Troubled owners: 3 warnings about short sales
Many struggling homeowners are considering short sales as a way to avoid foreclosure on their homes, but there are a few things they should know before taking the plunge.
Dealing with the burden of owning a home that's underwater, or worth less than the underlying mortgage, can be financially devastating. Go into foreclosure and the blemish will stay on your credit report for the next seven years. Try to eke by and you put the rest of your finances in danger.
One solution some struggling homeowners turn to in hopes of limiting the financial damage is a short sale. In real estate, that term has a different meaning than the stock transaction in which an investor seeks to profit from a drop in price. A real-estate short sale entails selling the home at a loss under an agreement with the lender. Even though lenders often frown upon short sales, the U.S. government is trying to make them more amenable to such transactions. But the government may not be doing homeowners much of a favor.
In May, the Obama administration said it would expand its Making Home Affordable program by offering lenders and loan servicers an incentive of up to $1,000 for each completed short sale and up to $1,000 more to share the cost of paying any second-mortgage lenders to release their claim on the property. (If a home has a home-equity loan or home-equity line of credit, in other words, the investors who own the primary mortgage may pay those who hold the second mortgage a certain amount to settle that loan. The government will match $1 for every $2 paid by the investors, up to $1,000.) Homeowners also benefit: They can get up to $1,500 for relocation expenses.
But while a short sale may seem like a great way to avoid the financial fallout of foreclosure, it's not always the smartest move. In certain states, for example, a homeowner may have better legal protections by going the foreclosure route. And the damage to your credit score is the same whether you carry out a short sale or foreclose on the home.
Here’s what you should know about short sales before taking the leap.
1. Your credit score will tank just the same
Contrary to what many homeowners believe, a short sale can have the same devastating impact on a credit score as a foreclosure. “If someone is unable to repay their mortgage, regardless of how that turns out, that failure to repay the mortgage is highly predictive of future risk,” says Craig Watts, a spokesman for Fair Isaac, the company that calculates the FICO score, the score most commonly used by lenders. A short sale, a foreclosure and a deed-in-lieu, which lets the borrower transfer the property deed to the lender and walk away from his home, have the same impact on your score because they are all regarded as serious delinquencies. “When an account goes to foreclosure or a short sale, that’s as severe as it can get,” Watts says.
The impact on your score will depend on what shape it was in before the short sale or foreclosure. If your credit was good — say you had no late payments before the short sale and your score was in the 700s — your score could drop by 200 points, Watts says. Your score will begin to recover after a year or two, but how soon it gets to its previous level is going to depend on how you handle your credit in the meantime.
The drop will be less severe if your score was already low because of late payments or other negative marks on your credit. So if you persuade your lender to do a short sale without having a late payment on record, your credit score will tank a lot further than if you’ve been missing mortgage payments for months, as typically happens with a foreclosure.
2. The lender may come after you for the difference
Depending on the state you live in, you may have more protections from your lender with a foreclosure than with a short sale.
This is particularly true in states that ban deficiency judgments in foreclosure, such as California, Minnesota and Alaska, says Mark Ireland, supervising attorney at the Foreclosure Relief Law Project, a St. Paul, Minn.-based nonprofit that represents homeowners and neighborhoods affected by the foreclosure crisis. Deficiency judgments empower lenders to sue borrowers if the home they lost in foreclosure is sold for less than what they owe, he says.
When a short sale occurs, meanwhile, the bank will almost always try to get the homeowner to sign a promissory note agreeing to pay back the difference between the amount they owe and the final sale price, says Robert Lattas, a real-estate attorney in Chicago who specializes in foreclosure and short sales. It's up to the homeowner or the homeowner’s attorney to try to get the clause removed and the lender to agree not to pursue any further payment by the homeowner.
3. You'll have less time to recover financially
In most states, a foreclosure takes at least several months — a time when homeowners don’t make house payments and can create a cash cushion that will let them move on with their lives after they leave the property, Ireland says. In states that have a nonjudicial process — meaning the lender doesn’t have to take you to court to foreclose and the process is much faster — the homeowner gets a redemption period that can be as long as 12 months. (Click here for a list of states and information on redemption periods, compiled by foreclosure listing company RealtyTrac.) “The redemption period is an opportunity for a soft landing,” Ireland says. “You give that up with a short sale.”
ALL OF WHAT I HAVE READ ,SEEN,AND HEARD IS ABSOLUTELY HORRIFIC. I RECENTLY RECEIVED A UNEXPECTED CHILD SUPPORT
SETTELMENT AFTER RAISING MY CHILDREN AND THEIR CHILDREN , ALL THE WHILE WORKING 2-3 JOBS. AN 30 YEARS LATTER.
I HAVE LIVED BEYOND MY MEANS MOST OF THOSE YEARS. THE KIDS REALLY NEVER WANTED FOR ANYTHING, BUT THEIR MOM WHO WAS ALWAYS AT WORK. WHEN I GO TO LOOK AT PROPERTY TODAY, I SEE A LITTLE SHOE, TOYS PICTURES AND A LOT OF ANGER AND PAIN THAT A FAMILY ENDURED OVER GREED, MONEY AND KEEPING UP WITH THE JONES. THAT IS WHAT IS CALLED THE AMERICAN DREAM. FANCI CARS , CELL PHONES COUNTRY CLUBS . DOES ANYONE CONSIDER THE IMPACT ON THE KIDS. THE DROP OUT RATE IN SCHOOLS IS AT CRISIS NUMBERS, NOW NOT ONLY DO OUR KIDS NOT HAVE AN EDUCATION THEY ARE HOMELESS.
I CANT IMAGINE THE FEAR THESE CHILDREN ARE LIVING WITH. WHO DO YOU THINK THEY WILL GROW UP AND BE.? THE WORLD IS NOT GETTING BETTER. I HEAR ALL THE CRAP ABOUT OWING THE IRS, LOSING AN INVESTMENT, ETC. WHAT DO YOU THINK OUR CHILDREN ARE? I HAVE WORKED WITH GANG BANGERS FOR 15 YEARS IN CORRECTIONS AND 15 YEARS IN EDUCATION. IT STARTS AT HOME. HOME DOES NOT MEAN ANYTHING ANYMORE UNLESS WE HAVE A BETTER AND MORE EXPENSIVE ONE. SO PAY OFF THE IRS, SUE THE LENDER OR REALTORS FOR LOSING THEIR FUDISHUARY DUTY, OR BLAME YOURSELF. JUST TAKE CARE OF THE KIDS AND GET BACK TO A SIMPLIFIED AND HUMBLE LIFE. READ TOGETHER, EAT DINNER(HOMEMADE) TOGETHER, SET AN EXAMPLE OF PERSEVERANCE AND INTEGRITY. I AM NO DIFFERENT OR BETTER, SO FORGET WHAT WE LOST AND APPRECIATE WHAT IS LEFT.
First, why are you looking to do a short sale? Have you thought about staying in your home? Where are you going to go? Check out a site called payoffthatmortgagefund at either .com or .net you may be pleasantly suprised. There are alternatives to giving away your home.
If the concept works, it just may be the simplest solution to our housing crisis.
I reading a lot about short sale for home owners... how about a short sale on an investment property (condo)? Are they treated differently? Can the bank come after my condo that I am living in or my savings?
Just want to see what are my options. I've always had good credits and had automated monthly deductions for my mortgages and condo fees but as soon as my tenant moved out and I couldn't get another due to high rents and condo fees. I can't afford to pay my mortgages and the supposedly the investment one.
America........go bankrupt....list the house too....don't be afraid.......that's what the law is used for...............................Just start all over again.............start fresh.................can't start over ?????? Dust yourself off.......stop crying..............
It is absolutely the Lender's fault for approving loans to buyers who obviously wouldn't qualify for a loan in the first place. I worked as a loan processor for years and I left because it was getting out of control with how greedy these mortgage brokers were getting. They never cared about the outcome except that they would get their big commission checks and the huge payoffs from the Banks/Lenders from the bank end of the loans. These checks were way bigger then their commission checks, FYI! That is the only reason why people were able to buy these homes because the Brokers lied and said, "Of course you can afford to buy this dream home of yours."
I did a Short Sale on my home back in Oct. 2008 in Southern California. Our homes value dropped in value by over $300k. I called the bank(GMAC) all way back in Nov. 2007 and asked for help to re-appraise the home and they said no way and to just Short Sale it but that they would not start the process until I was over 30 days late. Then I called after I was late and they re-appraised it then. Okay, I thought this is dumb but I will refuse to pay a mortgage & taxes on a home that is worth over $300k less now. The bank was pretty good with the process, we had no problems with them just some buyers in the process. Anyway, we closed in Oct. of 2008 and we even purchased another home 4 months later with no money down at 5.5% for $420k thru Wells Fargo Mortgage. With the money we set aside from not paying our mortgage on the Short Sale property we took a long vacation and paid bills. The home we bought is a bigger and better home only 5 miles from our old one.
We are living proof that a Short Sale is not as bad as a Foreclosure when it comes to your credit. Also, when we filed taxes and received the 1099 from the bank it put us in the free and clear from having to paying a penny in penalties from the difference we sold it for and not paying our taxes which we also owed over $50k on. Thank you Mortgage Forgiveness Debt Relief Act & Thank you for Short Sales!!!!
So some here say...let's not blame the lenders...ok, how about the brokers, or the appraisers. Using the equity in ones home to improve it...repair it, upgrade it, is very usual and common, anyone who's ever done this knows how much a new roof can cost, or having to replace all old galvanized steel piping and underground plumbing system, etc. after having ones home for years and years. We didn't make enough to save and keep up...bla, bla,...so my story goes. But how dare they tell me my home is worth 450k, and then one year later after all the upgrades and repairs it come in at a whopping $150k, hmmm, yea, you tell me what i did wrong, what went wrong was the watchdogs let the wolves guard the flock. They way over appraised properties, and even mistated my income...I promptly brought that to their attention... and even provided income statements and tax return copies...and still managed to get the loan because of all the so called equity. The house fix, not able to sell for it's $70k less than it's appraised value barely a year prior, so yea baby short sell, oh and the difference....this is a home sale...$250k exemption from how I read it, so the bank took it in the shorts for $213k, well that's less than the $250k I don't think I will have to be paying taxes on that if I read the rules right. I could be wrong, hoping that I am not.
Under NAIS, a property has been signed up either voluntarily or unbeknownst to the owner by the state or some other entity, because there was one animal or more livestock, such as a horse, cow, pet pot belly pig. This step clouds title to private property. It has been given a global positioning number which stays forever even if no animals are ever on the property again.
The USDA program called NAIS (National animal Identification System) was developed to benefit and improve marketability of factory farms and corporate agriculture. But while factory farms and big ag gets a free ride, the ones who have to work and pay for the program are private property owners, mostly those who are small producers who raise even one farm animal whether for a pet, their own consumption or to sell locally.