The term short sale is being used frequently in today’s real estate articles and discussions. A short sale is a strategy to stop the foreclosure of a home if all parties agree to this type of real estate transaction. So here is more information on what a short sale is and why it’s become a widely used real estate transaction.
What is a short sale?
Wikipedia says …”When the proceeds of a real estate sale fall short of the balance owed on the property. In a short sale, the bank or mortgage lender agrees to discount a loan balance due to an economic or financial hardship on the part of the mortgagor. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender, sometimes (but not always) in full satisfaction of the debt. A short sale typically is executed to prevent a home foreclosure.”
For example – If a borrower owes $200,000 on a mortgage and is in default. The lender may be willing to accept $170,000 for full payment of the $200000 mortgage. Why would a bank agree to this type of sale? The bank/lender can save money by accepting less money now compared to possibly losing more money using the foreclosure process.
So why is a short sale transaction happening more often?
- 1 out of 5 Properties are in distress.
- No market level is immune. The $1 Million + price range is the fastest growing segment for foreclosures.
- Defaults for sub-prime loans issued in 2007 hit 11% (and this
was before the first reset).
- One out of two mortgages that reset (ARMS) are going into
- 7% of prime mortgages are not making payments.
- 6.35% of sub-prime loans are in foreclosure nationally and 1 in 5 are not making payments.
- Nationally, 2.2 million homeowners are in foreclosure and 8.8 million are in default (30 days late with a payment) adding up to 11 million distressed properties.
- Potential payment increase on an “Option ARM”will be 63%.
- 7 out of 10 homeowners go into foreclosure without visible intervention (i.e. they don’t try and sell their home).
Foreclosure vs. Short Sale
- A homeowner who loses a home to foreclosure is ineligible for a Freddie Mac/Fannie Mae backed mortgage for 5 years.
- A homeowner who successfully negotiates and closes a short sale will be eligible for a Fannie Mae backed mortgage after only 2 years.
- On any future 1003 loan application a prospective buyer will have to answer YES to the question “have you had a property foreclosed on.?” This will affect future rates of the borrower.
- There is no similar disclosure or question regarding a short sale.
- A foreclosure will lower a credit score any where from 250 to over 300 points, typical affecting the score for over 3 years.
- Only late payments on the mortgage will show after the sale. Mortgage will be reported as paid or negotiated. This will lower a 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.
- Foreclosure will remain as a public record on a credit history for 10 years or more.
- Short sale is not reported on a credit history. The loan is typically reported “paid in full”.
- An employer has the right to and is actively checking the credit history of employees in sensitive positions. A foreclosure can be grounds for termination or reassignment.
- A short sale is not reported on a credit report.
- In 100% of foreclosures (exception some states) the bank has the right to pursue a deficiency judgment.
- In a successful short sale, it is possible to convince a lender to give up the right to pursue a
(data from Distressed Property Institute, LLC)