What exactly is a short sale?
A short sale is when a bank agrees to accept less than the total amount owed on a mortgage to avoid having to foreclose on the property. This is not a new practice; banks have been doing short sales for years. Only recently, due to the current state of the housing market and economy, has this process become a part of the public consciousness.
To be eligible for a short sale you first have to qualify!
To qualify for a short sale:
- Your house must be worth less than you owe on it.
- You must be able to prove that you are the victim of a true financial hardship, such as a decrease in wages, job loss, or medical condition that has altered your ability to make the same income as when the loan was originated. Divorce, estate situations, etc… also qualify.
Now that you have a basic understanding of what a short sale is, there are some huge misconceptions when it comes to a short sale vs. a foreclosure.
1.) If you let your home go to foreclosure you are done with the situation and you can walk away with a clean slate.
The reality is that this couldn’t be any farther from the truth in most situations. You could end up with an IRS tax liability and still owing the bank money. Banks are continuing to pursue the deficiency balances when the bank ultimately sells the property. As an example, if the outstanding balance on your mortgage is $300,000 and the bank forecloses and sells the home for $200,000 then the bank has the right to try and collect the $100,000 difference plus all of their expenses like attorney fees and closing costs.
2.) There are no options to avoid foreclosure.
Now more than ever, there are options to avoid foreclosure. Besides a short sale, loan modifications along with deed in lieu are also examples of the many options. In most cases (but not all) a short sale is the best option.
3.) Banks do not want to participate in a short sale, or, it is too hard to qualify for a short sale.
Banks would rather perform a short sale than a foreclosure any day. A foreclosure takes a long time and creates a huge expense for the banks; a short sale saves both time and money.
4.) Short sales are not that common.
At this present time the number short sales has gone up and is predicted to keep increasing in 2013. A short sale should be looked at as a helpful tool, not a negative stigma.That is why the government is offering programs that actually pay consumers to participate in short sales. It is not just affecting one community; it is affecting communities and consumers across the nation.
5.) The short sale process is too difficult and they often get denied.
Though the short sale process is time consuming; it is not as difficult as the media would have you believe. It is true that if the short sale process is not followed correctly there is a good chance of getting denied. An experienced agent knows how to avoid this. Short sales require a lot of experience, and a special skill set.
6.) Short sales will cost me money out of pocket.
A short sale should not cost you any out of pocket money. In fact, you could get between $3000-up to $30,000 to participate in a short sale. In many ways, a short sale may put you in a better financial position than prior to the short sale. As a seller of a property you should never have to pay for any short sale cost upfront to any professional service. Realtors charge a commission that is paid for by the bank.
7.) If I am behind on my payments, I can perform a short sale any time.
The farther you get behind on your payments, the harder it is to get a short sale approved. The closer a property gets to a foreclosure the harder it is to convince the bank to perform a short sale. As they get closer to a foreclosure sale more money is spent, thus deterring them from doing a short sale. If you think you need to perform a short sale, time is of the essence; the sooner you start the process, the better. Waiting too long can trigger the ramifications of a foreclosure, losing the ability to do a short sale as a viable option.
8.) I have already been sent a foreclosure notice so I can’t perform a short sale.
If you have received a notice to foreclose this means the bank is filing paperwork and starting the process to take legal action to repossess the house. You still have time at this point to prevent foreclosure, but do not hesitate! The closer you get to the foreclosure date the harder it becomes to negotiate with the bank for whichever option you choose.
9.) I was denied for a loan modification, so I know I will get denied for a short sale.
Short sales and loan modifications are handled by two separate departments at the bank. These processes are totally different in approval and denial. If you got denied for a modification you can still apply for a short sale; in some cases you can get a short sale approved faster than a loan modification, as some loan modifications are denied because they cannot reduce the loan low enough based on the consumers income.
10.) If I go through a short sale I cannot buy another house for a long time.
The time to buy another house depends on your entire credit picture and can vary from 2-3 years.
These are just a few of the common myths surrounding short sales and foreclosure. With the options available today, no homeowner should ever have to go through foreclosure, and hopefully this information can help a few more homeowners think twice before walking away from their home not realizing the possible long term ramifications a foreclosure can have.