Short Sale Can be an Alternative to a Foreclosure
Written by: Kristy Welsh
- Homeowner with a mortgage balance that's higher than the current value of their home (a.k.a. "underwater")
- Case of financial hardship (loss of income, loss of renter, balloon payment looming, medical emergency, etc, etc)
- A sprinkling of sage advice (from a lawyer or tax professional)
- Large dollops of persistence and perseverance (from you and your realtor)
- Generous pinches of patience (from you, your realtor, and your potential buyer)
Clearly I've been watching too much TV this winter, because I'm tempted to mix the Food Channel with HGTV, and toss in Lost, to suggest a new reality show called Short Sale Stories.
Picture it. Nice people. Faceless villains (the banks). Home threatened. Future uncertain. Hopefulness alternates with despair, week after week, until the final episode when the bank approves the short sale. Or, the bank forecloses.
What is a Short Sale?
A short sale is a viable option for homeowners who find themselves owing more on their mortgage than their house is now worth. The process is slow and aggravating and paperwork intensive, and the outcome is never certain until the deal closes, but the banks seem to be getting better at it. They have to. Many owners who bought at the height of the market are upside-down on their mortgages in today's economy. If they need to sell now, chances are it will be a short sale.
A short sale is generally less hurtful to your credit than a foreclosure would be. Though the credit scoring model is a black box and no one can accurately predict the effect of any one item, according to the National Association of Realtors, a foreclosure can lower your credit score by 200 points or more, and remains public record (and on your credit history) for 7 years. A short sale, on the other hand, could lower your credit score by as little as 50 points if you are current with other payments. Your lender can report the short sale as Paid in full - Paid as Agreed, or Paid - Settled in Full for Amount Less than Owed, or Paid - Unrated. True, this less than perfect mark will also remain on your credit report for 7 years as well, but it's better than a foreclosure.
How to Pursue a Short Sale
- First talk to your lawyer or tax advisor so you understand what a short sale will mean to your financial future.
- There are other choices on the menu you might consider:
- Handing your house keys back to the bank (deed-in-lieu); or,
- foreclosure which can offer anti-deficiency protection in some states such as Arizona.
- If a short sale is the best answer in your particular situation, then talk to your bank and explain your hardship. They should send you paperwork to get things started.
- Finally, find a good realtor to list your home for sale and to help you find a buyer who is patient enough to stick with you through the bank negotiations. It can take several months.
Find a Knowledgable Realtor
Your realtor will be the point of contact between you, the bank, and potential buyers. You will want one who is patient, persistent, and knowledgeable about short sales. Choose wisely for the most palatable result.
You can read our article about the other side of the fence — buying a short sale property.