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5 Things You Should Know About Short Sales

For many homeowners who are facing possible foreclosure a better option is often a short sale.

According to industry researcher RealityTrac, short sales are up 10 percent from the same period last year. While they are becoming increasingly popular for homeowners facing foreclosure, many homeowners still aren’t clear what a short sale is and whether it is the best solution for them.

With help from this article on Christian Science Monitor, we’ve compiled five things you need to know about short sales:

1.   What is a short sale?

A short sale is when a lender agrees to take less than what they’re owed and allows homeowners to sell their property because they are facing financial hardship. Typically, if the property is underwater, that is to say if there is a mortgage balance that is greater than the market value of the home, that property may qualify for a short sale. The homeowner sells the home and the bank marks down the value of the mortgage

However, not every property qualifies as a potential short sale in a bank’s eyes. Lenders will agree to do this if it makes most financial sense for them. According to recent statistics, homes offered as short sales are bought for roughly 20 percent below their market value as opposed to 39 percent under market value for foreclosed homes. Lenders also save on costly foreclosure and maintenance procedures. While short sales are sometimes a better option for the lender, but some investor guidelines make it more profitable for the bank to foreclose.

2.  How do short sales compare to foreclosures?

The biggest difference is how your credit is affected. A short sale, which is carried out similar to any other real estate transaction, does far less damage to your credit than a foreclosure. You may be eligible, under Fannie Mae Guidelines, to buy another home immediately instead of waiting the 5 to 7 years to get approved for another mortgage.

3.  How do short sales compare to bankruptcy?

When faced with foreclosure, some homeowners turn to bankruptcy. In some cases, filing for bankruptcy can be less damaging to your credit profile than having a foreclosure on your record. Filing for bankruptcy will consolidate your debt and can wipe out your liabilities. It will not, however, prevent an eventual foreclosure if the bank has already started the process. A bankruptcy only delays a foreclosure.

If your home is the only debt that is creating your financial hardship, a short sale is probably your best alternative to bankruptcy. Although you can conduct a short sale while in bankruptcy, it requires strategy and a plan. It is best to consult with a knowledgeable bankruptcy attorney and short sale real estate agent before making any decisions.

4.  Are you qualified for a short sale?

To qualify for a short sale, homeowners generally must show legitimate hardship. Common reasons include: death, divorce, loss of job, relocation, etc. Anytime a property is inevitably headed towards foreclosure, a borrower qualifies for a short sale. Also, you can’t be eligible for a loan modification.

The bank is going to want proof in writing that you meet all of these criteria. Getting approved for a short sale can be a long process in itself. If you should happen to find yourself meeting these requirements, find a proper real estate expert who is knowledgeable about short sales. They are different than the average transaction, and it is important that you do your own research.

5. Long Closing Time

Short sale” is sort of a misleading name. It doesn’t refer to the time involved, but to the seller coming up short on the loan payoff. This is part of why short sales can take four to nine months to close, and sometimes even longer. The bank doesn’t just come out and tell the seller how much it would accept for the house, so while the seller and buyer negotiate a price, the seller also has to get that price approved by the bank. Approval can take a long time, and if the bank rejects the first offer, it draws the process out even more.

Lastly, a few things to beware about short sales:

Short sales often involve fewer headaches than losing your home to foreclosure but that doesn’t mean there the process isn’t frustrating. Less than a quarter of short sales actually close and the back and forth between the buyer, the seller and the bank is a big part of the problem. Many frustrated buyers end up walking away from short sales because they get fed up with the process. Even with so many foreclosures on the market, it’s still tough to complete a short sale.

When it comes to short sales, the process can be tricky. If you’re the short seller, the bank can sue you for the loan balance on the home, so it’s important to protect yourself. So-called “deficiency judgments,” in which a borrower can’t pay back a loan, are legal in most states, but not all. Talk to an experienced real estate agent or attorney to find out what the laws are in your state. In many cases, you can require that the bank waive the right to come after you for the difference as part of the short sale agreement.

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