WHAT IS A SHORT SALE?
What Is A Short Sale? A short sale is a sale of real estate in which the sale proceeds fall short of the balance owed on the property’s loan. It often occurs when a borrower cannot pay the mortgage loan on their property, but the lender decides that selling the property at a moderate loss is better than pressing the borrower. Both parties consent to the short sale process, because it allows them to avoid foreclosure, which involves hefty fees for the bank and owning a non-producing asset and poorer credit report outcomes for the borrowers.
A Short Sale is a win-win-win solution for the lender, the home owner, and the buyer:
- The lender gets a quick sale and avoids the fees and hassel of a foreclosure. In order for this to take place the lender(s) must accept a discounted payoff; meaning the bank(s) get paid less than the full loan amount owed.
- The borrowers get out from under their burden; they get complete relief from all of their mortgage debt. The end result is their home is sold, the mortgage is satisfied (paid off) and they avoid a foreclosure or a bankruptcy in the event of hardship. Perhaps even better, their credit rating will almost immediately improve because your credit report shows that your mortgage was paid in full. However, immediately following a short sale your credit score will probably drop between 50 and 100 points. At that point you will be carrying less debt, and debt reduces your credit score. The homeowner will have a lower debt to income ratio following a short sale. Less debt will help his/her credit score and within a few years it should return to normal ratings. When a Short Sale is achieved, there will not be a foreclosure. A Foreclosure damages credit up to 7 years and bankruptcy up to 10 years. Many experts believe that a foreclosure is much worse than a bankruptcy. In addition to getting their credit restored they generally get relief from possible future legal actions and deficiency judgments. All home loans owned or insured through Fannie Mae, Freddie Mac, FHA, and the VA have policies in effect that mandate debts be erased following a successful short sale. Under the Fannie Mae program you are eligible to buy another home in 2 years. FHA programs allow you to qualify for another FHA loan within 3 years.
- The buyer gets a great deal on the property, usually below market (whatever “market” means…..that’s a moving target these days.) However, there is no way of knowing how long the short sale process will take.
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