the events taking place in 2008. One of the fastest ways to end up with a security clearance issue is have a significant, negative event take place with finances. In light of the uncertainty in the housing market, and economy more broadly, clearance holders should be cognizant of their options and how those options may impact their security clearance.

Foreclosure vs. Short Sale

If an individual gets behind on mortgage payments or if their mortgage is underwater (the home is worth less than the amount owed on the mortgage), homeowners have two primary options: a short sale or a foreclosure. The owner is forced to part with the home in both cases, but the timeline and other consequences are different in each situation. A short sale is a voluntary process. When the homeowner sells the property for an amount that is far less than what is owed on the mortgage, it is called a short sale.

For example, if a homeowner owes $300,000 on the mortgage, but a financial crisis forces them to sell the home quickly for $250,000 — the remaining amount on their mortgage ($50,000) plus any costs associated with the sale are still owed by the homeowner. A short sale requires the approval of the lender in advance, and generally, the approval comes with an agreement by the lender to forgive the remaining balance owed on the mortgage after the sale, but this is not required.

A foreclosure, on the other hand, is involuntary. In this case, the mortgage holder (the lender or the bank) takes legal action to seize the home after the borrower fails to make a specific number of monthly payments. In a foreclosure, the lender takes ownership of the mortgaged property and sells it to recover the amount owed to them on the mortgage. Another major difference between the two is the impact on one’s credit.

Generally, short sales are not significantly detrimental to a homeowner’s credit rating, while foreclosures are. A homeowner who has gone through a short sale may, with certain restrictions, be eligible to purchase another home fairly soon. A foreclosure, on the other hand, is kept on a person’s credit report for seven years.

How Does a Foreclosure or Short Sale Impact a Security Clearance

While both foreclosures and short sales can impact a security clearance, it is generally the case that a short sale is far less detrimental to a clearance holder than a foreclosure. There are several reasons for this difference.

One reason is that a short sale provides the homeowner with the ability to obtain forgiveness, or a deficiency waiver, of any balance that remains on the mortgage after the sale. Short sales also do not show as negative credit actions in the same way that foreclosure do. While a credit report will show that the mortgage was not paid in full, there will not be a foreclosure entry specifically.

The Department of Defense, Defense Office of Hearings and Appeals, an entity that decides cases related to security clearance issues, has made decisions over the years suggesting that short sales are viewed more favorably in the context of clearance adjudications. One basis for the more favorable view of short sales is that a homeowner seeking a short sale, rather than allowing foreclosure to occur, generally shows financial responsibility and a willingness to play by the rules. Those are crucial traits during any security clearance investigation and will significantly suppress any questions about one’s ability and/or willingness to live within his/her means.

Other considerations that clearance adjudicators rely upon for financial issues include the circumstances and the amount of control an individual had over the circumstances leading to the financial issue, the likelihood of recurrence of the financial problem, and whether the individual acted responsibly under the circumstances. For each consideration, a short sale places the clearance holder or applicant in a better position to argue that he/she is not a security risk than a foreclosure would.

If you are an employee in need of security clearance representation, please contact our office at 703-668-0070 or through our contact page to schedule a consultation. Please also visit and like us on Facebook and Twitter.