What is a
Short Sale? A Short Sale is when a home is
sold for less than the amount owed and the lender agrees to release the
lien and settle for less than the full payment.
Why would a lender accept a Short Sale? A Short Sale is a form of
loss mitigation, the lender (investor) is presented with a choice
between a smaller loss by Short Sale or a larger loss through
foreclosure, so accepting the Short Sale “mitigates the loss.”
The advantage of a Short Sale compared to a foreclosure is that you
avoid having a “debt discharged due to foreclosure” on your credit file
which can reduce your credit score by over 250 points and keep you from
qualifying for a home loan for up to 5 years. With a Short Sale you can
qualify for a home loan in just 24 months. Also if a Short Sale is
negotiated properly with your lender you can avoid a possible deficiency
judgment.
Qualifying for a Short Sale For a Short Sale to
be approved by your lender you must show a hardship. A hardship is
defined as a situation that is the result of some extenuating
circumstance that forces you into a position where you can no longer
afford the mortgage payments. Some examples of a hardship are loss of
income, unemployment, divorce, illness and job transfer.
Lenders will also allow a short sale of an investment property. Some
examples of hardship include the amount of rent charged does not cover
the mortgage payment and related expenses and you cannot afford to pay
out-of-pocket to make up the difference. You are unable to rent the
property at a price that covers all expenses. You cannot afford to fix
damage to the property that keeps you from renting it out.
Benefit of a Short Sale When Buying A New Home Fannie
Mae's new policies for manually underwritten loans related to the time
period that must elapse before borrowers can demonstrate they have
reestablished an acceptable credit history after the occurrence of a
short sale or foreclosure.
Short Sale 2-year time period from completion
date. Additional Requirements: None Note: No exceptions are
permitted to the 2-year time period due to extenuating circumstances.
Foreclosure 5-year time period from completion
date. Additional requirements that apply after 5 years up to 7 years
following completion date:
The purchase of a principal residence is permitted with a minimum 10
percent down payment and minimum representative credit score of 680.
Purchase of a second home or investment property is not
permitted.
Limited cash-out refinances are permitted for all occupancy
types pursuant to the eligibility requirements in effect at that time.
Cash-out refinances are not permitted for any occupancy type.
Deed-in-Lieu of Foreclosure 4-year time period
from completion date (date deed-in-lieu executed) Additional
requirements that apply after 4 years up to 7 years following completion
date:
Borrower may purchase a property secured by a principal residence,
second home, or investment property with the greater of 10 percent
minimum down payment or the minimum down payment required for the
transaction.
Limited-cash-out and cash-out refinance transactions secured by
a principal residence, second home, or investment property are
permitted pursuant to the eligibility requirements in effect at that
time.
Tax Considerations of a Short Sale On
December 20, 2007 President Bush Signed H.R. 3648, The Mortgage
Forgiveness Debt Relief Act of 2007.
The law applies to primary residences only and takes effect from
January 1, 2007 through December 31, 2012. It provides relief to home
owners by shielding them from the additional burden of potential federal
income tax on any amount written off or forgiven by their lender in
case of foreclosure or short sale. Consultation with an experienced tax
professional to see how the law applies in your circumstance is
advisable.
How Do I Get Started? The first thing we need
to do is evaluate your situation, which includes a conference call with
your lender to understand your loan terms and current status. Only after
discussions with both you and your lender can we determine if a Short
Sale is the best solution. Many people have called us resigned to losing
their home to happily find out we were able to negotiate a modification
of their loan that made it possible to keep their home.
If a Short Sale is the best solution for you, we will immediately
begin the process. A Comparative Market Analysis will be ordered and a
listing agent will be assigned. A marketing strategy will be developed
based on the time frame we have agreed on to complete the Short Sale.
Short Sales normally take 90 days to complete. Lender approval will
take up to 60 days from the time an offer is submitted. Once approved 30
days will be given to close escrow.
Is There a Fee to Hire Your Company for a Short Sale? Absolutely
not. Unlike other loss mitigation companies, our services are provided
at no cost to the homeowner.
What Areas do You Cover? We cover the entire
state of California.
Credit and Short sale
Basics of a Short Sale
Short sales happen when a lender agrees to accept less than the
amount owed against the home because there is not enough equity to sell
and pay all costs of sale. Not all lenders will negotiate a short sale,
and that is why a real estate agent or a
lawyer can be a tremendous help by contacting the lender's loss
mitigation department to find out.
You can't just wake up one morning and decide you're going to
sell your home at a loss by asking for a short sale. It used to be that
lenders wouldn't even consider a short sale if your payments are
current, but that has changed. However, realize that lenders will be
more agreeable to negotiation if your payments are in arrears. Plus, if
you have cash assets, the lender might try to tap those accounts.
How is a Short Sale Seller's Credit Affected?
Fair Isaac released a report that says credit scores are affected
about the same, whether a seller does a short sale or foreclosure. Fair
Issac says the average points lost on a FICO score are as
follows:
30 days late: 40 to 110 points
90 days late: 70 to 135 points
Foreclosure, short sale or deed-in-lieu: 85 to 160
Bankruptcy: 130 to 240
Foreclosure or Deed-in-Lieu of Foreclosure Both of these
solutions affect credit the same, says David Steep of Vitek Mortgage.
Sellers will take a hit of 200 to 300 points, depending on overall
condition of credit. This means if a seller's FICO score before
foreclosure was 680, it could dip as low as 380.
Short Sale Steep maintains that the effect of a short
sale (providing the sellers are more than 59 days late) on a seller's
credit report is identical to that of a foreclosure. The ding on credit
will show up as a pre-foreclosure in redemption status, Steep says,
which will result in a loss of 200 to 300 points. This means a short
sale seller with a previous FICO of 720 could see it fall from 520 to
420.
My personal experience has been somewhat different. I completed a
short sale for a Sacramento seller who was 90 days behind on her
mortgage. A few months after her short sale closed, she checked her
credit report and found her FICO fell by only 100 points to 671. I
suspect every seller's situation varies.
Catherine Coy, a mortgage broker in southern
California, agrees with Steep. "The effect on a consumer's credit report
-- foreclosure vs. short sale -- is the difference between being hit by
a train or a bus," says Coy, speaking about borrowers who are a few
months in arrears.
Waiting Period Before Buying Another Home
Foreclosure or Deed-in-Lieu of Foreclosure Steep says a
seller who wants to buy another home after foreclosure will end up
waiting about 24 to 72 months before a lender will offer any kind of interest rate that
makes sense.
Coy says, "The good news is a short sale will allow the consumer to
obtain an institutional loan for a new home within two years".
For more information, see the Fannie Mae Selling Guide online.
Click on the PDF link in the yellow box and see page 75.
Short Sale Some agents say the good news for short
sale sellers is the wait is much shorter before buying another home, and
Fannie Mae guidelines in 2008 adopted new procedures.
Can a seller buy again in less than two years? Not really, says Coy,
"It's an utter myth that a consumer 'can buy again in about 18 months at
a good interest rate.' However, Fannie Mae guidelines now require only
24 months' seasoning, and that's good news for agents who specialize in
short sales."
FHA adopted guidelines in 2010 that say a seller who is current
and does a short sale may qualify to immediately buy another home.
Lenders aren't so quick to follow those guidelines. However, Flagstar
Bank gave an Elk Grove short sale seller a new loan within 2 months of
closing his short sale, and that seller was current at the time.
Note that Fannie Mae guidelines allow a seller to immediately
apply for a new loan to buy another home if that seller kept the
payments current, had no delinquencies exceeding 30 days and did not
agree to repay the debt relief. Moreover, it's the late payments that
dramatically affect your credit report, not the short sale.
Foreclosure or Short Sale Decision
If you're a seller trying to decide whether to let a home go through
foreclosure versus attempting a short sale, salvaging your credit may
not be an advantage to doing a short sale, says Coy. She reports that
according to "Score Factor Code #22, there's no credit score advantage
for a delinquent borrower on a short sale over a foreclosure."
I have my doubts about that, though. From what I've seen, there
is less damage to a credit report after a short sale involving late pays
than a foreclosure. Moreover, another advantage for those with
delinquencies on their credit is the ability to buy another home within 2
years over the 5- to 7-year period required for foreclosures. And there
are other short sale advantages
over a foreclosure. But seek legal and tax advice before making that
decision.
