Selling Short: Debunking Some Myths about the Process
Homeowners thinking about selling short – asking mortgage lien holders to release their lien against the property for less than what is owed, in order to facilitate a sale to a bona fide buyer – are faced with some difficult decisions. A short sale can impact credit for years, so the decision should not be arrived at lightly. But it is important that homeowners have the facts before proceeding to short sale, and there is a lot of misinformation out there about the process. Here are 5 myths debunked:
Myth 1: You have to be in default or arrears on your mortgage to get a short sale. No, not necessarily. While many homeowners considering a short sale are in arrears on their mortgage due to financial hardship, it is not necessary that a homeowner be late on payments to get the bank to consider the application. The test is financial hardship, and if a seller presents that picture accurately, and has a bona fide purchaser ready to go, banks will often approve short sales even if the borrower is not in default. I advise clients to keep making payments as long as they can, as a continued stream of payments can often result in a more favorable payoff negotiation.
Myth 2: Once the bank starts a foreclosure, there is no time to do a short sale. Not correct. A foreclosure of a condominium or house can take man, many months, and often more than a year, so the commencement of this process affords a motivated seller opportunity to do a short sale in enough time. Moreover, telling the judge presiding over the foreclosure that the borrower is working actively on a short sale will usually buy more time with the court, as they generally prefer parties to reach mutual agreements (as in a short sale) instead of ordering foreclosure. Even if a final date had been set by the foreclosure court, a pending short sale submission will typically push this back 30-40 days. Coop foreclosures, on the other hand, are typically non-judicial, and proceed much faster, so short selling is not always a viable option then.
Myth 3: A short sale is just as bad on a credit report as a foreclosure or bankruptcy. Absolutely not. A short sale will drop your scores significantly as does a bankruptcy or foreclosure but getting a mortgage in the future is easier and quicker if you have had a short sale. “The short sale is treated as a charge off in the majority of cases and once paid becomes a settled for less than full balance account,” according to Tracy Becker, a credit expert and president of North Shore Advisory. FICO scores are dramatically reduced the first 2-4 years with a short sale, but banks look more favorably at short sales since the payer did not walk away leaving the bank with the full burden of an unpaid loan. Becker says because of this, “short sales are much easier” for her staff to work on removing than foreclosures. Moreover, continuing to make payments during the short sale negotiation process keeps the FICO score from being damaged by late payments on the mortgage.
Myth 4: The borrower has to pay the bank the deficiency after the closing, so why bother with a short sale. In rare cases, banks will require borrowers to agree to post-closing payments to repay the deficiency in the short sale. In other words, if the bank agrees to accept $50,000 of the $100,000 owed on a mortgage, it might require the borrower to agree to a payment plan post-closing for the remaining $50,000 owed. But that is rare, and in most circumstances banks accept the short sale proceeds at closing as payment in full. Moreover, many borrowers who agree to post-closing payments settle for pennies on the dollar after the closing.
Myth 5: I will have to drain my savings before a bank will agree to a short sale. Not true. While banks will consider cash balances of the borrower before agreeing to a short sale, it will not necessarily require that all of the cash assets of the borrower be used to fund the shortfall.
Myth 6: A short sale can take 9 months, and no buyer is going to wait around for that long. Not anymore. While banks reviewing short sales in the past took extended time to respond, today lenders are far more interested in moving properties out of default, and closing out problem loans. As such, they tend to process pending short sales much faster that previously. Moreover, new government regulations require banks to move faster also.
Myth 7: I can’t afford to pay a lawyer to handle my short sale. Legal fees for short sales are paid by the bank, from the proceeds. Most lawyers handling short sales, like this one, do not charge clients a retainer and no fee is due if the short sale is not approved.