What is a short sale? Very simply, a short sale is when a mortgage lender agrees to accept less than the total amount of money they are owed on a piece of property in order to facilitate the sale of that property. This is done when the owners of the property can prove to the lender they are no longer financially capable of making their mortgage payments every month. A short sale allows the owner to sell the property and avoid having a foreclosure ruin their credit and economic future for up to ten years. A foreclosure is by far the worst possible item you can have on your credit report.
A completed short sale will not show up on your credit report as a foreclosure action. Instead it will most likely appear as a debt settled for less than was owed. This is a much less drastic effect on your credit rating. Yes it will impact your credit score and will hurt you but it is a short term hit and you will recover from it relatively quickly. Normally within 24-36 months your credit rating will have rebounded to the point where obtaining loans and financing will no longer be an issue, assuming you have made all of your payments and kept your credit clean since the completion of your short sale.
But there is even more incentive now to do a short sale rather than a foreclosure. In December of 2009, FHA (Federal Housing Administration) announced if you sold your home as a short sale you could immediately qualify to buy another home with a 3.5% down FHA loan so long as:
- The home you short sold was financed with a non-recourse loan. A non-recourse loan is one where the lender cannot come after you for a deficiency judgment if they foreclose on the property. Their only recourse is to take the property back.
- The home you short sold was your primary residence and you can show that the hardship you were under in trying to keep that loan either no longer exists or the payment on this new loan will be significantly less and therefore more affordable.
- You were not late on your mortgage payments at the time of the short sale.
- You did not short sale your house as part of a strategic default just to take advantage of market conditions. (You didn’t walk away from the house even though you could have kept it but it didn’t make sense to keep paying on it because its value had dropped so much.)
Now number three is normally the one that can keep people from qualifying for this program. After all, the reason you short sale your home is because you can no longer afford the payments. But, here is a little known trick if you are worried about getting a loan after a short sale.
If you approach your lender for a loan modification before you go into default and they agree to lower your payments for a period of time, then so long as you continue to make those agreed upon lower payments you are not in default as far as FHA is concerned. You are still abiding by the new, modified terms of your loan given to you by your lender. Then you can still decide to short sale your home down the road and be able to get a loan with no waiting period from FHA under this program.
But even if this new FHA program doesn’t work for you, the benefits of a short sale over a foreclosure when it comes time to buy a new home are significant. You normally have to wait up to three years to qualify for a new loan. But HUD regulations allow lenders to make exceptions to this three year waiting period. For instance if your default was due to illness or death of a spouse which impacted your income.
Having to make the decision to give up your home is never easy. There are always going to be certain consequences to deal with. But using a short sale minimizes those consequences and gives you the best chance to get back on your feet and rebuild your life immediately.
Daniel Doran is a 20+ year veteran in the real estate industry. He is a previous owner of a law firm, mortgage and title company. Daniel has also written several books on mortgage modification, short sales and real estate investing. He currently specializes in Commercial Finance and Real Estate Development and is a graduate of Manhattanville College and Brooklyn Law School. You can contact Dan at Buildings By Owner.