Important things to know about short sales:
1. A short sale benefits you by avoiding the foreclosure
A short sale:
- Saves you from the damaging effects of a foreclosure on your credit record
- Shows future creditors that you are a person of action in dire situations and will do everything possible rather than walking away
- Will often make you eligible to purchase another home sooner
- Protects your security clearance (foreclosures can negatively affect ones job security clearance)
- Can make you eligible for programs that offer $750-25,000 to homeowners for completing a short sale ($750-3,000 is typical)
2. Selling as a short sale helps the homeowner control the amount of deficiency
The “deficiency” is the difference between the sale price of the home in a short sale or foreclosure and the amount owed on the loan. Our goal is to negotiate with the lien holder(s) to get the short sale approved, liens released from the property AND the sale confirmed as full satisfaction of the loan so that the lien holder CANNOT go after the homeowner for repayment of the deficiency. When a property goes to sale at the Public Auction as a Foreclosure, the homeowner has no control over the bid and deficiency amount.
3. The sale of property as a short sale is not automatically guaranteed, even if we have a valid offer to purchase
The lien holder(s) must approve the short sale in order to release the lien(s) to transfer title to the new owners. Lien holders have various reasons for not approving short sales, some of which do not seem logical, especially when their loss is less in a Short Sale compared to a Foreclosure. However, it is their prerogative to deny the short sale of any given property.
4. In general, the homeowner/borrower does not receive any funds from the sale
Since the lien holders are accepting less than what they are owed when approving a short sale, they do not allow the homeowner to walk away from closing with funds. The homeowner wins by receiving relief from the debt without having a foreclosure on their record.
HOWEVER, the seller can possibly receive $750-25,000 for completing a short sale under specific programs
- FHA loans are typically $750-1,000
- HAFA (Fannie Mae or Freddie Mac) $3,000
- Special programs offered directly by the lien holder can be from $3,000-25,000
5. The homeowner/borrower may be asked to contribute funds to the sale or sign a promissory note
Most of the time, the homeowner does not have to pay to sell their house as a short sale. However, if the homeowner is in a position to make a contribution, the lender could ask them to contribute. For example, if the homeowner has a large amount in their checking account the lien holder may ask for a contribution to minimize the lien holder’s loss. We cannot predict if this will happen for any particular client until we get close to the short sale approval. At that point, the homeowner has the option to continue with the short sale and contribute the requested amount, or cancel the short sale and allow the home to go into foreclosure.
The lender can also ask the homeowner to sign a promissory note for an amount they designate (such as $5-20,000) at a 0% interest rate. The homeowner has the option to decide to sign the note and proceed with the sale or cancel the transaction and go into foreclosure instead. This is the homeowner’s decision at that time.
6. Short Sales do not have a “short” timeline
It takes an average of three to five months for approval of a short sale. Each lien holder has a specific internal system for approving short sales. Approval takes several months because the lien holders must follow their specific process and procedures. Generally speaking, lenders are overwhelmed with files and do not have sufficient trained staff to efficiently manage paperwork in a timely manner, and/or they have to wait for the investor (decision maker who holds the funds) to approve the loss. Depending on the loan, there are also mortgage insurance providers who must approve of the sale as well. Needless to say, short sales take patience, but it can be worth while.
7. If the scheduled Foreclosure Public Auction date is approaching and the Short Sale is not yet approved, the lien holder has the authority to postpone the sale date
Often lien holders will postpone the auction date if in the middle of the short sale process in order to allow more time to review and approval of the short sale. They can postpone it a week or a month at a time, up to 12 months. If they want to postpone it longer, they have to start the foreclosure process over again and re-file the foreclosure with the Public Trustee