Regardless of whether you are inforeclosure, if selling your home won't net enough to pay off your existing mortgage(s), you may want to consider choosing ashort sale. For many years, there were few reasons to take this route, apart from earning thereal estate agent a commission, but times have changed.
Why Agents Recommend Short Sales
It's not uncommon to hear people say that short sales protect your credit, but that's only partially true. Your credit will tank if you fall behind on your payments, and experts say agents who repeat that mantra without clarification do so out of ignorance or self-interest. There's one exception, though. If you have no late payments—15 days late or more—on your credit report, Fannie Mae might still offer you a loan to buy another home. However, most people who sell on a short sale with Fannie Mae are in default for at least 90 days, so this exception wouldn't apply.
The main reason agents encourage sellers to do a short sale is because agents get paid from the proceeds of a short sale, but they don't get paid if the seller loses the home to the bank by going all the way through foreclosure. Even if the home never sells on ashort sale, the agent gets free publicity (and new business) through signage,open houses, marketing, andposting listings online.
Benefits for Foreclosure
Although going through foreclosure is often painful and embarrassing for sellers, there are benefits. There are no mortgage payments to make, the home is still yours until the foreclosure is final—which could take months to conclude—no strangers are traipsing through your home, and banks sometimes givecash for keysafter the public sale.
Drawbacks to Foreclosure
Few people, apart from the sellers who choose tobuy and bail, really want to experience a foreclosure. Memories are made in a home, and losing it can shatter future dreams. Thedrawbacks to foreclosuresinclude the right of homeownership being stripped away, a Notice of Public Sale on your front door, and your credit takes a nosedive, with a foreclosure remaining on your credit report for seven years. UnderFannie Maeshort sale guidelines, you could qualify for a new loan in two years, rebuilding your life sooner.
Benefits for Short Sale
Choosing a short sale allows you to retain some dignity in knowing that you sold your home, and you won't suffer the social stigma of a foreclosure. You won't have any mortgage payments to make, unless you choose to make them, and under Fannie Mae guidelines, you'll be eligible to buy another home in two years instead of 5–7 years. If your credit report doesn't reflect late payments, under Fannie Mae guidelines you'll be eligible to buy another home sooner than you think.
Drawbacks to a Short Sale
To begin, waiting for the bank to respond to an offer is frustrating. They will want to examine personal records such as tax returns, bank accounts, assets, and liabilities, in addition to asking for ahardship letterfrom you. There is no assurance the bank will accept a short sale offer.
Ashort sale could also ruin your credit rating. It might not happen right away, but sooner or later, unless the bank has specifically agreed not to report the shortage, the bank may report it to the credit bureaus, and it will remain on your credit report for seven years. Real estate agents shouldn't give legal advice to clients facing foreclosure or assure sellers their credit rating won't suffer adverse effects.
For many sellers, though, the chance to buy another home in two years is the real motivation to do a short sale. Some sellers qualify immediately to buy again under certain terms. Good credit behavior can supplant bad credit after two years, even though the derogatory will remain.
FAQs
In this case, a short sale is the best option if there is a TRUE hardship. A hardship is anything that is or would prevent the homeowner from making mortgage payments such as a job loss, significant decline in income, divorce situation, illness or death.
Why is a short sale better than a foreclosure? ›
A Short Sale is listed as SETTLED DEBT and is much less harmful to the homeowner's credit than a foreclosure. It is not Paid in Full as it would be if the full balance was paid off on the mortgage, but a Short Sale is much better credit-wise than a foreclosure.
Why would a lender agree to a short sale? ›
The lender accepts this payoff and forgives the difference, releasing the borrower from the debt. Lenders allow short sales in order to avoid foreclosure, which is a time-consuming and expensive process.
Why do sellers choose a short sale? ›
Short-Sale Benefits For Sellers
However, in a short sale, the lender pays these fees. A short sale will also prevent a seller's home from going into foreclosure. Foreclosure can have a more detrimental impact on the seller's credit score. The short-sale home buyer will pay off much of the seller's debt.
When should a seller pursue a short sale? ›
Short sales usually occur when a homeowner is in financial distress and has missed one or more mortgage payments. Foreclosure proceedings may be looming ahead.
What are the disadvantages of a short sale? ›
Disadvantages Of A Short Sale:
- Must meet specific requirements to be eligible.
- More complicated and a lengthier process.
- The sale must be lender approved.
- The bank or lender could pursue a deficiency judgment.
- Your credit score will likely drop.
- You WILL lose your home.
Short sale home prices are negotiable, but not in the same way as the sale price in a traditional purchase is. As the seller, you may be motivated to get rid of the property—but the mortgage lender must ultimately decide whether to accept an offer.
Who benefits from a short sale? ›
If you are in a position that you owe more than your home is worth and you need to sell, the biggest advantage of a short sale is that you will be able to avoid foreclosure and save your credit. If you have a foreclosure on your credit history, you have to wait at least seven years before you can get a mortgage.
Can you back out of a short sale? ›
After Short Sale Approval
Buyers may back out based on due diligence, appraisal, or financing at this point, just like any other contract. If it's within the guidelines of the contract, they're free to do so. If it's not, you'll get to keep their earnest money deposit as damages.
Do you owe money after a short sale? ›
You may still owe money after a short sale. In some cases, the lender may take legal action against you to collect the remaining balance — this is called a deficiency judgment. Some states, including California and Nevada, prohibit deficiency judgments after short sales in specific circ*mstances.
You might not have the entire debt eradicated and could be responsible for the difference between what you owe and the sale price, called a deficiency judgment. If the difference is forgiven, you could be taxed on it. It is a significant credit hit.
What's the most common alternative to a short sale? ›
If you get behind on your mortgage payments or if your 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.
Can you lowball a short sale? ›
When you find a short sale home you'd like to purchase, it's best to make an offer quickly – but don't lowball it. Although a short sale often means a lower purchase price, the mortgage lender wants to recover as much money as possible. Therefore, the seller is more likely to accept a competitive offer.
Why do banks prefer foreclosure to short sale? ›
Banks are businesses and, just like any business, they are seeking to earn a profit. If it costs more to foreclose over agreeing to a short sale, the bank is very likely to favor the short sale. With foreclosure, a bank takes possession of the house, then resells it at a mortgage auction to the highest bidder.
Why would a lender accept a short sale? ›
A lender is interested in securing the best deal it can and will only accept a short sale offer after concluding that it provides an equal or better deal than a foreclosure sale.
What percentage of short sales are approved? ›
What are the chances my short sale offer will be approved by the seller's lender? If your offer is at fair market value and whoever is negotiating the deal for the seller is experienced and knowledgeable in their process, you have a better than 90% chance that your short sale will get approved.
How is a short sale actually beneficial for the homeowner? ›
However, if all sides agree on a short sale, a new buyer in a better financial state could absorb some of what the original homeowner owes the lender. This would ease the original homeowner's hardship and put him in a more manageable position [source: Foust].
Is a short seller better than a buyer? ›
Short selling involves the sale of a security not owned by the seller but borrowed and then sold in the market, to be repurchased later, with the potential for large losses if the asset increases in price. Buying a put option gives the buyer the right to sell the underlying asset at a price stated in the option.
When purchasing a short sale or foreclosure What's one of the biggest frustrations buyers face? ›
When purchasing a short sale or foreclosure, what's one of the biggest frustrations buyers face? The difficulty of finding a real estate professional to help them with the purchase.
