Understanding Short Sales
June 3, 2010
Author: Christopher Gross, e-PRO
When a real estate market becomes soft, short sales become very popular. The short sale market is designed specifically for homeowners who have homes that are not worth the amount of their loan. Short sales work cooperatively with the mortgage company, who commits to accept the sale proceeds as paid in full on the house even though the debt will be more than the buying price.
Sellers obviously do not turn a profit from a short sale, but they do get out from a burdensome debt without having to foreclose. The lenders advantage here is the chance to sell a property quickly, which saves money.
The major beneficiaries from a short sale are the buying agents and listing agents who get commissions. Title companies, appraisers, and insurers also get a cut from a short sale because a new title policy, appraisal, and homeowners coverage must be written for the buyer. Should the seller get legal consult, that real estate lawyer will see apiece of this pie too, as might tax consultants. Of course I should add that buyers get something too more house for their money and a lower mortgage payment.
Short Sales & Credit Ratings
Normally a short sale isnt even a consideration unless youre behind on your mortgage payments. Those late payments directly impact your credit rating. Being just 30 days late drops your rating an average of 80 points, while a foreclosure or short sale drops it around 120 points.
While that sounds terrible, there is an upside here. If youd foreclosed on your property you could end up waiting as long 5 years to be considered for another mortgage (at least one with a reasonable interest rate). When you complete a short sale, by comparison, you can look to buy again in about two years. If you were current in your payments and moved into a short sale, the FHA and Fannie Mae says you can try to qualify before that time. The question then becomes finding an amenable loan institution.
Deciding on the Short Sale
If youre not certain whether a short sale is right for you, theres a lot to think about. Financial advisors disagree somewhat as to whats worse short sales or foreclosures. The scales seem tipped toward foreclosures having a worse credit impact. Then too, if you know you will eventually want to own another home and dont want to wait too long, the short sale is a much better option.
Just bear in mind that it can take several months to obtain short sale approval from a lender, and the documentation that goes with the sale can be incredibly complex and cumbersome. Make sure that you work with professionals who understand the ins and outs of this process for the best possible outcome.