QueenCityHomeBuyers.com

So I was over at my buddy Patrick Riddle’s blog reading about this “Sweetheart Deal” that OneWest got. Very informative and may cause you to raise an eyebrow (or two)…

Click on the comments button to leave your thoughts and opinions.

Jason

There have been many terms that have been tossed around in real estate industry in recent times.  One of these is the term “Short Sale”.  What is a mortgage short sale and how can it help you?

First of all, lets define what a short sale is.  Bankrate.com defines a short sale as: “A short sale, in real estate terms, is a sale of a house in which the sale price is less than what the owner still owes on the mortgage.  It is a procedure sometimes agreed to by lenders, who often would rather take a small loss then go through the lengthy and costly foreclosure process.”  Why would a lender do this?  There are several reasons why.  The first reason is pretty obvious.  A lender will not even entertain the idea of a short sale unless they have a solid reason to believe that you will not be able to continue making the payments on your loan.  Usually, the evidence to support this belief is in the fact that you are already 90 days late in your payments and that you have no idea how you are going to get back on track.  You may have had a job loss or some unexpected financial disaster.  Whatever the situation, there is little reason to believe that being able to catch up the payments, or “cure” the loan, is a possibility.  This situation is unfortunate, but it does happen…even to those who have said, “That will never happen to me!”

Another reason that the lender may consider a short sale is if property values in your area have fallen, you borrowed heavily against your equity, or otherwise the value of the house is significantly less than what is owed on the loan(s).  So, the lender must consider their options.  One of these options is to accept a short sale.  The reasoning behind accepting a short sale is that it is better to get most of the money they are owed than to lose out and get nothing at all.  They can also take your property back through a foreclosure proceeding, but that’s a completely different post.

Another reason for accepting a short sale is for a very simple reason.  The lender is in the business of lending.  They are not in the business of selling or renting real estate.  A lender is required to maintain a certain amount of cash in reserves for every property that they have taken back in foreclosure.  This means that for every property that a bank has in it’s inventory, that is even more money that they cannot lend out and therefore make a profit on.  Do you see why there are incentives for the lender to accept a short sale?

Is a short sale right for everyone?  Of course not.  Every homeowners situation is different, just like every fingerprint is different.  You must take a look at your own circumstances and resources, taking into account every detail and determining if selling your house through a short sale is the right strategy for you.  You must know that there are disadvantages to a short sale, one of those being a negative hit on your credit report.  How much of a hit will your credit score take?  That is hard to say as there is no set-in-stone formula you can use to determine how many points will be deducted from your credit score (this formula is proprietary).  There are many different factors that go into determining an individual credit score, so no two reports will be identical in the impact from a short sale.  However, a short sale will also reflect that you are proactive and that you did not just “give up” or “quit” on your obligation, as is likely the case when a foreclosure shows up on your credit report.

You must also be aware that the lender does not have to agree to a short sale.  The case must be made to the lender as to why it is in their best interest to accept a short sale.  One way to kill any chance of a short sale being accepted is for the end buyer to offer the homeowner money at closing.  Most lenders will not agree to the homeowner receiving any cash at closing.  The reason for this is simple in that if the lender is taking a loss, they feel that the homeowner should not be “rewarded” for selling their home for less than what is owed on the loan.  For a short sale to work as it is designed, it must be the best option for all parties involved: for the homeowner, for the lender, and for the end buyer.  I hope this helps in explaining the short sale process to you.  Feel free to leave any comments or questions below.