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One reason why there are so many short sales on the market today is because so many homeowners are under water. This means that a homeowner purchased a home for a price that is higher than what the home is worth now. This means that if the homeowner is behind on their mortgage, they will not be able to refinance.

For example, John Smith bought a house for $300,000 in 2004. Today, because of the declining market, his home is only worth $260,000. John has an ARM that recently adjusted and he can no longer afford his monthly payments. He is facing foreclosure and cannot refinance because he does not have enough equity in the home and the home is not even worth what he originally paid for it. His only option is to try and sell the home for what the market will allow and negotiate a short sale with the bank so they essentially take what they can get for the home. This will allow John to satisfy his agreement with the bank, save his credit and one day own a home again.

The bad news is: Short Sales and Foreclosures are both going to have a negative impact on your credit report. A foreclosure and a short sale can even look about the same on your credit report. It’s devastating. But, if you can negotiate a Short Sale quickly and successfully, you can minimize that negative impact significantly. Here’s what Elizabeth Weintraub has to say on About.com:

In most cases, a Short Sale will reduce your credit score by 80-150 points, and it is possible that it may only take you about 18-24 months before you’re able to qualify for another mortgage at “reasonable” rates. When you sell your home via shortsale your credit will show late payments and a “settled for less than owed” BUT will NOT show that the home was actually foreclosed.

As of now current FHA lending guidelines allow home buyers to show a 12 month on time housing history (rental is OK) in order to qualify for a new FHA loan. This would apply in the case of a few missed payments. 2 years for bankruptcy and 3 years for a deed in lieu or a foreclosure. This means in some cases the sellers can qualify for a loan again in as little as 12 months….depending on how many payments are missed and how far behind the seller falls. This is not black and white, however, and the clock is always ticking. If the short sale takes 6 months and the seller shows payments over 6 months late/unpaid, the bank may consider this to be very similar to a foreclosure. This is all the more reason for a seller considering a short sale to act quickly.

A Foreclosure will reduce your credit score by 250-280 points, and will require a minimum of 36 months before a mortgage at “reasonable” rates is accessible, though if not FHA, most conventional programs require 4 years or more, for additional properties even as long as 7 years..

With a short sale, the biggest benefit is that you sell your home and if you don’t satisfy the mortgage amount the bank may forgive the deficiency. A short-sale is positive for both the lender who doesn’t have to go through the process of foreclosing and the homeowner, who may be able to walk away without a huge amount of debt.

If you simply walk away, your house will be sold at auction, and if the amount it’s sold for doesn’t satisfy the mortgage, you’ll be on the hook for the deficiency. And lenders can go after you for the money including attaching liens on other property you own.

A few benefits to the seller:

• You can remain in the property during the sale.

• You may be released from liability with the loan.

• You have time to make other living arrangements.

• You may be able to rent and even buy the property back from a third party.

• You can avoid a foreclosure on your credit history.

• You may be able to avoid bankruptcy.

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This entry was posted on Tuesday, June 10th, 2008 at 8:44 am and is filed under Foreclosure. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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