Short Sale Myths and Facts
Much of our business today is made up of listing, selling and financing homes that are currently being sold as a short sale, or homes that are bank-owned as a result of a prior foreclosure action. I’m certain most of you know the difference, but just to recap; a short sale occurs when you sell your home before it goes into foreclosure but for less than you owe on the mortgage, while a foreclosure takes place when a bank takes your home due to non-payment.
What we have to keep in mind is that whichever course of action the homeowner takes, it is the end of a dream. They are losing the home they live in, vacation in or purchased as an investment hoping to make money to set aside for their future. Be certain that when they come to you for help you do not worsen their situation by making statements that may not be certain.
There are four main questions you may be asked that I would like to review at this time.
1. Will my credit score drop less if I do a short sale?
Don’t count on it. Every instance is different and even if you’ve dealt with their lender before, the answer may change with this loan. How the credit agencies score this transaction will depend upon how their lender reports the closing. A short sale is normally considered a “settled” account, as the lender is accepting less than the balance owed. You may ask the lender to consider it “paid in full” as the settlement will save them money versus foreclosure action, but it’s doubtful that they will agree. Most credit experts consider a settled account the same as a collection, repossession, foreclosure or charge off and it will lower your credit score. Furthermore, lenders do not normally consider allowing a short sale on current accounts so your credit has already been affected as you made late payments or skipped payments. As your other creditors make random checks on your credit and realize your scores have dropped, they may increase your interest rate and fees (charge cards) or lower your credit lines, which will make your financial woes become an even heavier burden.
While most experts agree that your credit will be slightly easier to repair following a short sale rather than foreclosure, realize your credit will plummet as a result and only time and hard work will bring it back up to levels considered acceptable by lenders.
2. Will I be able to buy another home quicker if I do a short sale instead of a foreclosure?
Odds are the answer is no. Loans are granted based upon the lenders opinion of your ability and willingness to repay your loans. This is determined in a great part by your past credit history. It will take determination and time to build your credit back up. Lenders typically won’t touch a borrower who has a foreclosure on their credit history that is less than 3-4 years old and the samething applies to short sales. Anticipate renting for at least that long before attempting to purchase another home, and keep the rest of your credit clean and clear.
1. Is it true that I am not responsible for Debt Forgiveness in a short sale because of the new Debt Relief Act of 2007?
Let me state IN BOLD that I am NOT a tax expert. You should seek the advice of a tax professional! Your ability to write off this debt depends on the interpretation of the IRS and your accountant. Remember that if you took out a second loan on your home for improvements, didn’t complete said improvements and now require a short sale as you can’t pay the full mortgage balances off the odds are you WILL NOT benefit from this act. Furthermore, equity loans where the proceeds were not used to buy, build or improve the residence are not forgiven. Lastly, this act was intended for application on the taxpayer’s primary residence only so it wouldn’t apply to vacation or investment homes.
Bottom line-SEE YOUR ACCOUNTANT. Don’t make assumptions without checking the facts with an expert!
2. So why shouldn’t I just let my home go into foreclosure?
Well, for one thing a short sale does allow the lender a chance to recoup some of their money. It saves them time and money, (often as much as 8-12 months and $100,000+) so they are more likely to work with you to achieve a timely solution. If you have a willing buyer, they may find it acceptable to adjust how they report the transaction. This is why many experts do believe your credit might be restored faster under a short sale. It will still take time and work but it would be worth the attempt.
Finally, and probably the best reason for attempting a short sale is that, depending on the type of loan you have, your lender may be able to file a deficiency judgment following a foreclosure sale and go after you personally for their loss. In
While neither a short sale nor foreclosure is a situation we want to see anyone fall into, being willing to work with your client to negotiate a short sale with their lenders and find a willing buyer for their home seems to be a win-win situation. They salvage as much of their credit as possible, the buyer gets a new home to complete their dream and you not only earn commission but keep our real estate market liquid. Just remember to keep all lenders (not just the first) informed of your progress and be willing to work hard and stay organized. Success here will not
