Here’s a deep dive into what short sales are, exactly how they vary from either a deed in lieu or a foreclosure, what impact it’s got on credit and how good of a solution they may be today.
First, let’s discuss what exactly the definition of a short sale is. A short sale is the bank agreeing to a sale that’s below what’s owed on the property. For example let’s say a home is valued at $150,000 nevertheless the mortgage owed is $175,000. If the house is able to be sold on the open marketplace for $140,000 and after real-estate commissions in addition to closing expenses the final net will be $129,000 than the bank might be willing to forfeit $46,000 ($175,000 owed on mortgage – $129,000 final net sale = $46,000). The $46,000 is additionally what’s known as the “deficiency”.
A few thing to understand, every short sale is not the same. Therefore, this process is going to be fairly unique to each one nonetheless the biggest influence on the process would be the kind of financing the home owner has. There can be three basic forms of financing, FHA, VA and Conventional. FHA and VA are federally insured mortgages that the banks have some set standards that have to be met. Conventional mortgages can be an entirely different process completely. In some cases the banks must waive the deficiency where other cases the property owner is going to be asked through negotiations to work through a repayment plan usually at a deep discount.
Next, the lender is really the person in charge of whether a short sale is going to be successful or not. In certain situations such as certain cases in which the owner is asking to execute a deed in lieu, they are instructed to place the home in the marketplace for a set period of time. That doesn’t mean that even though they must first attempt a short sale (which on most occasions will be the owners best solution) that they aren’t in control of items that can prevent the sale, much more about this below.
When someone falls behind with their mortgage the financial institution can initiate what is known Lis Pendens which is basically a legal definition for the beginning of a court process to take the asset (the house) back in foreclosure proceedings. This commonly starts when the mortgage holder (aka mortgagor) misses three payments. At this time the mortgagor has a few choices, not make any additional payments and allow the bank go ahead and take the property back following the foreclosure process, usually at the public auction. Or, carry out a deed in lieu that’s essentially signing the title over to the lender (commonly known as as cash for keys) or finally a short sale. In rare occurrences the mortgagor may qualify for some form of a repayment modification nevertheless in those cases when someone qualifies for this the modification amount is seldom enough to really help the distressed financial circumstances, it typically only prolongs the inevitable.
Exactly what is so bad about these choices, particularly when it comes to a person’s credit? Foreclosures will ruin a person’s credit for a long time. It tells the credit bureaus the person walked faraway from their debt and will make it hard to receive a loan down the road, say years, especially a mortgage. A deed in lieu essentially provides the same impact to a person’s credit as does the foreclosure nonetheless it will not be promoted to the mortgagor as such. Instead it’s introduced in order to easily escape from the problem and there could even be financial incentives attached. Why would a bank want to do this? It’s a quick strategy to reclaim the home so it’s worth it to them to provide just a little incentive.
Short sales “should be” the least damaging to ones credit, at least far less than a foreclosure or deed in lieu. It’s reported to the credit bureaus in a gentler way especially with new regulations which has been put in play. So why the “should be” disclaimer? Because each month the owner is in the short sale process every missed payment is reported to the credit bureaus. If there are a significant quantity of missed payments reported that might drag a person’s credit down as much as a foreclosure could have. What’s important is that the short sale process be started in the onset of financial difficulty. The issue becomes how timely the financial institution executes a short sale once a suitable offer is presented.
Now we’ve come to the part that a financially distressed home-owner has chosen to do the right thing and attempt to work with the bank to execute a short sale. An aggressive offer has been presented to the lending company and they wait, wait and wait. The amount of communication with Real Estate Agent’s and home owners is practically non-existent, paperwork goes into a black hole to not ever be seen again, three consecutive calls to the bank inquiring concerning the status nets three different explanations, the lender requests paperwork that’s already been supplied giving a 24-hr deadline or the file is going to be cancelled along with an additional comedy of errors which could provide night time TV with an all new show. The buyers get frustrated waiting for months and walk while the whole process starts yet again. You can find documented cases of former bank employees that have blown the whistle that they received financial bonuses for delaying or ultimately wrecking a short sale. There are numerous properties the lender rejected strong short sale offers merely to sell it months later as a bank owned property for less money. It’s enough to make you scratch your head for an explanation. It is really one of two things, either the bank has one of the worst processes of managing properties or receive non-publisized benefits for carrying non-performing assets on the books. Either one needs to be dealt with accordingly.