This guide is intended to help those considering a sale or purchase of a home under "short sale" terms
- What Is It?
- Who Initiates a Short Sale?
- When and Why a Short Sale
- How It Affects Your Credit
- Negotiating With Your Lender
- Must A Lender Agree To A Short Sale
- Chances for Success
- Getting Help
- What About Fees and Commissions
- Advantages of A Short Sale For Seller and Buyer
- Disadvantages of A Short Sale For Seller and Buyer
What is a short sale?: A short sale, in the simplest terms, is when the mortgage lender has agreed with the homeowner to accept an amount to settle the debt which is less than what is owed on the home.
Who initiates a short sale?: A short sale is initiated by the homeowner. Sellers must have an agreement with the lender to sell the property for less than the balance owed. A word of caution to buyers and sellers: never enter a contract in the hopes that a lender will accept a request for a short sale. Be sure negotiations have been opened first.
When or why to short sale: A short sale is advantageous to a homeowner when they have met a financial crisis that has affected their ability to make their mortgage payments.
How it affects your credit: A short sale, while not quite so devastating as a foreclosure on your credit report, is still a negative report. It will affect your credit adversely. There is no way to avoid it, your credit will be affected.
When negotiating a payoff with many creditors for less than the balance owed, you can also request that the creditor report the account as "paid as agreed". This is not the case with a short sale.
In most cases, this derogatory remark will remain on your credit for 7 years. This does not mean you will not be able to purchase a home for the next seven years. Historically, mortgage lenders have approved a seller in as little as 2 - 3 years after a short sale of their previous home.
Interest rates on certain products and goods, including a new mortgage, could be at a higher interest rate.
Negotiating with the lender: You must take the first step in opening negotiations. You must prove financial hardship.
Hardship includes, but is not limited to, the following: death of a co-borrower, catastrophic illness or injury, loss of job, a required job relocation and, in some cases, divorce.
Negotiating with a lender is, unfortunately, not a simple phone call procedure. You will need to request a short sale packet from the Loss and Mitigation Department. The packet must be filled out completely and the conditions strictly adhered to.
Must a lender agree to a short sale?: There is no requirement currently under law that states a lender must accept an application for a short sale. That decision is up to the Loss and Mitigation Department. While most industry leaders feel that it is to a lender's advantage to accept a short sale, it is up to the lender's discretion. A lender can even decline a short sale if the property is in escrow.
Chances for success: To be very honest, it is going to depend largely on two things: who the lender is and what the reason is for requesting the short sale.
In my opinion, we may see lenders become more agreeable to short sales due to the current economic turmoil. I believe the steps our government takes in the next few months will be a determining factor.
Getting help: Getting the assistance of a qualified and knowledgeable professional is to your benefit. In most locales, a Realtor® will be able to assist you.
There are many factors to a short sale and the paperwork can be quite overwhelming. I suggest that you seek the advice and help of a professional as soon as you have decided a short sale is the best course of action for you. Getting help early on will not only benefit you, but the professional of your choice as well.
What about fees and commission?: Any professional is going to charge you for their services. Some professionals will charge you up front and out of pocket. A Realtor® will only get paid when the home sells. The Realtor® will be paid from the "proceeds" of the sale. In most cases, this is paid by the lender.
Advantages of a short sale for seller and buyer: The real advantage for a seller is that they can avoid a foreclosure on their credit. While a Short Sale is not great either, it is slightly less negative. It also tells creditors in the future that you did the honorable thing and "took the bull by the horns" to resolve an exceedingly difficult financial situation.
The advantage for a buyer is that they may be able to purchase home under current market value.
Disadvantage of a short sale for seller and buyer: The only disadvantage for a seller or a buyer is that the lender may not agree to the terms of the sale. A lender is not obligated to accept or complete the terms agreed upon by the buyer and seller.
Although a lender may agree to consider a short sale, until a purchase contract is submitted to the lender and approved, no one really knows exactly what the lender will accept in regards to price or specifics of the contract. Until the contract is approved, it is a "wait and see" situation. This can be extremely frustrating for a buyer who is anxious to know if they need to look for a home elsewhere. It is frustrating for a seller, who is also extremely anxious.
Note: Because this is a simplified guide, there are many details that have been omitted for simplicity's sake. Short Sales are a detailed and complicated proces .
Once again, I strongly advise you to seek the advice and help of a professional specializing in Short Sale transactions.