When Should You Do a Short Sale?
Short sale or foreclosure: Which is better for your credit rating?
By Susan Wellish
You have tried everything possible to remain in your home but your conclusion is that you will have to walk away from it. Is it better to have a foreclosure proceeding against you, which may allow more time for you to live in the home, or is a short sale a better financial decision? Owners who can’t afford to live in the home usually declare bankruptcy and a foreclosure proceeding to take away the home.
There is another option called a “short sale.” A short sale is a situation in which some lenders agree to accept less funds than the amount of loan due to the lender. A short sale, like a foreclosure, is a serious financial and credit reporting situation. A real estate attorney and tax accountant may advise which path is better to follow.
In the short sale, the lender is essentially agreeing to a discounted amount on the mortgage loan. Banks and lenders have specific rules on which properties qualify for a short sale. If you decide on attempting a short sale in lieu of a foreclosure status, call the lender. Speak to a senior manager and document the name and conversation. Have your attorney forward all communication to the bank expressing the desire to sell the home in a “short sale.” You will need to wait for official approval from the lender as the lender is agreeing to a discounted payoff, which is not an ideal situation for the bank. In addition, your accountant should advise you of any possible income that may be taxable from a “short sale” transaction with your lender.
Pros and cons of a short sale
A short sale will end with the homeowner vacating the home. There are some financial pros and cons to dealing with a short sale in lieu of a straight foreclosure sale of the home. If you decide on a short sale of the home, it will be the seller who is in control of the sale and not the bank. The seller will have control over who will be living in their home after it is sold. Avoiding a foreclosure status is a major benefit.
A short sale is conducted like any other sale except you will not be walking away with the money as the bank will receive all of the proceeds. The con to a short sale is that you might find a buyer very quickly and need to vacate the home immediately. In a foreclosure situation you may be able to remain in the home for many months. Planning your overall financial future after a short sale is the important issue.
Credit after a short sale versus foreclosure
Selling a home via a short sale is not a positive factor on a credit report and is considered a derogatory mark on the bureau records. The credit report usually doesn’t state “short sale”, rather it states “paid in full for less than price agreed.” Either way will result in a deep dip of points in the credit rating. A foreclosure will seriously damage a credit rating for seven to 10 years and the amount of points dropped can be twice the amount of a short sale.
Depending on the state regulation of the domiciled home, judgments for a “short sale” may not be considered a deficiency judgment. In foreclosure, the homeowner always receives a deficiency judgment.
Real estate attorneys and real estate agents
If you decided to pursue a short sale, be sure to handle the transaction with your real estate attorney and real estate agent. It is not a usual situation to sell a home short; yet if the bank agrees to a discounted payoff it may be more beneficial to the seller than a foreclosure. Short sales are another vehicle or opportunity to end the financial relationship with the lender.
LT Real Estate agents are trained and experienced in Short Sales
Most Real Estate agents you call will not want to handle a short sale as they have not been trained in how to negotiate in a timely manner with the banks. We have performed many short sales and are knowledgeable in negotiation, the process and navigating the different banks. We are also skilled in helping our clients through the process with continuous lines of open communication and support.
Tina Houser has been certified by several short sale platforms and banks in the United States to handle short sales.
Some banks we have worked with in the past include: Bank of America, Chase, Nationstar, Ocwen, Wells Fargo, PNC, First Federal Saving Bank, First Fifth Bank, Pro-Fed, Peoples Federal, Citi Bank, Horizon Bank, USDA, Midland Mortgage, and many more!