What Is a Short Sale?
When you owe more on your home than it’s currently worth and you need to sell, the transaction in which you will sell your property is called a short sale. You will need your lender’s approval to do a short sale because they’ll be accepting less than they’re owed at the closing table. While there are many reasons homeowners opt for a short sale, the most common is to avoid going into foreclosure.
How Will a Short Sale Work For You?
For homeowners who are underwater on their mortgage, short sales are often the best or only option when it comes time to sell their property, and generally to avoid going into foreclosure as well. For many distressed homeowners, short sales are an alternative to foreclosure. Here are the steps you will need to take in order to sell your property in a short sale:
- Provide proof of hardship: When you owe more than your home will sell for, you can’t just list your home to start. You first need to provide proof of hardship to your lender. The two most accepted hardship cases are proof that lower income has made your home unaffordable, or that you’re subject to a mandatory job relocation. When reviewing your hardship case, your lender will analyze your income and assets. If your debt-to-income ratio has risen, it will help your short sale approval. If you have money saved, they’ll require that you contribute these funds to minimize their loan payoff loss. You will also need to provide a market analysis as well as indicate any liens on your property.
- List your property: Once the lender has approved the short sale, you can list your property with a real estate agent. You’ll need to present any offers to the lender for approval. This process can take two weeks to several months. If you have a second mortgage, both lenders must approve each other’s terms, making the process longer.
- Lenders approve the sale of the property: The lenders will review the buyer’s offer and decide if they will approve the sale. Once approved by the lenders, the short sale can close as soon as the buyer can get their loan approved, funded and closed.
What Happens After Closing
Generally, you can expect your credit score will drop by 75 to 200 points after selling your property in a short sale. While this sounds extreme, fortunately this is less severe than a foreclosure. It is estimated that a foreclosure take a 200 to 300 point bite out of your credit score. Additionally, lenders often won’t consider a short sale approval for your property until you’re at least two to three months behind on your mortgage payments. This means that your credit score drop will likely be at the higher end of the range if this is the case. The remainder of the credit score drop will depend on whether your lender reports the short sale as "paid" debt or "settled" debt. You should try to negotiate for the former, but the latter is more common, and will generally hit your credit score harder.
When all is said and done, the short sale will stay on your credit report for seven years. Seven years may seem like a long time, however you will be able to finance a new home purchase within one to four years of your short sale depending on your credit score, the loan type, and the down payment amount. Just for comparison, with a foreclosure, that time ranges from three to seven years, making the forclosure again a more severe option. It is suggested that you ask your lender to advise you on options. Prior to the housing crisis, the lender’s loss was taxed as income for the seller, but now short sellers have no tax liability.
How Can We Help You With Your Short Sale?
If you owe more than the current market value of your home, or if you're not sure what you're home is worth and want to explore your options, Nichole Willey & Associates can help. We have over 10 years of short sale experience here on Cape Cod and beyond and are backed by the best team in the business.
With the right team of experts helping you, the short sale process won't be nearly as stressful. Reach out today to learn more about how we can help you get your home sold and if a short sale is right for you and your property.
Call Nichole today at 508-737-3567 or email at NicholeWilley@KW.com
or Contact Us right here.