What is a short sale?
Originally published at Dagnysrealestate.com
A short sale is when a home is sold for less than the amount owed on the mortgage loan. The lender agrees to accept less than the amount owed in order to avoid the foreclosure process and the homeowner (borrower) will not recover any amount of unpaid principal. A short sale is almost always financially preferable to the foreclosure process for both the lender and the borrower.
Why would I want to short sell my house?
The main reason to sell a house short is to avoid foreclosure. If you go into foreclosure, your credit status will not allow you to purchase another home for 7 years. With a short sale, you may be able to purchase another home in only 2 years.
What is the process of short selling a home?
Homeowners considering a short sale first need to get an approval from anyone who may be holding a lien on the property i.e. primary mortgage holder, junior lien holders, second mortgage or home equity line of credit lenders and home owners associations (HOA). This would mean writing a letter of hardship to each lien holder explaining why a short sale is needed and why the borrower cannot pay the deficiency.
After the 2008-2012 global financial crisis, many creditors became well versed in short sales and have set up special departments to evaluate the short sale applications. These departments often have predetermined criteria set for approval and require independent evaluation of the property using an appraisal or a BPO (Broker’s Price Opinion.) The process can still take many months especially if several signatures or varying levels of approval are required.
Any homeowner considering a short sale should definitely consult an accountant or tax attorney since a successful short-sale will ultimately reduce the debt of a homeowner and the IRS considers the reduction of debt as income, resulting in certain tax implications.
Will a short sale affect my credit?
The answer is tricky. It can, but hopefully not as much as going through foreclosure. Certain steps need to be taken to make sure the short sale is well documented. Often the credit reporting agencies do not differentiate between a short sale and a foreclosure and this may make it difficult to obtain a new mortgage.
Damage to one's credit due to a short sale is really no different from that of a foreclosure, however when a foreclosure is reported by a lender to the CRA (credit reporting agency), the balance consists of the entire unpaid loan amount on the date it went to foreclosure. For a short sale, the reported balance is made up of the outstanding loan amount on the date of the short sale, less the sale amount received from the buyer and agreed to by the lender. The different balance amounts should be substantial enough to lessen the negative impact of a short sale. It is advised to continue your mortgage payments monthly. This will help your credit score and hopefully make it possible to purchase a home sooner rather than later following a short sale. According to Wikipedia, ”On August 15, 2013, the Federal Housing Administration instituted a new program called “Back-To-Work-Extenuating Circumstances” to assist potential borrowers who faced financial hardship during the recession. This program provides a second chance for mortgage applicants who have experienced financial hardship such as unemployment or a severe reduction in income beyond the borrower’s control. This program is designed to assist borrowers with a recent history of foreclosure, judgment, short sale, bankruptcy, loan modification, or deed-in-lieu by acknowledging that their credit history may not fully reflect their ability or propensity to repay a mortgage. Prospective borrowers who have experienced an economic event and can document that the event was out of their control, that they have recovered, and that they have completed housing counseling can apply for an FHA-insured mortgage that will allow up to 96.50% financing.”
How soon can I purchase a home after a short sale?
Borrowers who go through a foreclosure may have to wait seven years before they’re eligible for a new mortgage, but short sellers may qualify in two years. However recent reports suggest that some mortgage loan underwriting systems are unable to distinguish short sales from foreclosures on consumer reports which could delay the mortgage process
To help the process along, previous short sale homeowners are advised to obtain a letter from the lender confirming that the loan closed in a short sale, not a foreclosure; and to order a copy of his/her credit report from all three bureaus. It would also be best to get pre-approved before finding another home. The process could take a while depending on the individual circumstances.
What if I want to purchase a home listed as a short sale?
State and National Real Estate laws are in a rapid state of change and there are professionals who specialize in loss mitigation who can help you through the process.Borrowers should first consult with a HUD approved mortgage counselor for specific advice relating to their situation. They should then build a team (accountant, attorney and real estate broker) that is well versed in handling short sales.
Some questions you will be asked when considering a Short Sale
- Is your home currently on the market?
- Do you have it listed with a real estate agent?
Where is your home located? Address?
Are you currently living in the property? If no, where are you currently living?
Is there more than one mortgage lien on your property? (2nd Lien. 3rd Lien. Etc.) If so, who are the lenders on the other liens?
Are you behind on any mortgage payments? If so, How many months behind on payments are you?
Are there any outstanding judgments and/or liens that you are aware of? (i.e. missed lease payments from a previous property, city or state violations with an associated unpaid fine issued to the property, unpaid utility bills, property and income tax)
What year did you purchase your home?
What did you originally pay for your home?
How much do you currently owe?
- Have you taken out a home equity loan? When?
- Who is on the mortgage note? (husband, wife, parent, relative, co-signer, etc.)
- Who is on title to the property?
- What is the condition of the property? (Does it need repairs, if so list them out in detail)
- Are the utilities still on at the property?
- If you have moved out, are you currently renting it out to someone else?
- Are you current on your utilities? What about Homeowner Association (HOA) Dues? If not current. how much is owed?
- If the situation is related to a divorce or separation, has the other spouse moved out? Will the other spouse be cooperative in signing paperwork?
- What correspondence have you received from your lender? Certified Letters? Notice of Default? Notice of Acceleration? Notice of Foreclosure Proceedings?
- What is the date of the last correspondence?
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This article has been written by Dagny Eason.
Feel free to call Dagny Eason to discuss this at (203) 762-1700
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