We have certainly heard a lot of talk about short sales, but do you know what it means and why people try to do a short sale rather than go into foreclosure? Let's start with the what? If you are a person who MUST sell and owes more than the house is worth, you may consider doing a short sale. A short sale is not a "quick fix", though. It is a lot of work for both seller and listing agent, but can be more beneficial than going into foreclosure. The first thing to know is that if an owner has mortgage insurance on the property, the bank can not give the okay for a short sale. Once you establish that there is no mortgage insurance on the property, the OWNER (not the listing agent) must ask the bank for a short sale packet. The owner must fill out this packet in order to start the process. The packet will ask the owners why they need to sell right now (the bank is looking for a hardship). They will ask for a list of assets: 401K account, cars, boats, anything of value. If the bank allows the owner to proceed with the short sale, the listing agent will list the property subject to the current lenders approval. (the listing agent can only proceed with an owner's letter of authority). At this point, the seller needs to understand that it is up to the bank to agree to a purchase offer. The seller will need to sign all contracts, but the bank is the one that has the authority to accept the offer. It is VERY important that sellers ask the bank for a "full release". There are banks that will issue a letter of agreement accepting the short sale offer, but it will also state the "bank will release the lien and charge off the remaining debit as a collectible balance". In other words... If you owed a $200,000 loan, but the short sale contract was for only $150,000, the bank would still make you pay the balance of $50,000! You don't want that deal! A letter of full release states that there is no balance to be paid off. The loan is completely forgiven. Side note... You may be wondering why a bank would take a $50,000 hit. The bank knows that if the property goes into foreclosure, they risk losing a lot more than the $50K. Banks do have a specific number in mind when they agree to a short sale, but no one knows that number until a purchase offer comes in. Only then, will all parties be told what kind of loss the bank will actually take.
Short sales can be long and hard for everyone involved, but a seller's credit score will decrease by 80-120 points, rather than the 250-280 points that it goes down with a foreclosure. (please remember: if you had late payments before going for the short sale process, your credit score decreases by 50 points every time you are late). Also, for both short sales and foreclosures, there are significant legal and tax implications, so seeking advice from the appropriate tax or legal professional should be done as well.
Hope this clears things up a bit. Probably the most important thing to remember if you are having trouble keeping up with your mortgage payments -- SPEAK WITH YOUR LENDER! Banks are not in the business of owning homes - they want you to keep your mortgage, so they will help you if at all possible!
Let me know your thoughts on this topic.
Have a great weekend.
Jenny B
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