Tammy Hamilton | Certified Short Sale Negotiator
What is a short sale? A short sale occurs when the sale of a home is less than the balance owed on the property. In a short sale the bank agrees to discount a loan balance due to hardship or loss of income. A short sale often occurs to prevent home foreclosure. The lender will agree to the short sale if they believe that the short sale loss will be less than a foreclosure loss.
For the homeowner the short sale will avoid a foreclosure on their credit and will reflect a partial settlement of the loan. Although this will mark the homeowner credit history, the alternative of a foreclosure will put a homeowner in a credit "penalty box" for a minimum of 7 to 10 years.
The lender and or bank on the other hand views the short sale as a measure to eliminate additional losses that incur during a foreclosure process. The foreclosure process is time consuming vs a short sale and does not require the same legal diligence as a foreclosure. The short sale process is not much different than a loan modification process. As with a loan modification hardship must be proven to the lender in order to complete a short sale.
Are you considering Short Selling Your Home?
The following table addresses the *possible consequences of a foreclosure versus a successful short sale.
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Issue
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Foreclosure
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Successful Short Sale
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Current Employment
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Employers have the right and are actively checking the credit regularly of all employees who are in sensitive positions. A foreclosure in many cases is ground for immediate reassignment or termination.
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A short sale is not reported on a credit report and is therefore not a challenge to employment.
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Future Employment
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Many employers are requiring credit checks on all job applicants. A foreclosure is one of the most detrimental credit items an applicant can have and in most cases will challenge employment.
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A short sale is not reported on a credit report and is therefore not a challenge to employment.
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Security Clearances
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Foreclosure is the most challenging issue against a security clearance outside of a conviction of a serious misdemeanor or felony. If a client has a foreclosure and is a police officer, in the military, in the CIA, Security, or any other position that requires a security clearance in almost all cases clearance will be revoked and position will be terminated.
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A short sale on its own does not challenge most security clearances.
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Deficiency Judgment
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In 100% of foreclosures (except in those states where there is no deficiency) the bank has the right to pursue a deficiency judgment.
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In some successful short sales it is possible to convince the lender to give up the right to pursue a deficiency judgment against the homeowner.
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Deficiency Judgment
(amount) |
In a foreclosure the home will have to go through an REO process if it does not sell at auction. In most cases this will result in a lower sales price and longer time to sale in a declining market. This will result in a higher possible deficiency judgment.
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In a properly managed short sale the home is sold at a price that should be close to market value and in almost all cases will be better than an REO sale resulting in a lower deficiency.
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Future Fannie Mae Loan – Primary Residence
(effective May 21, 2008) |
A homeowner who loses a home to foreclosure is ineligible for a Fannie Mae backed mortgage for a period of 5 years.
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A homeowner who successfully negotiates and closes a short sale will be eligible for a Fannie Mae backed mortgage after only 2 years.
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Future Fannie Mae Loan – Non Primary
(effective May 21, 2008) |
An investor who allows a property to go to foreclosures is ineligible for a Fannie Mae backed investment mortgage for a period of 7 years.
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An investor who successfully negotiates and closes a short sale will be eligible for a Fannie Mae backed investment mortgage after only 2 years.
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Future Loan with any
Mortgage Company |
On any future 1003 application, a prospective borrower will have to answer YES to question C in Section VIII of the standard 1003 that asks “Have you had property foreclosed upon or given title or deed in lieu thereof in the last 7 years?” This will affect future rates.
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There is no similar declaration or question regarding a short sale.
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Credit Score
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Score may be lowered anywhere from 250 to over 300 points and typically will affect score for over 3 years.
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Only late payments on a mortgage will show and after a short sale, mortgage will be reported as paid or negotiated. This will lower the score as little as 50 points if all other payments are being made. A short sale effect can be as brief as 12 to 18 months.
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Credit History
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Foreclosure will remain as a public record on a person’s credit history for 10 years or more.
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Short sale is not reported on a credit history. There is no specific reporting item for “short sale”. The loan is typically reported “paid in full, settled.”
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Bank Owned (REO) vs Short Sale
You've heard the terms "bank owned," "foreclosure," "REO," and "short sale." For many, there is confusion regarding these terms.
Here is a brief description of Short Sale properties vs. Bank Owned properties.
Short sales: The homeowner has suffered a hardship and is upside down on their loan and behind on payments. The house is being sold for less than what is owed. The Bank and the Seller is involved with the negotiations.
Bank Owned, REO, Foreclosure: All three of these terms mean basically the same thing and occurs when the house went through the foreclosure process, did not sell at auction on court house steps, and went back to the bank. The bank then hires a Realtor to sell the home at a usually very aggressive price. The home is usually sold in "AS IS" condition, meaning no warranties, and any repairs are usually the buyers' responsibility.
