What is a "short sale"?
Any real estate transaction in which the lender or lenders, agree to accept less than the mortgage amount owed by the current owner is called a "Short Sale". In some cases, the difference is forgiven by the lender. In other cases, the homeowner must make arrangements to settle the remainder of the debt.
A short sale can often be the best option for a homeowner who is "upside down" on a mortgage because it may not hurt their credit history as much as a foreclosure. Generally speaking a short sale is not reported on a credit history. The loan is typically reported as "paid in full, settled".
Only late payments on the mortgage will show and after the sale, the mortgage as "paid or negotiated". This will lower the score as little as 50 points if all other payments are being made. A short sale's affect can be as brief as 12 to 18 months, according to the Distressed Property Institute, LLC.
A homeowner who successfully completes a short sale will be eligible for a Fannie Mae backed mortgage after only 2 years. This is also true for an investor who will be eligible for a Fannie Mae backed investment mortgage in 2 years as well.
If a homeowner loses a home to Foreclosure, he or she is ineligible for a Fannie Mae backed mortgage for 5 years and ineligible for an investment mortgage for 7 years. After a foreclosure, an individuals credit score may be lowered anywhere from 250 to over 300 points. Typically the credit score will be affected for over 3 years.
In addition, in Foreclosures, the bank has the right to pursue a deficiency judgement against the former homeowner (except in states where there is no deficiency). A foreclosure may also result in a higher possible deficiency judgement because of a lower sales price and a longer selling time.
What challenges have short sales presented for Realtors and homeowners?
The rapid increase in the number of short sales and the process of the short sale itself presents many potential problems.
1. Many realtors are new to the short sale process, which is compounded by many lenders lack of sufficient and experienced staff to negotiate and process short sales, according to the National Association of Realtors.
2.There are no consistent forms for short sales. Both the short sale process and the documents for the process and application are lender specific. This lack of uniformity makes the process difficult and time consuming to work out efficiently and effectively.
3. The negotiations are even more difficult when more than one lender is involved. Either the second or the first lender can hold up the process. They can try to get the most payment possible, in exchange for releasing their lien, even if it holds up the potential sale and a buyer may become discouraged and drop out.
As a result of these difficulties, it is especially important to use an experienced, licensed realtor, particularly a professional who has additional specialized training and certification such as a Certified Distressed Property Expert. The Distressed Property Institute, LLC can provide a list of certified, experts in your area on line or by calling 1-800-482-0335.