Understanding the Basics of Short Sales




 

SHORT SALE FAQs

#1.  What is a Short Sale?

A short sale is the process by which homeowners can sell their home for less money than they actually owe on the mortgage(s). This is accomplished by providing proper documentation and proving "hardship" to the lender(s) to convince them to reduce the mortgage balance to allow the sale. If the sale is approved, the mortgage lender(s) will actually take a loss on the mortgage.

If a bank approves the discount of a mortgage, the home can be sold for a price lower than the amount owed without the seller having to come up with cash to cover the shortfall. The mortgage is satisfied and any foreclosure process stops.  Commonly, the seller's credit score receives less damage as opposed to a foreclosure.


#2. What Price Will a Lender Typically Accept as a Short Sale?

Traditionally, your lender will wish to see sale comparables for homes within your area or subdivision which are similar or "comparable".  By using sale properties that support this price, the Bank will traditionally be open to the price creating the Short Sale.

#3. What Does a Homeowner Need in Order to Qualify for a Short Sale?

Most short sales are accomplished on properties heading toward foreclosure. This means :

  • Homeowner is at least 3 payments behind, and the foreclosure process has already begun. However, more mortgages that are simply behind or "in default" are considered short sale candidates.

  • Homeowner typically has no equity or negative equity in the home. In other words, the total balance owed to the lender is equal to, or greater than, the price at which the house can be sold.

  • Homeowner must have some type of financial "hardship" which is preventing him from paying the mortgage.


#4. Does the Homeowner benefit from a Short Sale?

A Short Sale relieves the stress of being in foreclosure and it allows the homeowner to get rid of their big mortgage payment and move on with their lives. A short sale allows you to stop a foreclosure proceeding and get a fresh start. In our experience, this is the primary benefit to the homeowner.

On the credit side, a short sale is arguably the lessor of two evils. Having some late payments, and a foreclosure filed has already done damage to your credit.. However, a completed foreclosure generally does more damage than a short sale agreed to by a lender.

#5. What if my mortgage is a FHA or VA insured loan?

Short sales can still generally be accomplished on all of these types of mortgages, though each one has different criteria.


#6. What is "financial hardship" and why is it so important?

"Financial hardship" is a critical part of the short sale equation. No matter what you hear about banks "not being in the business of owning real estate", they DO NOT easily give homeowners a break. They require GOOD REASON to give a discount for a short a sale.

The only reason a lender will agree to a short sale is if they determine that a short sale will net them more money than proceeding with the foreclosure. Understanding the homeowner's financial hardship plays a major role in the lender's estimation of whether or not it will be paid in full for the mortgage. Quite simply, lenders will make the borrower pay the shortfall if there is no hardship.

Many homeowners try to use a short sale as a "get out of jail free" card to dump a poor investment. Lenders will not allow this, and it is a waste of time to try. If you are employed and have some assets, but you have simply lost value in your home and want to sell, you probably cannot short sale. If you are current on your mortgage, it is very difficult to short sale. Lenders need to see that you simply cannot pay them before they will agree to a short sale.


#7. Who owns the house after a short sale?

The purchaser of the house is the owner after a short sale, just the same as in a normal sale. The mortgage lender is paid off and the previous homeowner moves to a different home.


#8. What happen if I have back property taxes when I do a short sale?

Just as in a normal home sale, the property taxes are the responsibility of the homeowner until the date the sale is closed. Then they become the responsibility of the buyer. If your property taxes have not been paid this will affect the negotiations between the buyer and the bank, so you must inform me or any buyer of the taxes owed.



#9. My home is already listed for sale on the MLS, but isn't selling; can I still do a short sale?

Yes, you can and it is relatively common. Some lenders even require that a house be listed for sale before approving a short sale in order to show that a discount is necessary.


#10.  Will My Lender Forgive My Mortgage Debt?

Performing a short sale will affect the homeowner's credit score.  How the lender handles the debt may also affect the homeowner credit score.  Traditionally, on a credit report, the debt from the short sale will be listed as:

A. Paid - Settled
B. Paid - Unrated
C. Paid - Less than Owed

Upon acceptance of a short sale, a qualified Attorney can determine if your mortgage debt has been forgiven or carried as a deficiency judgement.  Consult your attorney for more information.

 

#11.  How Will a Short Sale Affect My Credit Score?


Traditionally, most homeowners will experience a drop of approximately 50 points to their credit score on account of a Short Sale.  However, as with any credit score, other factors regarding this score will need to be taken into account.

With a Foreclosure, credit scores are traditionally lowered 200+ points!  Furthermore, foreclosure remains on the public record and on a credit report for 7-10 years.
 


#12.  How Can I Get Assistance?


Feel free to consult our Short Sale Services by phone, or e-mail:

630-881-7082

seanmorrissey@kw.com



#13.  Can I Receive Counseling Prior to Making a Decision?


Consult HUD for FREE Consultation