FAQs About Short Sales

You likely have a thousand questions on your mind about foreclosures, short sales, and distressed properties. Fortunately, you're not alone! As a Thousand Oaks real estate professional, I've heard hundreds of questions about short sales from both buyers and homeowners. Here are a few of the questions most commonly asked about short sales.

What Do You Want to Know?

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What is a Short Sale?

Simply put, a short sale means selling a house for less than the mortgage value on it. A short sale is usually a last resort to avoid foreclosure.

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What's the Difference Between a Regular Sale and a Short Sale?

During a typical real estate transaction, the homeowner cleans, declutters, and improves their home in order to attract more buyers and command a high price. At the end of the sale, the homeowner profits all the proceeds.

During a short sale, the lender must first agree to allow the homeowner to short sell their home before putting the home on the market. After the home is sold (short of the total mortgage amount), the lender accepts the proceeds.

While selling a home can come with its fair share of challenges, a short sale involves additional negotiations and understanding of all possible ways to avoid foreclosure. That's why it's crucial to work with a qualified real estate professional — an agent who holds a Certified Distressed Property Expert® designation — when you are faced with a short sale.

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What's the Difference Between a Short Sale and a Foreclosure?

When a homeowner falls behind on their mortgage payments, the bank may send a Notice of Default letting the homeowner know they are at risk of losing their home and being evicted — in other words, foreclosed.  Foreclosures have a detrimental financial and personal effects: the foreclosure will affect the homeowner's credit score for 7 years, prevent them from qualifying for a mortgage for 5 years, appear in local newspapers along with their name, and show up when employers are conducting background checks.

Short sales are just one way to avoid a foreclosure, but must be approved by a lender. Short sales don’t have quite as devastating an impact on a homeowner's personal life and financial situation. A short sale may allow a homeowner to salvage some of their credit rating, apply for another mortgage in 2 years, and keep a foreclosure off of their public record.

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How Does a Short Sale Impact Credit Score?

While short sales aren't as financially detrimental as foreclosures, short sales have a similar effect as foreclosures on a homeowner's credit score. In fact, myFICO states that "The common alternatives to foreclosure, such as short sales, and deeds-in-lieu of foreclosure are all 'not paid as agreed' accounts, and considered the same by your FICO® score."

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Why Would a Lender Agree to a Short Sale?

Foreclosures can cost a lender a lot of money. In fact, the average foreclosure can cost a lender between 35% and 50% of the value of a property!

While lenders are more likely to agree to a short sale, you will still need to work with a qualified real estate agent to negotiate with the lender to first agree to a short sale. Agents like me, with the Certified Distressed Property Expert® Designation, have undergone extensive training in negotiating short sales.

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How Long Does a Short Sale Take?

A short sale generally has three parts — your submission of short sale request to the bank, the bank’s acknowledgment of receipt, and the actual sale. For just the first two steps to be complete it can take 30 to 60 days.

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Will I Need to Pay Back My Loan Eventually?

Once the short sale is complete, you should have no debt left to settle with the bank, but it depends on your individual case. It is recommended you seek a real estate agent experienced in short sales and possibly an attorney as well.

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Can the Lender Sue Me During a Short Sale?

No! The benefit of a short sale is that once the short sale is complete, there is no outstanding debt left on your part. However, this is not the case with foreclosure, where lenders may be able to sue you for additional means.

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Should I File for Bankruptcy?

It is not impossible to qualify for a loan after going through a bankruptcy, however it is much more difficult. Depending on the type of bankruptcy you filed, you can qualify for a loan in 2-6 years. There are steps to improve your credit, which may make a bank more likely to approve your loan application, so it would be in your best interest to contact a financial planner if you intend to own a home again in the future.

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How Much Will My Home Sell For/How Much Will I Be Short?

This depends on your market. Work with an experienced real estate agent who knows your market to determine realistic goals for your home short sale.

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Can I Be Evicted Without Notice During a Short Sale?

TNo, the Sheriff cannot show up and force you to vacate the property without notice.

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Will Anyone Find Out I Can't Pay My Mortgage?

Each state has different laws, but the general rule is if your home is foreclosed on, it will be public record. You can avoid this public embarrassment by choosing short sale of your home as an option.

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How Much Time do I have if I Choose to do a Short Sale?

A short sale generally has three parts — your submission of short sale request to the bank, the bank’s acknowledgment of receipt, and the actual sale. For just the first two steps to be complete it can take 30 to 60 days.

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What Constitutes as a Financial Harship?

The definition of financial hardship is “an unexpected need for cash arising from illness, casualty loss, sudden financial reversal, or other such unforeseeable occurrence which is not covered by insurance.”
This is broad, but can be more narrowly defined as:
1. Dramatic change in income
2. Change in employment status (reduced hours, losing your job, etc)
3. Traumatic life event, such as death or divorce
4. Injury or illness
5. Natural disaster

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What Are the Consequences of a Short Sale v. a Foreclosure?

While neither option is ideal, choosing a short sale over a foreclosure will help preserve your credit score, and allow you to borrow money down the road to purchase a new home. If you choose short sale, you may be entitled to relocation incentives from the bank as well, and can continue living in the home rent free during the process.

Foreclosures are a more passive process, but have major consequences for those who choose that option. It will be public record information, and will common knowledge for all your neighbors, friends and acquaintances. The foreclosure will also stay on your credit score, making any loans in the 7-10 years after the initial default almost impossible to secure.

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What are the Consequences on my Credit Score?

If you opt for a short sale, the consequences on your credit score and credit record are much more mild than they would be for a foreclosure. You can expect 70-100 points off your credit score, which is paltry to the 200-300 that would come off from a foreclosure.
Foreclosures also stay on public record for 7-10 years while short sales have no obligation to be reported legally, so some banks will not bother to do so.

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What is a Deficency Judgement?

In simplest terms, a deficiency judgment is when the proceeds from your foreclosure sale are not enough to cover all your debts, and so your lender can sue to garnish your wages to receive what is owed to them.

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Will I Be Able to Buy Another Home in the Future?

Short sales do not affect your long term credit, and so you should be able to secure a loan for a new home relatively quickly and easily — usually in about two years. However, since you are recovering from a short sale, you should meet with a financial planner to discuss your budget and how to plan for a home you can afford.

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I've Heard of Many People Getting Scammed During Short Sales-How do I prevent That?

Your best defense from being taken advantage of is getting an experienced agent. They will be familiar with the process of going through a short sale, and will be able to tell if something is not quite right. They also will have a vast network, and be able to connect you with an attorney if needed.

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What Are the Chances of my Short Sale Being Approved?

Unfortunately there is no science behind short sales, and there is no guarantee that your short sale offer will be accepted by the bank. An experienced agent in your market should be able to give you a good idea of what the requirements and expectations for your area are. The most common reasons short sale offers are rejected are:
- the selling price is too low
-the seller hasn’t filed the proper paperwork
-the seller doesn’t qualify
-and the bank has sold the loan already

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What do I Need to Qualify for a Short Sale?

While the exact qualifications vary by state, the three main qualifications you must prove for the bank to allow a short sale are financial hardship, not being able to pay your current mortgage (monthly shortfall), and not having the means to pay down your mortgage (insolvency).

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What Documents are Needed for a Short Sale?

1. Authorization to Release Information. This includes:
-Names of all borrowers
-Social security number of all borrowers
-Address of property
-Names of lenders/creditors
-Loan number
-Signature of borrowers
-Date
-Names and contact numbers for all parties involved

2. Borrowers Financial Statements

3. Listing Contract

4. Purchase and Sale Agreements

5. Borrowers Last Two Pay Stubs

6. Two Months of Bank Statements

7. Last Two Tax Returns

8. Personal Hardship Letter

9. Comparable Market Analysis of Value (CMA)

10. Any other documents requested by the bank

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How Much Will a Short Sale Cost Me?

Sellers in the position of short sale with have no closing or upfront costs, but will experience the loss of equity they’ve built in their home, and will not receive any monies directly from the sale.

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What in General is Expected of Me While Selling my Short Sale Home?

After completing the short sale package and getting the bank approval for a short sale, the home selling process is the same as any other. Try to make your home attractive and increase curb appeal, price competitively, and hope for the best!

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How Should I Prepare My Home for Viewings?

Show off the best features of your home! Thoroughly de-clutter your home, add curb appeal with new paint or flowers, and keep up maintenance on your home and property. Although you will probably be living in your home during the time of sale, you should make it a priority to keep it as clean and organized as possible!

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Should I Move Out of my Home During the Short Sale Process?

While you should consult your real estate agent, it is generally good advice to occupy your home during its short sale for a few different reasons. First, during the time of sale, it is rent free, and you will be able to (hopefully) save funds to rent a new home after the sale takes place. Occupied homes are also much less likely to be vandalized, and some banks require you to be living in the residence to approve a short sale.
If a bank truly does not want you in the home during the selling process, they often times will offer relocation assistance.

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How Will I Find Somewhere to Live After My Short Sale?

Short sales do not affect your long term credit, and so you should be able to secure a loan for a new home relatively quickly and easily — usually in about two years. However, since you are recovering from a short sale, you should meet with a financial planner to discuss your budget and how to plan for a home you can afford.

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Will You Stay in Touch/Keep Me Informed During the Process?

Of course! I understand that a short sale may be an extremely daunting process, and I am happy to be with you every step of the way.

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What Are the Requirements for a Short Sale?

Not every homeowner can quality for a short sale. Generally, a homeowner must meet one or all of the following circumstances in order to short sale their home:

• Financial hardship — Because of a mortgage payment increase, divorce, job loss, excessive debt, unplanned relocation, or other situation, the homeowner cannot pay their mortgage.
  
• Monthly income shortfall — The homeowners is either currently unable to afford their home or will soon be unable to afford their home.
  
• Insolvency — The homeowner has insufficient liquid assets and are unable to pay down their mortgage.

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Need a Qualified Real Estate Professional?

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