Posted by: rgmorgan | May 28, 2009

Short sales – right or wrong move for you?

Most of you have heard the term short sale when it comes to real estate. What does it mean? A short sale occurs when someone finds themselves in a situation where if they sell their house the proceeds from the sale of the house will not be sufficient to pay off the loan or loans on the house and one or more lenders accept a discounted payoff and allow the sale to go through.

Typically some type of hardship triggers the need for a short sale. It can be loss of a job, illness or injury, divorce, job transfer, significant income reduction, family crisis or something else causing a change in the home owners life.

If a homeowner finds themselves in a position where they believe they might need to become involved in a short sale the first thing they should do is contact a Real Estate professional who will in turn suggest they talk to both a Bankruptcy attorney and their tax advisor before proceeding any further. Depending on the circumstances refinancing or seeking a loan modification may allow the homeowner to remain in their home. Regardless do not take the step of short sale lightly. Explore your options first, but if a short sale is right for you make sure you work with someone who can guide you through the rough waters ahead.

One of the keys to selling your home with a short sale is getting the lenders to agree that they will accept less than you owe on your loan without the expectation that you will be responsible for the deficit.  Why would lenders agree to that, you ask? Simply put lenders are not in the real estate business or at least they do not want to be. They make money by lending money and if their money is tied up in real estate they cannot lend it. Therefore they would prefer to settle for less (although they want to minimize the loss) and free up money to lend again rahter than foreclose and have to manage the property until they can sell it. Foreclosures cost lenders more than short sales with the added expense of the legal fees associated with them and the possibility of managing the vacant property for an unknown length of time.

OK, why should the homeowner want a short sale versus say a foreclosure.  Simply put it is better for them and their credit score. Don’t they both hurt your credit score? The answer is yes but the impact is quite different. FNMA, the 800 pound gorilla in home lending, states that if you have a foreclosure on your record they won’t consider you for a home loan for a minimum of 5 years and 6-7 years without a minimum 650 FICO credit score and 10% down. If you opt for a short sale instead of foreclosure FNMA will consider you after 24 months for any of their home loan programs and with FHA possibly even less than 24 months.

What’s right for you? You need to seek the advice of the professionals mentioned in the beginning to determine what you could or should do. It is a long process and requires careful documentation so be prepared to go through the steps if it is the action you decide to take.

These comments are not meant to be legal advice but to simply discuss the options available. All information is believed to be correct but is subject to change.

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