Can you explain the financial impact as far as foreclosing versus a short sale? Why go through the pain of a short sale when it is simply easier to walk away and foreclose? - Rob, California
The bad news is: Short Sales and Foreclosures are both going to have a negative impact on your credit report. A foreclosure and a short sale can even look about the same on your credit report. It's devastating. But, if you can negotiate a Short Sale quickly and successfully, you can minimize that negative impact significantly. Here’s what Elizabeth Weintraub has to say on About.com:
In most cases, a Short Sale will reduce your credit score by 80-150 points, and it is possible that it may only take you about 18-24 months before you’re able to qualify for another mortgage at “reasonable” rates. When you sell your home via shortsale your credit will show late payments and a "settled for less than owed" BUT will NOT show that the home was actually foreclosed.
As of now current FHA lending guidelines allow home buyers to show a 12 month on time housing history (rental is OK) in order to qualify for a new FHA loan. This would apply in the case of a few missed payments. 2 years for bankruptcy and 3 years for a deed in lieu or a foreclosure. This means in some cases the sellers can qualify for a loan again in as little as 12 months....depending on how many payments are missed and how far behind the seller falls. This is not black and white, however, and the clock is always ticking. If the short sale takes 6 months and the seller shows payments over 6 months late/unpaid, the bank may consider this to be very similar to a foreclosure. This is all the more reason for a seller considering a short sale to act quickly.
A Foreclosure will reduce your credit score by 250-280 points, and will require a minimum of 36 months before a mortgage at “reasonable” rates is accessible, though if not FHA, most conventional programs require 4 years or more, for additional properties even as long as 7 years..
With a short sale, the biggest benefit is that you sell your home and if you don't satisfy the mortgage amount the bank may forgive the deficiency. A short-sale is positive for both the lender who doesn't have to go through the process of foreclosing and the homeowner, who may be able to walk away without a huge amount of debt.
If you simply walk away, your house will be sold at auction, and if the amount it's sold for doesn't satisfy the mortgage, you'll be on the hook for the deficiency. And lenders can go after you for the money including attaching liens on other property you own.
A few benefits to the seller:
- You can remain in the property during the sale.
- You may be released from liability with the loan.
- You have time to make other living arrangements.
- You may be able to rent and even buy the property back from a third party.
- You can avoid a foreclosure on your credit history.
- You may be able to avoid bankruptcy.
The benefits are fairly standard. The first lien holder will, typically, release the seller from the remaining debt (after subtracting the net proceeds of the sale from their total payoff), remove foreclosure credit blemishes, and in most cases, exempt the seller from the tax consequences of a 1099 capital gains filing to the IRS.
Forgiveness of debt basically relieves the seller from judgements, or even garnishment of wages, in some states. The judgement is calculated after all possible funds, and MI claims have been applied. The judgement is placed on your credit report for all to see and is designed to prohibit you from buying or selling anything without satisfying the judgement first. The judgement remains in place for several years, with the right to renew. With a closed short sale, a judgement will not be placed against you for Fannie Mae, Freddie Mac, VA or FHA loans.
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The removal of the FORECLOSURE from your credit report. While the foreclosure is active, the notice will remain on the credit report until the loan has been foreclosed, or an approved short sale is closed (the foreclosure process is not stopped or delayed during the listing or upon receiving an offer)
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You will be able to qualify on rental applications or purchase another home in the future without having to disclose a foreclosure on your application-this has a huge impact on your future credit worthiness
Banks don’ t want to be in the real estate business and during the delinquency and foreclosure action, they are responsible for the taxes and insurance payments. Because of this, they are willing to negotiate a short sale with you because they could reduce their losses which could be greater at the end of the foreclosure process.
An experienced real estate professional can guide you through this process, but I can’t stress enough- you must act at the first sign of trouble.
What is a short sale?
A pre-foreclosure short is simply what it looks like-homes sold “prior” to the foreclosure sale, and “short” of a full payoff. Candidates have negative equity, do not want to keep the home and are experiencing financial hardship.
Your cooperation and participation with the bank as the seller is extremely important. Without your full participation in submitting financial information, the invest will deny offers that are submitted.
Who is involved in the short sale?
You, myself, the investor, the mortgage company or “servicer”, the mortgage insurance or “MI” company as well as second lien holders, judgement holders and creditors with liens.
What about the 1099 tax form?
This aspect of a short sale is not standard across the board. (servicers can file a 1099 capital gains form for the seller on their loss) All Fannie Mae and Freddie Mac loans will fall within this exemption (they are the two largest investors in the USA-the marjority of loans will fall within this exemption) VA and FHA loans are not exempt-they have the final say but this can be part of the negotiations. However on FHA loans, sellers will receive $750 at closing for their participation and an additional $250 if the home closes within 3 months!
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