Short sales aren’t the right choice for everyone, but they can provide some notable benefits. However, before you can make a good decision, you need to understand the short sale process and its implications.
The Basics of Short Sales
In real estate, a short sale occurs when the proceeds from the sale of a property will not be enough to pay the remaining balance on the property’s mortgage. In such cases, the seller of the property cannot afford to pay the remainder of the debt, either, so the lender agrees to remove his liens from the property in exchange for a reduced settlement amount.
Even though the lender agrees to cancel his liens, he can still report the amount of the shortage to the major credit bureaus, which will affect your credit rating. Lenders may also approve the short sale, but not release the shortfall. In that situation, the sale will close, but the borrower may be liable for the deficiency. In some cases, lenders may agree not to report the shortage, but they are not required to do so.
Short Sales vs. Foreclosure
In many cases, creditors agree to short sales as an alternative to foreclosure. While both foreclosures and short sales will lower your credit rating, a short sale will not harm your credit as much as a foreclosure will. Under Fannie Mae guidelines, you will be able to buy a home within two years following a short sale, while a foreclosure will prevent you from purchasing a new home for five to seven years.
Though short sales do offer some advantages over foreclosures, they are not without drawbacks. For example, your lender will not be required to agree to a short sale or accept any offer. If he chooses to foreclose on your home instead, you cannot force him to change his mind. Even if the lender does agree to consider a short sale, most banks will require significant documentation from you before they will agree to the short sale, such as tax returns, pay stubs and a hardship letter.
Short Sales and Bankruptcy
In many cases, people filing bankruptcy don’t pursue a short sale because they know that the bankruptcy will relieve them of their obligation to pay the mortgage anyway. However, even though the bankruptcy will eliminate your personal obligation to repay the mortgage debt, your property can still move into foreclosure after the bankruptcy has ended. Because the foreclosure will extend the minimum waiting period for purchasing a new home, a short sale is a better option if you hope to buy a new home sooner.
Making a Decision
Before you decide whether to pursue a short sale for your home, consider all of your options carefully. If you plan to purchase another home in the near future, a short sale may be the best option. It will allow you to resolve the debt you owe on your mortgage and prepare to buy another home within two years. However, if you need more time in your home, it may be wiser to allow foreclosure proceedings to commence. Because the foreclosure process is lengthy, you can remain in your home for a longer period of time, and you won’t have to try to find a buyer.
This blog should not be construed as providing a legal opinion or legal advice. Each person’s situation is different and requires careful analysis before an attorney at our firm can provide a recommendation or legal advice on how to proceed