Short sales are an option some homeowners use when the bank, credit union or other types of lenders they have borrowed from provides them with the option of selling their home to a third party at a price that is much lower than what they actually still owe on the note of their home loan. The short sales process is one that is often used by homeowners who are trying to avoid getting caught up in a foreclosure. Thus, receiving approval from the lender to short sale allows them the opportunity to sell their property at a significantly lower rate. It is also important to compare short sales and foreclosures to ensure you are making the right decision.
To most people, it sounds rather strange for any type of lender to be willing to accept a lower amount from homeowners than what they truly owe on their home. There is more than just one reason why a bank chooses to accept short sales. The key reason is, simply put, that a short sale costs them much less than what a homeforeclosure would. The expense banks already have to consider from foreclosures is astronomical. They will also be able to supply you with information in regards to benefits received from short sales. However, when they provide homeowners with the option of a short sale, they are then able to recover at least a partial amount of what they would otherwise completely end up losing. When a bank has several home loans that are non-performing, the Federal Reserve will often lower the amounts or even suspend funds they provide to these lenders
Do I Qualify?
As with any other type of agreement that is made with a lending institution, there are stipulations on the homeowners that qualify for short sales vs. foreclosures. Below you will find criteria that must be met by a homeowner who is considering short selling, before they can proceed with the short sales process.
• If changes in a homeowners financial situation has occurred, resulting in bringing home less money than what they were when the initial mortgage loan was made
• The homeowners does not have any funds in a savings account
• Obligations on the mortgage are still current but the homeowner is able to show ample proof that expected payments for the future cannot be made
• The market value of the property has dropped
• The homeowner’s realtor can supply a Comparative Market Analysis (CMA), which helps in the process of determining the value of the property
• Existing liabilities cannot be taken care of through a debt service
• The mortgage payment is one month or more delinquent
While short sales is a great option for many homeowners that have hit hard times, it is not the best option for everyone and it should be researched in detail before making this important decision.
What Happens After?
If the sale of your home IS a short sale and you become 30 days late or have been 30 days late or greater on any of your mortgage payments during the 12 month period before the completion of the sale of your home.
Current mortgage FANNIE MAE underwriting guidelines will not allow you to buy another home for a minimum of 2 years. At 2 Years, the borrower will be required to put down 20%. At 4 Years, the borrower will be required to put down 10% and at 7 Years, the borrower will qualify as if he never had a short sale. These guidelines could change at anytime. This information was obtained directly from Fannie Mae via Announcement SEL-2010-05 on April 14, 2010.
Current HUD (FHA) guidelines will not allow you to buy a home for 3 years. After 3 years, you will qualify like anyone else. These guidelines could change at anytime. This information was obtained directly from HUD via Mortgagee Letter 09-52 published on December 16, 2009.
* It is impossible to predict the exact impact to your credit rating because a credit rating considers your whole credit history. This process can affect you differently than it can affect someone with different credit history.
* You have the opportunity to settle with your lender and received full debt forgiveness stated in writing guaranteeing that they will never seek a deficiency judgment against you for the balance of the loan.
* If you foreclose, the affect on credit is much more brutal. You can lose as much as 300 points and conventional Fannie Mae guidelines won’t allow you to buy a home for 7 years. There are exceptions but don’t hold your breathe!
* FHA will allow you to buy a home 3 years after a foreclosure but borrowers must have used that three-year waiting period to establish and maintain a clean positive credit history. Borrowers must also be able to show that their financial history, including income, will prevent another foreclosure from happening in the future. The biggest issue when you foreclose is the lack of opportunity to settle with your lender and receive debt forgiveness as with short sale. There is nothing that prevents them from coming after you for the debt or selling it to a collection company who may come after you. You must still have the proper income, debt to income ratios, assets, and credit to qualify for a new mortgage. In addition, specific lenders may have their own policies regarding short sales. It is impossible to predict all of the issues or changes in guidelines that may interfere with your ability to purchase a new home. You are advised and encouraged to verify all of this information and seek the advice of an attorney.