The information below is not warranted and may contain errors or omissions. You should consult with finance, tax and legal professionals before considering a short sale. Much of the following information was obtained from the National Association of Realtors.
In just a few years, short sales have grown to represent approximately one-third of all residential real estate sales in the United States according to the National Association of Realtors. A short sale is a situation in which the seller (1) owes more money on the loan than the sale of the property will likely produce on the market and (2) is unable or unwilling to bring money to closing. The seller may or may not be in pre-foreclosure. In a short sale, the lender has not yet foreclosed on the property, which provides a window of opportunity for the owner to sell the property in order to at least partially satisfy the amount owed to the lender.
Short sales are by no means the only option for distressed homeowners.
Other options include:
- Sell and bring cash to closing
- Lender workout (lender reduces or rolls back interest rates, forgives back payments, adds more years to loan, etc.)
- Deed in lieu of foreclosure (borrower agrees to trade the property to the lender in exchange for cancellation of the note)
- Do nothing and walk away
Reasons to consider a short sale:
|Issue||Foreclosure||Successful Short Sale|
|Security Clearances||"Foreclosure is the most challenging issue against a security clearance outside of a conviction of a serious misdemeanor or felony. If a client has a foreclosure and is a police officer, in the military, in the CIA, Security, or any other position that requires a security clearance in almost all cases clearance will be revoked and position will be terminated."||A short sale on its own does not challenge most security clearances.
|Current Employment||Employers have the right and are actively checking the credit regularly of all employees who are in sensitive positions. A foreclosure in many cases can be grounds for immediate reassignment or termination.||A short sale is not reported on a credit report.
|Future Employment||Many employers are requiring credit checks on all job applicants. A foreclosure is one of the most detrimental credit items an applicant can have and in most cases will challenge employment.||A short sale is not reported on credit report and is therefore not a challenge to employment.
|Deficiency Judgment||In 100% of foreclosures (except in those states recourse loans are permitted - Georgia being one) the bank has the right to pursue a deficiency judgement.||In some successful short sales it is possible to convince the lender to give up the right to pursue a deficiency judgment against the homeowner.
|Deficiency Judgment (amount)||A foreclosure usually results in a lower sales price and longer time to sell in a declining market. This will result in a higher possible deficiency judgment.||In a properly managed short sale, the home is sold at a price that should be close to market value, and in almost all cases at a higher price than a foreclosure sale, resulting in a lower deficiency.
|Future Fannie Mae Loan - Primary Residence (effective May 21, 2008)||A homeowner who loses a home to foreclosure is ineligible for a Fannie Mae backed mortgage for a period of 5 years.||A homeowner who successfully negotiates and closes a short sale will be eligible for a Fannie Mae backed mortgage after only 2 years.
|Future Fannie Mae Non-Primary (effective May 21, 2008)||An investor who allows a property to go to foreclosure is ineligible for a Fannie Mae backed investment mortgage for a period of 7 years.||An investor who successfully negotiates and closes a short sale will be eligible for a Fannie Mae backed investment mortgage after only 2 years.
|Future Loan with any Mortgage Company||On any future 1003 application, a prospective borrower will have to answer YES to question C in Section VIII that asks "Have you had property foreclosed upon or given title or deed in lieu thereof in the last 7 years?" this will affect future rates.||There is no similar declaration or question regarding a short sale.
|Credit Score||Your score may be lowered anywhere from 250 to over 300 points. Typically, your score will be affected for more than 3 years.||Only late mortgage payments will show and after sale, the mortgage will be reported as paid or negotiated. This will lower a credit score as little as 50 points if all other payments were made on time. A short sale's effect can be as brief as 12 to 18 months.
|Credit History||Foreclosure can remain as a public record on a person's credit history for 10 years or more.||A short sale is not reported on a credit history. There is no specific reporting item for "short sale". The loan is typically reported "paid in full, settled."
Should a short sale be your best option, here are some things you need to know:
1) You must define your hardship. Loss of equity is not considered a hardship. These factors may qualify you for a hardship with your lender:
- Job loss
- Business failure
- Illness and medical costs
- Divorce or death of a spouse
- Natural disaster
2) You should determine if there is sufficient time to accomplish a short sale. There should be no less than two months before foreclosure to list, market, and sell the home.
3) You should consult with qualified finance, tax and legal professionals. For example, a qualified foreclosure attorney can help determine whether the loan is recourse or non-recourse. With a recourse loan, the borrower retains personal liability for any deficiency after a short sale or foreclosure. In a non-recourse loan, the lender is limited to whatever funds are available from its security interest in the property.
4) You should determine what is owed on the loan and what a likely sales price might be. A Beacham & Company agent can help with a free market analysis. Just email [email protected] for an appointment with one of our sales professionals.
5) You should know that money forgiven by a lender in a short sale is considered taxable income by the federal government. However, the Mortgage Debt Relief and Emergency Economic Stabilization Act of 2008 delays taxes on lender debt forgiveness until 2012 provided the property is used as a principal residence and the debt was forgiven in 2007, 2008 or 2009. Contact a qualified accountant for further details.
6) You should know that, due to the necessity of lender approval, a short sale transaction may take anywhere from 30 days or less or up to six months or longer. One of the main reasons why sales can take so long to complete is the failure of the seller to provide a complete short sale package to the lender. It helps to have one person working with a bank on a short sale and for that person to follow up with the bank on a daily basis.
Other factors that affect the time required to complete a short sale:
- Problem: The short sale package was not properly submitted to the lender.
Solution: Follow the lender’s guidelines precisely.
- Problem: The offer was too low.
Solution: Know prior to listing the home what price the lender will accept on a short sale.
- Problem: The buyer is not strong enough.
Solution: The buyer should provide pre-qualification documentation including proof of funds. The contract should have as few contingencies as possible.
- Problem: The offer is too low.
Solution: Be realistic about the contract price to avoid having the lender reject the price based on a higher appraisal value.
- Problem: The junior lien holder will not approve the deal.
Solution: Make sure the contract takes into account payoffs of junior lien holders (second mortgages and home equity lines of credit, for example), as such parties can hold up the deal.