Short Sale Explained
The owner of a home wishes to sell the property. However, the value of the property is less than what the person owes. When the home is sold, the transaction is known as a short sale. This is a very difficult situation for the homeowner and usually, the person will only make a short sale so that the lender does not foreclose on the mortgage. A short sale is possible when the lender approves the sale. This is because the lender will be receiving less than the person owes on the home.
Buyers see short sale properties as opportunities to get a home for a substantial discount on the expected price. The seller is trying to avoid foreclosure and does not have a lot of options. One downside for a buyer in this situation is that short sales require more time to finish all the steps needed for the purchase.
To help buyers of real estate understand more clearly the processes of pre-foreclosure and foreclosure here are several useful tips. We also present tips on how to get a mortgage after going through a short sale. When dealing with a short sale, be sure to use a realtor with extensive short sale experience as this choice will greatly help you deal with this process.
How Long to Wait after a Short Sale in Order to Purchase a Home
After completing a short sale there is a mandatory length time that one must wait before buying another home. This is like adding insult to injury when you have gone through a short sale and now need to wait to buy another property. But, there can be special circumstances that will reduce the time needed to wait. For some types of loans, there has been a recent change but you need to qualify for the minimum period of waiting. Find out if you have the extenuatingcircumstances required to qualify.
The world's largest mortgage insurer is the Federal Housing Administration. Their loans are lender insured and not insured by the consumer! This type of loan can be especially attractive if you have a low credit score around 680 or less. That is because they commonly have better interest rates for low credit score persons than with other kinds of loans. If you had a pre-foreclosure or short sale, the FHA has an extenuating circumstances, Back to Work, program that only requires a 3.5% down payment. But, your lender needs to participate or there is a three-year wait. If that is the case, look for another lender.
The Federal National Mortgage Association is commonly known as Fannie Mae. They offer conventional, but government-sponsored conventional loans. Fannie Mae just recently lowered the waiting period from 4 years to 2 years for folks who had a short sale. A 5% down payment is usual with Fannie Mae although they do offer other options with a lower down payment.
The Federal Home Loan Mortgage Corporation is known more commonly as Freddie Mac. Their loans are sponsored by the government. This may help lower credit costs for mortgages by way of loans and savings. Buyers can purchase properties owned by banks using the Freddie Mac HomeSteps program. They also have guidelines for extenuating circumstances and if you qualify the wait to buy a home after a short sale is 24 months.
USDA Rural Loan
For credit scores below 640, the wait for a loan after having a short sale is three years. But, if your score is more than 640 the wait may only be several months providing you meet other guidelines.
For this type of loan, you will need to put down 20% or more and wait for 4 to as long as 7 years depending on interest rates, down payment, and fees.
VA loans require up to a 2-year wait. However, if you are able to demonstrate that your short sale was not done to use market prices to your advantage the time can be less. And, if you made no late loan payments, the wait can be significantly shorter or none at all.
Lenders do not like to lose money. They look upon a short sale as a significantly bad event. For many lenders, no matter how long you wait, they will require a larger down payment, charge a higher interest rate, and add more fees. Talk to a professional who is mortgage qualified about the details of your short sale and the effect they have on your ability to purchase another home.
Seller's Perspective of a Short Sale
When you cannot pay the mortgage and are looking at foreclosure things are pretty tough. But, a short sale allows you to avoid foreclosure and complete the process of selling your home. Here are the steps to go through for a seller to accomplish a short sale of their property.
Prove Financial Hardship
In order to accomplish a short sale, the homeowner needs to talk to the mortgage lender and show proof of financial hardship with solid evidence. If you are being relocated because of work or have experienced a significant decrease in income, these are common reasons to have a short sale accepted. In both cases, your circumstances have changed and you simply cannot afford the home you are in and the payments.
A lender reviews each hardship case looking at income and assets. When you debt has gone up or income has gone down, or both, these findings improve your chances of the lender approving a short sale. The lender will insist that you apply any of our savings toward what you owe and they will carry out a market analysis for property liens before approving the short sale.
The Property Listing
You will be able to list your property for sale once the lender has approved a short sale and confirmed this with you. It is advisable that you list with a real estate agent with experience in completing short sales. When you get offers they must be approved by the mortgage lender. This is where much of the delay comes into play as the lender may refuse multiple offers for weeks and months.
Be sure to stay in touch with your mortgage lender on a frequent basis and do not just assume that all will work out in in the time you think it will. If they request more information make sure to get it to them promptly. Any delays on your part will be multiplied on the part of your mortgage lender.
Approval of the Short Sale
When you get an offer that your mortgage lender approves, the only things holding up the sale will be the buyer's mortgage funding and scheduling the closing. Continue to stay in touch with the lender as well as your real estate agent at this time to ensure that some minor issue does not derail the process.
Patience is a virtue, they say. And, patience on the way to completing a short sale is essential. It can be really easy to become angry and do or say something to nix a promising sale. Stay cool and stay in touch with your agent and the lender. And, remember the rules of the game. If, for example, you can raise your credit score during this period, you could qualify to purchase another home quite rapidly!
After the Short Sale
Your credit rating will usually fall and fall substantially after a short sale. A common practice is to wait until a person has missed three months of mortgage payments before approving a short sale. This information is reported to credit agencies. The short sale is reported as a paid or settled debt. Remember to talk to your lender about reporting the short sale as a paid debt. This will cause less damage to your credit score.
Although a short sale shows up on your credit report for 7 years, sellers in short sales typically get financing for a new home within a range of 1 to 4 years. This varies with the kind of loan, credit score, and the size of the down payment.
No matter how bad you think a short sale is, a foreclosure is much worse. The usual wait to be able to purchase a new home after a foreclosure is between 3 and 8 years. Ask your lender about your options as they deal with this issue all of the time and can provide useful advice. The financial loss of the lender was taxable income for the home seller in the days before the housing crisis. Today sellers have no liability in their taxes for losses by the lender when there is a short sale.
The Buyer's Side of a Short Sale
A short sale can be an excellent opportunity for a home buyer. You will be buying a home for a discount! The downside of shopping for a short sale home is the time involved. First of all, your offer may be refused by the lender. Then, when an offer is accepted, closing will require more time and the normal purchase of a home. Here is the buyer's process for completing a short sale of a home.
This is an important first step for any home purchase. When the buyer is pre-approved for a specific amount it greatly speeds up the process. The lender lets you know how much you can borrow, the size of your down payment, and projected mortgage costs each month. With this information, you will know the price range of property you can look for whether for a normal purchase or a short sale.
With pre-approval in hand, the seller and both real estate agent know that you are in the business of buying a home and not just window shopping. Also, when you take the trouble to get pre-approved as a first step you will know all of your financing options going in.
The Agent Who Represents You
This is a really important step. Find an experienced agent who knows the short sale process. To find the right agent, talk to family and friends who have dealt with realtors. Look online for reviews of real estate agents. And, when you have a short list, speak to each and every one. For most people, the biggest financial transaction of their lives is the purchase of a home. Make sure the real estate agent at your side is the right one for you.
This is a really important step because the right agent knows the process for a short sale and things will move along smoothly. And, when there is an issue, the experienced agent will deal with it promptly and efficiently. Pick the wrong agent and you may end up with a whole series of problems. You do not need to know that much about real estate but you do need to pick the right realtor. Smart thinking in this regard will pay off.
The Property Search
Looking at home is what most people think of when they think of buying a home. Some folks think the process is fun! When your agent has a good idea what you are looking for, you will get to see lots of homes in your price range and ones that meet your specific criteria. And, the criteria may simply be that you want to see possible short sale opportunities.
When you have found a home that is a possible short sale, discuss the opportunity with your realtor. You will need to find out how much the seller owes for the home, any other loans of the seller, and if the seller is approved by their lender for a short sale.
Making an Offer
This part is the same as for any home purchase, except for the length of time involved. Talk to your agent and decide on an offer. Then realize that it is not the seller who is going to approve the offer but the lender. That can take a lot longer than with a normal sale.
Be realistic even when making a short sale offer. Your experienced real estate agent will know the values of similar properties that have sold in the area. And, he or she will know the prices for short sales of similar properties. Your agent will have the best idea of what constitutes a reasonable offer in these circumstances so consider his or her advice. The right offer will get you a good deal on your new home and get you into the home in a timely manner.
Securing Your Interest Rate
The lender for the seller may insist on your applying for a mortgage with them to purchase the short sale property. They cannot demand this but may just do it to make sure that you qualify for a loan. Being pre-approved should take care of this issue.
Because it can take weeks or months to approve the offer for a short sale, there may be an issue with your interest rate. In general, when a lender quotes a rate for you, they will lock that in or guarantee it for two months. When the short sale offer drags on, you may not be able to lock in your rate. This can be a problem with your final mortgage terms and costs. It is a factor to consider when making a reasonable offer.
Moving Towards the Sale
While waiting to lock in an interest rate, move forward with inspection and appraisal of the property. Your agent will help with this and make sure that reports are sent to the lender. By finishing the final steps while waiting, the buyer is ready when the sale is approved. The purchase will be concluded shortly as the loan process is virtually complete.
Short sales can be frustrating but they can be profitable. Talk with your realtor and understand the steps you need to take and what you need to wait for. An experienced realtor knows short sales and can provide timely and sound advice. Let them help you follow the exact steps you need to take to finalize a short sale.
A New Mortgage after a Short Sale
When you lose your home due to a short sale, you hope to find another home and get on with your life. Unfortunately, most folks are not aware of the complications that a short sale causes with their credit and getting another mortgage on another home. The changes to your credit score resulting from a short sale have a direct effect on how long you need to wait, your next interest rate, and your monthly payments. Here are some basics for obtaining your next mortgage.
How Is Your Credit Score Affected by a Short Sale?
There will be a reduction in your credit score in the 70 to 200 point range after a short sale. Even for people who meet other loan guidelines, this drop in credit makes getting a mortgage more difficult. And, even if you qualify for a loan, the interest rate and terms of the loan may so bad that you give up.
Your best chance is if your credit score stays above 680. This level of credit may allow you to get a good interest rate even in the short sale is recent. Getting a credit report is a good idea so that you know your chances of getting a new mortgage at the present time.
A practical step to take in regard to your credit after a short sale is to make sure you stay current on all payments. Do not let your credit score fall farther. If you do everything else properly for your credit it will help raise your score and improve your chances of getting a new mortgage. Pay off any debts that you can. Get credit reports each year from the three credit agencies and fix any mistakes that you may find.
Last Comments about Short Sales
There are lots of moving parts to a short sale. Make sure that you stay on top of what is going on. Any single person who plays a role can make a mistake that will change your waiting time from a month and a half to half a year. A short sale is a tough thing to deal with but staying on top of things will make it less painful and bring on your financial recovery sooner.
When dealing with a short sale, always remember that the alternative, foreclosure, is worse. Look to the future, do what you have to do, and get the sale processed.
While not optimal, a short sale can be a solid alternative to having your home foreclosed because it is no longer affordable. As long as everyone remains optimistic and patient, there is every reason to believe the sale will get processed. And, work with an expert on mortgages to speed up when you can get another mortgage and back into your own home.