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James Michaels

Broker Associate

Short Sales



"south loop real estate"

Foreclosure vs. Short Sale

 

 
A Short Sale will in NO Way affect your Credit as much as a Foreclosure will!!  

 

 

Don't let the bank force you into

foreclosure, a deficiency judgement, wage garnishments,and bankruptcy.  

 That's 3 Judgments against you.
 

In general, a Short Sale in Real Estate occurs when the sales price of the home is NOT high enough to cover

the Liens (mortgages) and closing costs. 

When this happens, a seller only has 2 options: 


1 - come to the closing with a Check

2 - Short Sell the home. 

I CAN help you:  Whether you have never missed a payment or you have missed many payments, I have the ability to process your short sale successfully.  The sooner you contact me.  the better our success rate is.

Call for a FREE, NO Obligation Consultation

 

What is a Short Sale



Short Sale

short sale is a sale of real estate in which the proceeds from selling the property will fall short of the balance of debts secured by liens against the property and the property owner cannot afford to repay the liens' full amounts, whereby the lien holders agree to release their lien on the real estate and accept less than the amount owed on the debt. Any unpaid balance owed to the creditors is known as a deficiency.[1] Short sale agreements do not necessarily release borrowers from their obligations to repay any deficiencies of the loans, unless specifically agreed to between the parties.

A short sale is often used as an alternative to foreclosure because it mitigates additional fees and costs to both the creditor and borrower; however both will often result in a negative credit report against the property owner.

Process

Often creditors require the borrower to prove they have an economic or financial hardship preventing them from being able to pay the deficiency.

Creditors holding liens against real estate can include Primary Mortgages, Junior lien holders—such as second mortgages, Home Equity Lines of Credit HELOC lenders, Home Owners Association HOA (special assessment liens)—all of whom will need to approve individual applications for a short sale, should they be asked to take less than what is owed.

Most large creditors have special loss mitigation departments that evaluate borrowers' applications for short sale approval. Often creditors use pre-determined criteria for approving the borrowers and the terms of the sale of the properties. Part of this process typically includes the creditor(s) determining the current market value of the real estate by obtaining an independent evaluation of the property from an appraisal, a Broker Price Opinion (abbreviated BPO), or a Broker Opinion of Value (abbreviated BOV).

Depending on each creditor's policy and the type of loan, creditors may accept applications from borrowers even if the borrower is not in default with their payments. Due to the overwhelming number of defaulting borrowers due to mortgage failures and other causes as part of the financial crisis of 2007–2011, many creditors have become adept at processing such short sales applications; however, it can still take several months for the process from start to finish, often requiring multiple levels of approval.

Additional Parties with an Interest in the Real Estate

Some junior lien holders and other with an interest in the property may object to the amounts other lien holders are receiving. It is possible for any one lien holder to prevent a short sale by refusing to agree to negotiate a reduction in their payoff to release their lien. If a Creditor has mortgage insurance on their loan, the insurer will likely also become a third party to these negotiations as the insurance policy may be asked to pay out a claim to offset the Creditor's loss. The wide array of parties, parameters and processes involved in a short sale can make it a complex and highly specialized form of debt renegotiation. Short sales can have a high risk of failure from inability to obtain agreement from all parties or they might not be approved in time to prevent a scheduled foreclosure date.

Private Debt Negotiation Services and Non-Profit HUD Approved Housing Counselors

The Federal Trade Commission and individual States license and regulate debt negotiators and other consultants who, for a fee, advise borrowers and negotiate loan modifications with creditors on the borrower's behalf. These consultants are required by various laws to disclosure to borrowers the risks of renegotiating their mortgages and/or selling their property short. The Federal government sanctions and recommends borrowers use only HUD approved non-profit organization, who do not charge a fee for their services, however such services rarely provide short sale negotiation services. Private debt negotiators, who do short sale negotiations and also charge a fee for their service, are required in some states to be licensed, obtain a fidelity bond and insurance. They might also be limited to the amount they can charge and when these fees are due to be paid by the borrower. In many states Real estate brokers, who handle a short sale application as part of their real estate services, are often allowed to do so without additional licensing or insurance.

Due to the risks and benefits from obtaining a short sale approval, the Federal government and individual states have different and often changing laws protecting borrowers.

Credit Implications

A short sale negotiation resulting in a reduction of the amount a borrower owes towards a debt acts as a type of settlement or renegotiation of a borrower's debt. Should the creditor report the debt reduction to credit reporting agencies it can adversely affect a person's credit report. After a short sale borrowers may find it difficult to obtain a new mortgage as lender's underwriting guidelines might reject lending to a borrower who has obtained a short sale in the past.

As of 2011, National and State laws and industry standards for both real estate sales and lending are in an ongoing and rapid state of change. Borrowers interested in pursuing a short sale should consult first with a HUD approved mortgage counselor for up-to-date and specific advice as it applies to their situation. Also, borrowers need to obtain up to date information from multiple professionals, including an accountant, an attorney, and a real estate broker - all of who specialize in loss mitigation and are licensed to practice in the state where the real estate is located.

 

Should You Choose a Short Sale Over a Foreclosure?


Whether you should do a short sale or let the home go to foreclosure depends on several factors. While for some homeowners, it is easier to throw up your hands and let the bank take your home, that might not be the wisest thing to do.

Short Sale Benefits

Here are a few benefits for doing a short sale that may not have occurred to you:

  •     You are in control of the sale, not the bank.
  •     You may sleep better at night knowing who is buying your home.
  •     You will spare yourself the social stigma of the "F" word, foreclosure.
  •     Contrary to popular belief, you can be current on your payments and still effect a short sale.
  •     Your home sale will be handled like any other home sale.

Buying Again After a Short Sale

If your payments have never fallen behind 30 days late and the lender does not require that you pay back the loan, Fannie Mae guidelines may allow you to buy another home immediately. Finding a lender who will fund that kind of loan is very difficult. If you are current on your mortgage, you can qualify for an FHA loan immediately as well, but lender requirements can be weird such as you have to move more than 600 miles away.

If your payments are in arrears yet a short sale is granted by your lender, you may qualify to buy another home with a Fannie-Mae backed mortgage within two years, regardless of whether the home is your primary residence. The wait for FHA is 3 years. 

Buying Again After a Foreclosure

With certain restrictions, you may be eligible to buy another home in 5 years if the home was your primary residence. Without restrictions, the wait is 7 years.

If you are an investor and do not occupy the home, the wait to buy with a Fannie Mae insured loan is 7 years.
Affects on Credit After a Short Sale

A short sale may be considered to be a derogatory mark on your credit even though credit bureaus do not show the word "short sale" on your credit report. It may say "paid in full for less than agreed" or "settled for less," among other categories. Some clients have reported negative FICO score drops from 50 points to 130 points.

Major point drops are typically due to being in default, meaning you have fallen behind on your payments. 

Affects on Credit After a Foreclosure

Depending on your credit history and other guidlines, Myfico.com shows 2 examples in which a credit score could fall 105 points to 160 points after a foreclosure. Generally, a foreclosure will remain on your credit report in the tradelines section for 7 years. 

Credit Reports After a Short Sale

All lenders report short sales differently, with many reporting "paid in full for less than agreed," and some report the short sale as a charge off. Negative credit, however, stays on your report for 7 years. 

Credit Reports After a Foreclosure

If a prospective employer runs a credit check on you, your job application may be denied if you have a foreclosure on your record. 

Deficiency Judgments After a Short Sale

Judgments are often negotiated between the seller and the short sale bank. In some cases, such as California, if the home is your personal residence and was financed through purchase money, there is no deficiency judgment.

Deficiency Judgments After a Foreclosure

Banks are generally unwilling to negotiate deficiency judgments with the homeowner after a foreclosure. In California, for example, according to the California Association of REALTORS, a deficiency judgment may be filed regarding a hard-money loan if the lender forecloses under a judicial foreclosure versus a trustee sale or if the second loan is a hard money loan and the sale takes place as a trustee's sale. 

Loan Application Questions After a Short Sale

Loan applications do not ask questions about a short sale. You may report that you sold your home. 

Loan Application Questions After a Foreclosure

You are required to answer the question: "Have you ever had a property foreclosed upon or given a deed-in-lieu thereof in the past 7 years." If the bank sees you have had a foreclosure, your loan most likely will be denied. If you lie, you may be subject to investigation by the FBI for mortgage fraud. 

Length of Time to Move After a Short Sale

If you've had a foreclosure notice filed, you may be able to postpone that action while the bank considers your short sale. The wait for short sale approval can be from 2 to 3 months, or longer. 

Length of Time to Move After a Foreclosure

Unless prior arrangements have been made, the bank may want you to immediately vacate the property and can commence eviction proceedings. 

Taxation After a Short Sale

A personal residence is exempt from mortgage debt relief until the end of 2012 on a federal level. Some states will still tax you unless you qualify for an exemption. An investor is not exempt from mortgage debt relief, subject to certain conditions. 

Taxation After a Foreclosure

Same as with a short sale. Except some lenders immediately send out 1099s, even if the owner is exempt.

In closing, always obtain legal and tax advice before making a decision between a short sale or a foreclosure.