Short Sales

WHAT IS A SHORT SALE? 

A short sale occurs when a property sells for a price that is insufficient to pay back the loan(s) secured against it (or any other liens against the property, such as delinquent property taxes, Homeowners/Condominium Association fees, etc.) as well as standard sales closing costs. In such a case, in order to complete the sale, you, as a Seller, must either: (1) come to closing with sufficient cash from other sources to cover these shortfalls; or, (2) your lender(s) must agree to forgive all or a portion of the amounts you are 'short' or make other arrangements for repayment (such as an execution of a promissory note). The second alternative is commonly known as a Short Sale. Your lender will generally not allow you to receive any proceeds or otherwise obtain any monetary benefit as part of a Short Sale.

WHAT OTHER OPTIONS MAY BE AVAILABLE OTHER THAN A SHORT SALE? 

Depending upon your financial condition and other factors such as other liens against the property and available interest rates, you may be able to negotiate a modification of your loan(s), refinance, deed the property back to the lender in lieu of foreclosure, or declare bankruptcy in lieu of attempting a Short Sale. You may also be eligible for government assisted refinancing options such as FHASecure or visit www.hud.gov. Other options may be available depending upon your individual circumstances and you should consult with legal, tax, credit or financial advisors to help you evaluate theses options and determine whether any others may exist and be more appropriate for your circumstances.

WHAT IS THE PROCESS FOR GETTING A SHORT SALE APPROVED?

There is no universal set of rules or regulations that determine whether you are eligible for a Short Sale or whether your lender(s) will approve a Short Sale. Each lender is different and each has established their own criteria, which may or may not be favorable to you. Some lenders will not communicate with anyone but you regarding a possible Short Sale and others may not discuss the possibility of a Short Sale unless you are in default, or until a contract offer is presented. The basic general steps in the Short Sale process after listing the property for sale are:

• Proving Financial Hardship: You must typically prove to your lender(s) that you are experiencing financial hardship and will be unable to continue making loan payments. In some, but not all cases, you may already be in default of your payment obligations. Most lenders will require you to provide specific information such as a financial affidavit, tax returns, bank statements, and pay stubs in order to prove financial hardship.
  
  
• Determining Property Value: Once you have proven a financial hardship, you must be able to demonstrate that the property is worth less than the total amount owed to your lender and any other lien holders. Frequently, your lender will require a Broker's Price Opinion (BPO) or Comparative Market Analysis (CMA) from a Realtor, and it may also order an appraisal of the property from a licensed appraiser of their choosing. In come cases you may be responsible for this expense.
  
  
• Finding a Buyer: A qualified buyer must submit an offer to purchase the property, which is then submitted to the lender for approval. Each lender with a mortgage or lien against the property must approve the potential purchase to the extent that their loans will not be paid in full at closing. Many lenders will not even consider a Short Sale, review the property's value, or evaluate your hardship until a bona fide offer to purchase is received.
  
  
• Final Approval: Once your lender acknowledges your inability to continue satisfying your payment obligations and the fact that the property is not worth as much as the loan(s) secured by the property, you or your representative must convince the appropriate decision makers at each lender that it is in their best interest to approve the Short Sale. Most lenders have a specific department that handles these requests which is commonly referred to as either the Loss Mitigation, Pre-foreclosure, or Loan Workout department.

HOW LONG WILL FORECLOSURE AFFECT MY FICO SCORE? 

A foreclosure remains on your credit report for 7 years, but its impact to your FICO® score will lessen over time. While a foreclosure is considered a very negative event by your FICO score, it's a common misconception that it will ruin your score for a very long time. In fact, if you keep all of your other credit obligations in good standing, your FICO score can begin to rebound in as little as 2 years. The important thing to keep in mind is that a foreclosure is a single negative item, and if you keep this item isolated, it will be much less damaging to your FICO score than if you had a foreclosure in addition to defaulting on other credit obligations.

FORECLOSURES AND SHORT SALES WILL IMPACT YOUR CREDIT SCORE! 

How many points will my credit score drop from a foreclosure? There is no correct answer here, and anyone who tries to give you an exact point drop is guessing. I'd expect a 100-150 point drop for most folks from a foreclosure. A 200 point drop is more likely if you had a score over 750-800, but I suspect few people are in this scenario, as most people are looking at foreclosure after maxing out credit cards and being late on other loans. The length of time your credit score needs to recover? Again, it depends, over a year in most cases. A foreclosure is not quite as damaging as a bankruptcy and a bankruptcy can take 18 months or longer to improve your credit score. Your score is not likely to reach the 800s until the foreclosure drops off your credit file and that will take 7 years. Remember, a bankruptcy takes 10 years to fall off your report.

Because of the credit crunch, Fannie Mae has stated new requirements before you can be approved again for a home loan:

• Foreclosure: 5 years from completion date; additionally between 5 and 7 years you can only purchase a personal residence, and must have a minimum of 10% down and 680 credit score. Also you can only do limited cash-out; no regular cash-outs are permitted. After 7 years you're back at square one.
• Deed in lieu: 4 years from completion date; also 10% down payment required between years 4 and 7.
• Short sale: 2 years from completion date.
• Chapter 13 bankruptcy: 2 years from discharge date or 4 years from dismissal date
• All other bankruptcies: 4 years from either the discharge or dismissal date