Short sales are becoming a necessary tool for both lenders and borrowers. Although the process can be complicated and lengthy, short sales allow borrowers to sell their home for less than they owe. In many instances, the homeowner can walk away from their house without owing additional monies.
There are two types of short sales - Deficiency judgment and Payment in full without pursuit of deficiency judgment. When discussing short sales with your lender it is imperative to determine which type your lender engages in. Otherwise, you could end up being responsible for the difference between the purchase price and mortgage note balance
Deficiency judgments require the borrower to pay the difference between the sale price and balance of the mortgage loan. For example, if you owe $225,000 to your lender and sell your house for $190,000, you will owe the bank $35,000. The judgment remains on your credit history for up to 7 years; even if it has been paid in full.
Payment in full without pursuit of deficiency judgment allows borrowers to walk away from their house without owing additional funds. Obviously, this is the best option. However, if your lender does not offer this option, you must consider if a deficiency judgment will serve you better than foreclosure.
It's important to understand the foreclosure process cost banks around $60,000 and typically takes about 18 months to complete. In order to obtain short sale approval, you must be able to show the bank that allowing you to engage in a short sale will be less detrimental to their bottom line than foreclosure.
In order to qualify for short sales you cannot have any equity in your home and must be at least 60 days delinquent on your loan. Additionally, the house must be used as your primary residence. Short sales are not available for investment properties or second homes. Finally, you must owe more on your loan than your home is worth.
Although short sales are less detrimental to your credit than foreclosure, there will still be some financial fallout. Short sales can lower your credit score by as much as 200 points and remain on your credit for up to 7 years. Foreclosures can lower your credit score by as much as 300 points and remain on your credit for 10 years.
Engaging in a short sale allows borrowers to have more control over the final outcome. Although homeowners must sell their house they can walk away with their dignity and avoid the foreclosure process. In many instances, homeowners can qualify to purchase another home within one to three years after a short sale; whereas borrowers who lose their home to foreclosure might not qualify for a mortgage loan for ten years.
If you are considering a short sale, take time to understand the process involved, along with the pros and cons. Our short sales article library is packed with informative articles which provide additional resources to help determine if short sales are the best option for you.