This is because there are two parts to all mortgages. The first is the lien against the property that is used to secure the loan. It gives the lending institution the right to sell the property for repayment. This part of the mortgage is waived in a short sale. The second part of the mortgage is the promise to repay.
Lenders can still enforce this portion either through a new note or the collection of the deficiency. Whatever happens, lenders must approve the short sale, which means borrowers are sometimes at their whim.
Short sales and foreclosures are two financial options available to homeowners who are behind on their mortgage payments, who have a home that is underwater , or both. In both cases, the owner is forced to part with the home, but the timeline and consequences are different.
A foreclosure is the act of the lender seizing the home after the borrower fails to make payments. Foreclosure is the last option for the lender. Unlike a short sale, foreclosures are only initiated by lenders. The lender moves against the delinquent borrower to force the sale of a home, hoping to make good on its initial investment of the mortgage. Also, unlike most short sales, many foreclosures take place after the homeowner abandons the home.
If the occupants are still in the home, they are evicted by the lender. Once the lender has access to the home, it orders an appraisal and proceeds with trying to sell it. Foreclosures do not normally take as long to complete as a short sale, because the lender wants to liquidate the asset quickly.
Foreclosed homes may also be auctioned off at a trustee sale, where buyers bid on homes in a public process. A homeowner who has gone through a short sale may, with certain restrictions, be eligible to purchase another home immediately.
Depending on the circumstances, homeowners who experience foreclosure can expect to wait two to seven years to purchase another home. While a foreclosure essentially lets you walk away from your home—albeit with grave consequences for your financial future, such as having to declare bankruptcy and destroying your credit—completing a short sale is labor-intensive. However, the payoff for the extra work involved in a short sale may be worth it.
Less disruptive alternatives to a short sale include loan modification and utilizing private mortgage insurance. Before resigning yourself to a short sale, talk to your lender about the possibility of a revised payment plan or loan modification. One of these options might allow you to stay in your home and get back on your feet.
Another possible option for staying in your home arises if you have private mortgage insurance PMI. If the PMI company thinks you have a chance at recovering from your current financial situation, it may advance funds to your lender to bring your payments up to date.
The source of the financial trouble should be new, such as a health problem, the loss of a job, or a divorce, rather than something that was not disclosed when the homebuyer originally applied for the loan.
However, if you feel you were a victim of predatory lending practices, you may be able to talk the lender into a short sale even if you have not had any major financial catastrophes since purchasing the home. To put yourself in a more convincing position to complete a short sale, stop purchasing non-necessities. Be aware of other circumstances that may prevent the approval of a short sale. If the lender thinks it can get more money from foreclosing on your home than from allowing a short sale, it may not allow one.
If someone cosigned the mortgage, the lender may hold that person responsible for payment rather than doing a short sale. If you think your situation is ripe for a short sale, talk to a decision-maker at the bank about the possibility of engaging in this type of transaction.
At this point, you should consult an attorney, a tax professional, and a real estate agent. While these are high-priced professional services, if you make a mistake by trying to handle a complex short-sale transaction yourself, you may find yourself in even bigger financial trouble.
You may be able to pay for these service fees out of the sale proceeds from your home. Professionals accustomed to dealing with short-sale transactions will be able to give you guidance on how to pay them. When setting an asking price, make sure to factor the cost of selling the property into the total amount of money you need to get out of the situation.
Of course, you want to sell the home for as close to the value of your mortgage as possible, but in a down market, there is bound to be a shortfall. In some states, even after a short sale, the bank will expect you to pay back all or part of that shortfall. These may include bank statements , medical bills, pay stubs, a termination notice from your former job, or a divorce decree. It is up to you to come up with a proposal.
Be aware that the lender ultimately must approve a short sale after receiving all the details because the lender is the recipient of the proceeds. Your job is to find a buyer for your home. Along with the documentation of your distressed financial status, your proposal should include a hardship letter explaining the circumstances that are preventing you from making your mortgage payments.
You want to make it as convincing as possible and protect your interests while also appealing to the bank. Be careful about submitting your financial information to a lender because, if it does not approve the short sale, it may use your financial information to try to get money out of you in foreclosure proceedings. If you still have cash assets , you may be expected to use them to continue making mortgage payments or to make up some of the shortfalls between the sale price and the mortgage amount.
An attorney experienced in completing short sales can help you navigate the details. Because short sales can take longer than regular home sales due to the need for lender approval, they often fall through. The buyer may find another property while waiting for an answer from you. Be prepared for this possibility. If the short-sale transaction goes through, consult with the Internal Revenue Service IRS to see if you will have to pay taxes on the shortfall.
Also, be aware that a short sale can still affect your credit score in the sense that the months of mortgage payments you missed prior to the short sale can show up as delinquent payments on your credit report. Your bank may be more likely to be generous in this regard if you brought up your hardship before you were significantly behind. For credit purposes, while this is somewhat damaging, it is certainly less damaging than a foreclosure.
Short sales can also provide excellent opportunities for buyers to get into houses at a reduced price. Here are a couple of tips to help you make smart decisions when considering the purchase of a short-sale property.
Most short-sale properties are listed by real estate agents and on real estate websites. Some listings may not be advertised as short sales, so you might have to look for clues within the listing, such as being subject to bank approval or giving the bank time to respond. An experienced real estate agent can make a big difference in terms of both finding and closing short-sale properties.
Holders of this certification have received specialized training in short sales and foreclosures, qualifying sellers for short sales, negotiating with lenders, and protecting buyers. Realize in advance that short sales are complicated, time-consuming transactions. It can take weeks or months for a lender to approve a short sale and many buyers who submit an offer end up canceling because the short-sale process takes too long.
This process can take up to 3 weeks, depending on when the bank schedules an official appraiser. Once the homeowner begins turning in offers to the lender, the lender may take several weeks to respond to the home buyer with a counter offer.
If the home buyer and lender go through several rounds, this may take even longer. In a standard home sale, the escrow process generally takes about four weeks.
In a short sale, however, the escrow process can take longer. Therefore, homeowners and home buyers must be prepared for a wait. Some factors can complicate the short sale process, causing it to take longer than it would otherwise.
Examples of these exceptions to the timeline include the following. When the homeowner has multiple mortgages on the home, lien holders must get in line to collect money on the balance owed.
If all lien holders cannot mutually agree to a settlement, then the deal may fall apart. Sometimes, buyers lose patience waiting to hear back from the bank.
If the bank does not respond to an inquiry from a buyer within a certain period, the buyer can walk away. Some home buyers will wait until they hear from the lender, while other buyers will move on. When a buyer is lost, the homeowner must start the process over, which can extend the home selling process by weeks or even months, depending on how long it takes to find another buyer.
If the broker price opinion BPO or appraisal for the property is inaccurate, then the representatives at the bank may develop an unrealistic expectation for how much they can get by selling the home. This can extend the selling process by weeks or months as the lender waits for an unrealistic offer that may not come. If the lender rejects an offer from a home buyer, then the buyer must make an additional offer, or the homeowner must wait for a new offer from a new buyer, which can add more time.
Buyers and sellers are subjected to a similar timeline throughout the short sale process. From the buyer's perspective, however, the short sale process may look different. For a buyer, the short sale process consists of a long waiting period for the lender to acknowledge and respond to documents.
Although standard home sale processes also include similar steps, short sales do require more time. At every milestone of the process, the home buyer must wait for the lender to respond.
One of the reasons that many homeowners drop out of the short sale process is because there is no guarantee that lenders will respond to the offers that buyers make. Without the promise of a response, many home buyers eventually lose patience and interest.
Receiving a mortgage approval takes most home buyers a couple of months, starting with a pre-qualification and ending with the closing of escrow and the signing of the mortgage documents. Most home buyers who want to be considered a strong candidate to purchase a home should get pre-approved before making an offer on a home. It takes most potential buyers at least one week to look at online listings, and view a home they would like to buy.
Once they've seen the house, the home buyer may come back a second time before making an offer, or may make an offer immediately following their first visit. Making an offer to a homeowner takes a couple of weeks, as the home buyer and homeowner may negotiate before they can agree on a final price. Once the offer is signed by both parties, the offer must go to the lender for final approval. A lender can take as long as 12 months to process a short sale package, including an offer from a viable buyer.
In that time, the buyer must wait for approval from the lender. If no response is received from the lender, then it may be time for the interested buyer to move on to a different home. Generally, mortgage lenders only accept a short sale buyer offer when the offer makes more financial sense than a foreclosure would. Because mortgage lenders want to minimize their losses on home loans they frequently scrutinize short sale buyer offers closely, which takes time.
Once a mortgage lender finally gets around to approving a short sale buyer's purchase offer, the closing period is usually very brief.
For example, it isn't uncommon for a mortgage lender to accept a short sale and demand closing within a couple weeks. In some cases, a mortgage lender approving a short sale has wanted to close within a day of offer acceptance. Once your mortgage lender approves your short sale buyer's purchase offer be ready to close your sale shortly thereafter.
Short sales are sometimes delicate, and lender-accepted purchase offers can be killed by failures to close on time. Keep in mind that your lender might be working on foreclosing your loan even while your short sale is taking place. Mortgage lenders have several different departments involved in their mortgages, including foreclosure departments, collection departments and loss mitigation departments.
Sometimes, mortgage lender foreclosure departments try to push mortgage foreclosures while their loss mitigation departments are pushing for short sales. It's important that homeowners conducting their already lender-approved short sales stay in communication with those lenders. Short sales aren't for the novice home seller, and experienced real estate agents are frequently helpful when it comes to conducting them.
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