What is a Short Sale?
A short sale, sometimes known as a pre-foreclosure sale, is the process in which a homeowner sells their house for less than the amount owed on their mortgage(s). This must be negotiated with the bank in advance, as the short sale price is less than the amount owed on the mortgage.
Short Sale vs. Foreclosure – how does it help me?
If you are facing foreclosure and are seriously delinquent on your mortgage payments, some lenders will agree to accept the proceeds of a short sale and forgive the rest of what you owe them on the mortgage. By accepting a short sale, the lender can avoid a lengthy and costly foreclosure, while you are able to pay off the loan for less than what you owe.
Effects of a short sale on your credit
Lenders report to credit bureaus differently, with some not reporting a short sale at all. However, with a foreclosure a FICO score can drop considerably: about 200-400 points.
Buying again after a short sale
Depending on if you were late on payments before your short sale, you may buy another home immediately. In other cases, you may have to wait 2-3 years for FHA or Fannie-Mae backed loans.
In the case of a foreclosure, it takes 5-7 years to become eligible to buy another home.
Banks generally lose a substantial amount of money through foreclosing and auctioning off a house. In a short sale, the lender may save some money while recovering some of their loss. It could be a win-win situation for both you and the bank.
Important Short Sale Information
- In many cases, both the lender and borrower receive financial incentives to perform a short sale.
- Be sure and check with a certified professional tax adviser about the tax implications of a short sale.
- Sometimes lenders will require you to attempt a short sale before they will consider other foreclosure alternatives such as a loan modification or a deed in lieu of foreclosure.
HAFA Short Sale Program
The Home Affordable Foreclosure Alternatives (HAFA) program is for homeowners who are eligible for the government Home Affordable Modification Program (HAMP), but are not able to secure a permanent loan modification or cannot avoid foreclosure. HAFA provides protection and money to eligible homeowners who decide to do a Short Sale.
Short Sale Help
If you are considering doing a short sale on your home then it will help to get some free advice before contacting your lender. Talk to a nonprofit housing consultant from a HUD-approved agency and find out the details of how a short sale may benefit you based on your individual mortgage and financial situation.