What Is A Short Sale?
Foreclosure on a home has consequences for the family, the community, the housing market, and the economy. However, the option for a short sale provides a way for troubled homeowners to prevent foreclosure and many of the dire penalties involved.
A Short Sale, also known as a pre-foreclosure sale, is when you sell your home for less than the balance remaining on your mortgage. If your mortgage holder or bank agrees to a short sale, you can sell your home and pay off all (or a portion of) your mortgage balance with the proceeds. You may also be eligible for the government’s Home Affordable Foreclosure Alternatives Program (HAFA) which offers short sale and Deed-in-Lieu(DIL) options.
A short sale is an alternative to foreclosure and may be an option if:
- You owe more on your home than what its worth
- You can no longer afford to keep your home and are ready to leave or need to leave
- You are behind on your mortgage payments
- You are unable to refinance or modify your mortgage
- You have not been able to sell your home at a price that covers what you still owe on your mortgage
- You are facing a long-term hardship or difficulties
A short sale is an agreement in which your bank or mortgage lender agrees to accept a payoff on the loan for less than the balance. Many lenders agree to a short sale because they receive more of the loan balance in comparison to the amount they would gain from selling the property following a foreclosure.
A short sale is not a typical real estate transaction. Most real estate transactions involve the home seller and their real estate agent, the buyer and their lender, and their real estate agent. In a short sale situation, all of those parties in addition to the seller’s loan servicer, a housing counselor, any junior or second lien holders, mortgage investors, and insurers may be involved too.
You will want the advice and a Real Estate Broker who has your best interests in mind and will expedite the short sale transaction. It is essential to have a real estate consultant who won’t allow you to miss a detail that could delay closing the transaction in a timely manner and to the specifics required by all parties involved.
Homeowners agreeing to a short sale should also consult a tax expert and obtain the services of an attorney to help protect themselves from any future claims by the lender.
What is the Difference Between a Short Sale and a Foreclosure
Here are some comparisons between short sales and foreclosures. You will have a better understanding of why short sales are a better option for most homeowners. Even though a short sale can sometimes be a lengthy and a complicated process, the outcomes of your patience and diligence are worth it in the end when completed.
Who Decides if my home should go through a foreclosure or a short sale?
In both short sales and foreclosure, the decision is made by your mortgage lender. The most important aspects to getting a lender to agree to a short sale, and saving you the more damaging credit implications of a foreclosure, is to prove that you have no other way to pay the mortgage and that the amount received from a short sale is the fair price of the market. Lenders who believe they can receive more by taking possession of the home in a foreclosure and selling it themselves will not agree to a short sale.
What are the Implications to my credit score?
Following a successful short sale your mortgage will be reported on your credit score as either paid or negotiated, lowering your score as little as 50 points and affecting you for only 12 to 18 months. After a foreclosure, however, your credit score can lower as much as 300 points and usually at a minimum of 250 points and affects your score for over three years. Keep in mind that each person’s credit scores are different and you may see different results than those listed above.
What are the implications to my credit history?
A short sale is usually reported as paid in full and is not reported on your credit history. A foreclosure will remain on your credit history for 10 years or more and will remain as public record.
What will be the effects on my future loans?
For most mortgage lenders you will not be asked to declare or be questioned regarding a short sale on any standard loan application (1003). In regards to foreclosure, you will be asked on any future standard loan application (1003) if you have had a property foreclosed in the last seven years, therefore affecting your rate. Fannie Mae backed mortgages will be available to you following a short sale after two years. Fannie Mae backed mortgages will not be available to you for at least five years if you have lost your home due to a foreclosure.
How long will I have to wait to buy another home?
After a foreclosure, you may end up waiting another 24 to 72 months before a mortgage lender will offer you an interest rate that is acceptable. Most mortgage lenders report that for homeowners who have undergone a previous short sale they may get a reasonable interest rate in less than two years. Fannie Mae guidelines allow a short seller to apply for a new loan immediately if payments were kept current and had no 60-day late payments on their record.
How does a short sale versus a foreclosure affect the deficiency judgment?
If your short sale is handled successfully, the lender may give up the right to pursue a deficiency judgment against you. If the lender does pursue a deficiency judgment against you after a successful short sale, the amount will be considerably lower because your home was sold at a price closer to market value than that of an REO (Real Estate-Owned) sale. In all foreclosures, with the exception of those states without deficiency, the bank has the right to file a deficiency judgment against you. Since your foreclosed home will have to go through the REO process if not sold at auction for a lower sales price, this results in a higher deficiency judgment against you.