As the market starts to slow again, we see more people asking about short sales and whether or not they may need to sell by using a short sale. A short sale can help you avoid foreclosure, even if you are already behind in payments. It is important to discuss this option as soon as possible with a real estate agent if you know you are about to be behind or are already behind on your mortgage. This guide will walk you through how short sales work, what to consider before doing a short sale, and how long it will be before you can own a home again after selling by short sale.
What is a short sale?
A short sale is simply the process of selling a home for less than you owe on your mortgage. If you owe $300,000 on your home but can only sell your home for $240,000 you would normally have to bring $60,000 to the table at closing in order for the buyer to be able to buy your home. If you don’t have $60,000 then your options would be to stay in your home, let the bank foreclose, or try a short sale. In a short sale the bank agrees to take the $240,000 rather than the $300,000.
Short sales tend to spike when the market slows down or communities begin seeing downturns in employment and other local issues. After the housing market crash in 2008 many owners found themselves unable to afford their mortgages and we saw a lot of foreclosures and short sales. Today in many communities home owners home values have still not rebounded to what they paid for their homes in 2005-2007 so when they need to sell their home they have some tough decisions to make.
What happens to the shorted amount?
When the bank agrees to take less than you owe on your mortgage, that doesn’t mean the difference just goes away. So what happens to the money I owe from a short sale? The bank can legally still come after you for the shorted amount unless you or your real estate agent negotiate with the bank during the short sale process to have the amount forgiven. This is very important, especially if you need to sell due to a job relocation and you still have other assets the bank could come after.
However, even if the bank forgives the short sale amount, you will likely get a 1099 for the difference and have to pay taxes on the amount as income to the IRS. It is important to discuss all of the possibilities with a tax adviser, the bank, your agent and the short sale attorney if one is involved.
Who qualifies to sell using a short sale?
Obviously banks don’t want everyone trying to get out of paying their mortgage simply by selling their home for less than it is worth. Banks look at hardships and the value of your home before determining if they will approve a short sale for your home.
Short Sale Hardships include:
- Job loss
- Business failure
- Death in the family
- Illness, medical bills
- Divorce or separation
- Job relocation
- Military service
- Mortgage or property tax increases
- Loss of income
- Incarceration
As you can see these hardships can affect your ability to pay your mortgage very quickly and unexpectedly. Each bank has a short sale package that will need to be requested and completed to start the approval process for a short sale. You will need to provide proof of the hardship, as well as the value of your home. Depending on your mortgage type you may also need to apply for a loan modification first.
A loan modification can lower your mortgage payment making it easier for you to stay in your home. This is typically done by lowering your interest rate for a period of time or extending the length of your mortgage, or a combination. Typically if you are approved for a loan modification you will not be approved for a short sale. However if you are denied a loan modification the bank will usually fast track the short sale process.
Home Value
This is where contacting a real estate agent immediately will help you through a short sale process. Your real estate agent will complete a market analysis of your home. The analysis will determine what your home would likely sell for in today’s real estate market. You will need to prove to the bank that you are not able to sell your home for what you owe on it.
Many banks, and HUD if you bought your home with an FHA mortgage, have guidelines for what type of offer they will accept from a potential buyer. This can look something like they will accept an offer of 90% of the value for the first 30 days, anything lower than that will be automatically rejected. The amount tends to go down slightly as time goes on.
Do I have to be behind in my mortgage to sell by short sale?
In the past, the only way to be approved for a short sale or loan modification was to be behind in your mortgage. This is becoming less common now, but some programs still require you to be at least 31-90 days behind on your mortgage at closing. Before planning to be behind on your mortgage it is best to discuss the requirements with your bank and get access to their short sale package so you can review everything. Of course if you are already behind on your mortgage it is imperative you move quickly so you can get the short sale process started and avoid foreclosure.
How long will a short sale take?
If only I had a crystal ball! Short sales are completely different for each bank and mortgage type. Some are approved immediately and the first offer is accepted and closed within a month. Others take 4-6 months and don’t close for a year, or at all. The key to a successful short sale is having a real estate agent who stays on top of the bank, and a little bit of luck. Unfortunately an agent doesn’t control everything, and the bank is an institution that doesn’t always understand someone’s life and living situation may be dependent on their actions. As your agent we can help guide you and determine when and if you need to arrange for new living quarters.
How will a short sale affect my credit?
A short sale will definitely affect your credit, but less so than a foreclosure. Each month you are late with your mortgage payment you will see a drop in your credit score, and then you will see another drop when the short sale is recorded on your mortgage. This is why it is imperative that you take action sooner rather than later so you can minimize the affect to your credit score. In the end your score could drop 100 points or more from a short sale.
Is a short sale better than foreclosure?
In short, YES! A foreclosure will not only affect your credit score by lowering it 250 points or more, it will affect your chances of owning a home for far longer. The credit impact will also affect other credit situations more and for longer than a short sale. Anything in your future such as buying a car or applying for a rental home will be affected more by a foreclosure.
Lenders also prefer short sales over foreclosures as the process to foreclose can be long and expensive. If the end result is them not being able to sell the home for what you owe in your mortgage anyway, they would prefer to do the short sale as it will cost them less.
When can I buy another home after a short sale
In today’s market many lenders are opening mortgages to those with short sales in their past much quicker than before. There are programs for short sale survivors just 12 months out from their short sale depending on the circumstances that required the short sale. Most people can buy a home 2-3 years after a short sale. When you compare that to the 7-10 years for buying a home after a foreclosure you can see why trying to get approved for a short sale can be much better for your future.