Short Sale Considerations

Short sale transactions are becoming more prevalent. There have been questions in the Chattanooga market about how they work and what is their impact.

A short sale involves negotiating a reduced payoff from a lender so that a homeowner can sell a property which could not otherwise be sold at a high enough price to cover the existing debt and costs associated with closing.

The purpose of a short sale is to provide a way for a stressed home owner to sell their home without being foreclosed.The benefit to the lender is to avoid the expenses of foreclosure, which includes interest on the loan, repair costs, legal fees, market value loss, advertising, real estate commission, and more.

The benefit to the home owner is that a foreclosure is avoided.

Recent FNMA guidelines call for a 5 year period to reestablish credit after a foreclosure. Between 5 and 7 years a new home purchase will require a 10% down payment.

A short sale is not a foreclosure. Until these new guidelines, there was no specific guidance with regard to how a short sale should be considered with a new home purchase.

FNMA's guidelines, discussed in the above link, call for a 2 year period to reestablish credit after a short sale is closed. This is considerably less than a foreclosure, under the new guidelines. 

At present, I know of no guidelines from FHA, VA, or Rural Development as to how a short sale will impact a new home purchase.

This means it is left to the individual lender discretion. Most likely approval on a new home will depend primarily on how the short sale is reported to the credit agencies by the lender who accepted the short sale.

It is possible to be reported as paid in full or settled for less than the balance.

Another factor in establishing qualifications for a new home purchase after a short sale will be the actual pay history on the mortgage up to the short sale close date. Generally, in sales involving a short sale there will be some mortgage delinquency.

For those homeowners who are considering a short sale, remember that there may be a significant impact on your credit and on your ability to purchase a new home.  The short sale transaction is intended to help avoid foreclosure. If foreclosure is imminent, the impact on credit from a short sale is not a significant consideration.

If foreclosure is not imminent, the credit impact of a short sale should be a significant consideration. Additionally, if the circumstances of the sale become known to your new lender, either by credit reporting or by required disclosure, then expect the new lender to question the reason for the short sale as part of their underwriting review.

A conventional loan will require a 2 year period. For government loans guidelines are not yet established.

The short sale negotation with the lender is difficult and time consuming. It is generally not negotiated without a specific contract. The lender may require justification of the present homeowner's inability to pay, the reduced market value, and the costs associated with the new sale. Approval is further complicated when there is a 1st and 2nd mortgage on the property.

If there is no apparent reason for the lender to doubt the homeowner's ability to pay, then it is not likely that the short sale will be approved.

Short sales have a place in today's market to the benefit of struggling home owners and lenders, but they are becoming so prevalent that in the minds of some they are beginning to be consider as normal transaction. Short sales should not be considered a normal transaction. They are a way out of a distressed situation.

If the situation is an inability to handle the loan payments, then another option may be to try to negotiate a loan modification. Specifics on the new FHA Foreclosure Prevention Law are still not published, but this program may offer an additional option for some home owners.

Roland Woodworth is one of many who have posted some helpful information on how to negotiate a short sale.

http://activerain.com/blogsview/563831/Foreclosure-VS-Short-Sale

http://activerain.com/blogsview/584512/Short-Sale-Requirements

 

 

Richard Smith

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