Foreclosure vs. Short Sale
Are Foreclosure or Short Sale your only options?
If your mortgage loan is owned by Fannie Mae or Freddie Mac, you may be eligible for a Home Affordable Refinance to take advantage of lower interest rates. Only loans owned or guaranteed by Fannie Mae or Freddie Mac are eligible. Your mortgage company can tell you who owns your loan, or you can contact Fannie Mae and Freddie Mac directly by clicking on the links below and completing the forms for each company
Fannie Mae
• 1-800-7FANNIE (8am to 8pm EST)
Freddie Mac
• 1-800-FREDDIE (8am to 8pm EST)
After finding out that your mortgage is owned or guaranteed by Fannie Mae or Freddie Mac, see if you are eligible for a Home Affordable Refinance by clicking on the button below.
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Understanding your Mortgage Statement
FREQUENTLY ASKED QUESTIONS ABOUT SHORT SALES
A "Short Sale" is a relatively new phrase to many homeowners, but this type of sale has been part of the real estate market for many years. Most Realtors are not up to date with the process and that has caused much confusion in the community with homeowners and even real estate agents. Since I'm a "Certified Distressed Property Expert," I would like to explain and dispel many misunderstandings.
What is a Short Sale?
It's when:
• A homeowner is authorized to sell for less than what is owed on the mortgage.
• The lender authorizes or accepts the sales price as a payoff.
• The seller avoids foreclosure and many times they can also avoid a judgment.
• The seller avoids a negative report, by the lender, to the credit bureaus.
The seller won't get any money at closing, but they will avoid the emotional toll a foreclosure can cause. The negotiations include a favorable wording for the forgiven debt on the mortgage that can help the recovery of the homeowner.
Why would a lender agree to lose money?
• Financially, it's a smaller loss to accept a short sale than it would be to incur the additional expenses of a foreclosure.
• Lenders are in the business to lend money not home ownership. The more resources they have tied up on a property the less they have to lend out.
• With prices dropping so rapidly, even if the lenders decides to foreclose they will lose even more money when they finally try to sell the property later rather than sooner.
How Do I Qualify for a Short Sale?
There are four criteria a homeowner must meet to qualify for consideration by the lender for a short sale. These are:
• There must be a demonstrable financial hardship, e.g., a lost job or material change in the financial situation;
• There must be a monthly shortfall;
• There must be insolvency, meaning that the owner does not have the money to pay down the mortgage; and
• The owner does not have any assets to sell to pay for the shortfall.
What is Considered an Acceptable Hardship to Qualify for a Short Sale?
There must be a hardship that is preventing the owner from being able to pay their mortgage. Examples include:
• Loss of job
• Business failure
• Damage to property
• Death of a spouse
• Death of family members
• Severe illness
• Divorce
• Mandatory job relocation,
• Medical bills
• Military service
• Payment increase or Mortgage adjustment
• Insurance or tax increase
• Reduced income
• Separation
• Too much debt
• Incarceration
What is the insolvency requirement to qualify for a short sale?
The owner must not be able to pay down their mortgage. To qualify for a short sale, the homeowner must be financially insolvent. This means that they owe more than they have or that they do not have liquid cash or assets that could be used to buy-down their mortgage.
If the owner does have liquid cash or assets they will be expected to use them to pay down their mortgage. There could be a scenario where an owner made a contribution towards the sale of the property and the lender covers the shortfall.
A short sale is not a way to get out of a mortgage. It is a tool for a borrower to use when they truly can’t pay their mortgage.
How does a short sale help me?
• It helps you avoid an emotionally draining foreclosure process.
• Avoiding a foreclosure with help save your credit. Typically a foreclosure will drop your credit score more than 200 points per loan.
• You will avoid having a foreclosure on your credit report for anywhere from 7 to 10+ years, which affects your future purchasing power and interest rates.
• It could help you avoid a "deficiency judgment" from the lender after the foreclosure as they try to recuperate their loses.
I've already received my foreclosure notice, is it too late for a short sale?
• The short answer is no, but there are a few variables that can affect the foreclosure timeline.
• A qualified Realtor or better yet, a Certified Distresses Property Expert can help you extend the foreclosure timeline up to 6 months and in many circumstances up to 7 or 8 months.
• A sale of a home can be done and approved up to the day of the bank sale or auction of the home.
I haven't missed any mortgage payments; can I still do a short sale?
• Typically the lender will not consider a short sale if there have not been any missed payments but can be overcome if we can show a compelling reason why the payments have been made but the payments are not sustainable into the near future.
• We would need to show if the payments were made with your credit cards, by borrowing from family members or even if the money came from retirement accounts, as an example. This will not guarantee the lender will accept but there are instances where they have done so.
How do I pay the Realtor commissions, taxes and other expenses associated with a home sale?
• The homeowner does not pay any of the expenses associated with the sale of the home, such as commissions and other closing costs. Those expenses are also paid by the lender.
• In December 2007, President Bush signed into law the Mortgage Forgiveness Debt Relief Act which eliminates the income tax that used to be levied on the forgiven portion of the primary home's sale. The tax is still in force for second homes and investment properties.
FORECLOSURE VS. SUCCESSFUL SHORT SALE
Homeowner Consequences
Security Clearances
Foreclosure is the most challenging issue against a security clearance outside of a conviction of a serious misdemeanor or felony. If a client has a foreclosure and is a police officer, in the military, in the CIA, Security of any other position that requires a security clearance in almost all cases clearance will be revoked and position will be terminated.
A Short Sale on its own does not challenge most security clearances.
Current Employment
Employers have the right and are actively checking the credit regularly of all employees who are in sensitive positions. A foreclosure in many cases is ground for immediate reassignment or termination.
A Short Sale is not reported on a credit report and is therefore no a challenge to employment.
Future Employment
Many employers are requiring credit checks on all job applicants. A foreclosure is one of the most detrimental credit items an applicant can have and in most cases will challenge employment.
A Short Sale is not reported on a credit report and is therefore no a challenge to employment.
Deficiency Judgment
In 100% of foreclosures the bank has the right to pursue a deficiency judgment.
In some successful Short Sales it is possible to convince the lender to give up the right to pursue a deficiency judgment against the homeowner.
Deficiency Judgment (amount)
In a foreclosure the home will have to go through an REO process if it does not sell at auction. In most cases this will result in a lower sales price and longer time to sell in a declining market. This will result in a higher possible deficiency judgment.
Future Fannie Mae Loan – Primary Residence (effective May 21, 2008)
A homeowner who loses a home in foreclosure is ineligible for a FNMA backed mortgage for a period of 5 years.
A homeowner who successfully negotiates and closes a Short Sale will be eligible for a FNMA backed mortgage after only 2 years.
Future Fannie Mae Loan – Non Primary (effective May 21, 2008)
An investor who allows a property to go to foreclosure is ineligible for a FNMA backed investment mortgage for a period of 7 years.
In investor who successfully negotiates and closes a short sale will be eligible for a FNMA backed investment mortgage after only 2 years.
Future Loan with any Mortgage Company
On any future 1003 application, a prospective borrower will have to answer YES to question C in section VII of the standard 1003 which asks, “Have you had property foreclosed upon or given title or deed in lieu thereof in the last 7 years?” which will affect future rates.
There is no similar declaration or question regarding Short Sale.
Credit Score
Score may be lowered anywhere from 250 to over 300 points. Typically will affect score for over 3 years.
Only late payments on mortgages will show and after sale mortgage will be reported as paid or negotiated. This will lower the score as little as 50 points, if all other payments are being made. A short sale’s affect can be as brief as 12 to 18 months.
Credit History
Foreclosures will remain as a public record on a person’s credit history for 10 years or more.
Short Sale is not reported on a credit history. There is no specific reporting item for ‘Short Sale’. The loan is typically reported ‘paid in full, settled’.
What is a Certified Distressed Property Expert (CDPE)?
The Developers of the Certified Distressed Property Expert Designation believe that in almost all cases the best person for a homeowner in distress to speak with is a well informed Licensed Realtor that has the tools needed to help that homeowner find the best solution for their situation.
Foreclosure is a devastating financial and emotional process for a homeowner to go through, and in many cases they do so alone and without help of any kind.
A Licensed REALTOR who has earned the Certified Distressed Property Expert (CDPE) designation has dedicated their time and effort to understanding the issues distressed homeowners are currently facing. The Certified Distressed Property Expert (CDPE) is a professional who understands the full range of solutions and is ready to help.
- NUMBER1EXPERT 
