What is a Short Sale? MN Short Sales

Foreclosure on a home has consequences for the family, the community, the housing market, and the economy. However, the option for a short sale provides a way for troubled homeowners to prevent foreclosure and many of the dire penalties involved.

A short sale is an agreement in which your mortgage lender agrees to accept a payoff on the loan for less than the balance. Many lenders agree to a short sale because they receive more of the loan balance in comparison to the amount they would gain from selling the property following a foreclosure. This process also aids in maintaining home values in the community the property is located and helps the homeowner maintain a better level of credit compared to a foreclosure. Homeowners considering a short sale must in most instances meet specific criteria to qualify: you must be behind in your mortgage payments, provide evidence of economic hardship, and have little or no equity in the property. Click here to see if you qualify for a short sale situation with your lender.

A short sale is not a typical real estate transaction. Most real estate transactions involve the home seller and their real estate agent, the buyer and their lender, and their real estate agent. In a short sale situation, all of those parties in addition to the seller's loan servicer, a housing counselor, any junior lien holders, mortgage investors, and insurers may be involved too.

With so many parties involved in a short sale, the process can be difficult to complete without a qualified Realtor to help guide you and act as a liaison between all of the parties involved. You will want the advice and expertise of a Realtor who has your best interests in mind and will expedite the short sale transaction. It is essential to have a Realtor who won't allow you to miss a detail that could delay closing the transaction in a timely manner and to the specifics required by all parties involved.

Short Sale vs. Foreclosure

Review the following comparisons between short sales and foreclosures for a better understanding of why short sales are a better option for most homeowners. While a short sale is a complicated process, the outcomes of your patience and diligence are worth it in the end!

A qualified Realtor with experience in short sales will also be able to find a buyer to complete the transaction. Homeowners agreeing to a short sale should also consult a tax expert and obtain services of an attorney to help protect themselves from any future claims by the lender.

What are the implications to my credit score?
Following a successful short sale your mortgage will be reported on your credit score as either paid or negotiated, lowering your score as little as 50 points and affecting you for only 12 to 18 months. After a foreclosure, however, your credit score can lower as much as 300 and usually at a minimum of 250 points and affects your score for over three years.
What are the implications to my credit history?
A short sale is usually reported as paid in full and is not reported on your credit history. A foreclosure will remain on your credit history for 10 years or more and will remain as public record.
Who decides if my home should undergo a foreclosure or a short sale?
In both short sales and foreclosure, the decision is made by your mortgage lender. The most important aspects to getting a lender to agree to a short sale, and saving you the more damaging credit implications of a foreclosure, is to prove that you have no other way to pay the mortgage and that the amount received from a short sale is the fair price of the market. Lenders who believe they can receive more by taking possession of the home in a foreclosure and selling it themselves will not agree to a short sale.
How long will I have to wait to buy another home?
After a foreclosure, you may end up waiting another 24 to 72 months before a mortgage lender will offer you an interest rate that is acceptable. Most mortgage lenders report that for homeowners who have undergone a previous short sale they may get a reasonable interest rate in less than two years. Fannie Mae guidelines allow a short seller to apply for a new loan immediately if payments were kept current and had no 60-day late payments on their record.
What will be the effects on my future loans?
For most mortgage lenders you will not be asked to declare or be questioned regarding a short sale on any standard loan application (1003). In regards to foreclosure, you will be asked on any future standard loan application (1003) if you have had a property foreclosed in the last seven years, therefore affecting your rate. Fannie Mae backed mortgages will be available to you following a short sale after two years. Fannie Mae backed mortgages will not be available to you for at least five years if you have lost your home due to a foreclosure.
Does it affect my employment opportunites?
A short sale does not appear on a credit report and will not challenge your current employment status. In comparison, if you have a foreclosure on your credit report, some employers consider it a reason for termination or reassignment since many run credit checks on employees for certain positions. A foreclosure can be extremely harmful to your chance of being selected for a new job if your credit report is taken into consideration.
How does a short sale versus a foreclosure affect the deficiency judgment?
If your short sale is handled successfully, the lender may give up the right to pursue a deficiency judgment against you. If the lender does pursue a deficiency judgment against you after a successful short sale, the amount will be considerably lower because your home was sold at a price closer to market value than that of an REO (Real Estate-Owned) sale. In all foreclosures, with the exception of those states without deficiency, the bank has the right to file a deficiency judgment against you. Since your foreclosed home will have to go through the REO process if not sold at auction for a lower sales price, this results in a higher deficiency judgment against you.

What is the Short Sale Process?

A successful short sale requires a lengthy process, one that is best initiated early on in order for all parties involved to resolve the issue to satisfaction. The entire short sale process can take anywhere from three months to a year or more when considering the many negotiations needed before the actual sale. A qualified and knowledgeable Realtor, attorney, and accountant will be invaluable assets for anyone seeking a short sale, helping to make sure communication is expedited to see the process resolved to the benefit of all parties involved.

The short sale process may vary according to your state but the following information is a general guideline of what you can expect.

1) You must be considered in a distressed state, most often with the home entering the foreclosure process, but many lenders are now willing to negotiate a short sale even if your mortgage payments are current. Proving your financial situation is rapidly deteriorating to your lender may help them reconsider allowing a short sale of your property. Always contact your lender immediately if your financial situation dictates that a short sale or foreclosure situation is imminent.

2) In order to prove to your lender that you are not able to make your mortgage payments, you must gather documents of proof of your financial hardship. These documents are similar to those you may have used initially to qualify for your home loan, but this time you are proving that you would disqualify for the loan. Additionally, a letter explaining the cause of your financial hardship should be written. Be honest and be thorough. Your lender is likely to understand the request for a short sale if you are detailed in why you can't afford your payments when you are descriptive and sincere. These documents, combined with market trend reports, market analysis, and any other useful information that can help your lender decide why your request for a short sale should be granted.

3) If your lender agrees to accept a short sale, your home must be placed on the market and evidence of a concentrated effort to sell the property at market value must be provided. Your lender must receive detailed information about the effort to sell your property, another advantage of hiring a qualified Realtor to aid in the short sale process.

4) Once you have found a buyer for your home, the purchase contract and other documents are provided to your lender for approval. If your lender accepts the offer, the sale of your home continues in the same way as any other real estate transaction.

In most instances, your lender will pay almost all of the fees and commissions required by all of the parties involved in the process, leaving you to pay nothing. However, your lender may require you to pay for any appraisals or back dues owed to a homeowner's association. In no instance are you allowed to complete a short sale with any form of financial gain or proceeds.