Over the past several years there have been a lot of financial terms in the news as a result of the 2008 financial crisis. Experts talk about the collapse of the housing bubble, sub-prime mortgages, foreclosures, and short sales.
However, to many of us these terms and concepts are new and confusing. The reality that a home bought in 2005 may be worth 30 to 40% less in 2012 is something that seems to defy logic and yet a good percentage of home owners have found themselves in that very situation. Stuck in a home they may no longer be able to afford, home owners believed foreclosure their only option. That was true, until banks began to consider an alternative: the short sale.
A short sale is the sale of real estate or property where the amount owed to the bank by the property owner is more than the property’s current fair market value. When the property owner cannot afford to pay the amount owed, the bank can agree to release the property owner from paying off the debt and accept less for the property than they are owed. Although property owners are not always released from paying the difference between what is owed and the property’s current fair market value, lenders will usually agree to forgive this deficiency because they stand to lose less money on a short sale than they would in a foreclosure. Regardless of whether a property owner faces a short sale or a foreclosure, both can negatively impact a property owner’s credit report.
The short sale process can vary greatly from property to property and lender to lender. In the majority of cases, a property owner may be required to prove they are unable to repay the lender due to economic or financial hardship. In addition all lenders holding liens against the property must approve individual applications for a short sale. These liens include primary and secondary mortgages, home equity lines of credit, and even home owners associations. This means that once a property owner has hired a real estate agent and a buyer makes an offer on the property the offer then must be approved by all of the property’s lien holders. As a result it can take weeks, sometimes even months to complete a short sale.
Despite the many challenges a short sale presents, in most cases they are a better alternative for property owners and lien holders than foreclosure. Although both do have a negative impact on the property owners credit report for up to 7 years, short sales typically have been known to lower credit scores or FICO scores by as much as 40% less than a foreclosure. In addition, property owners who have remained current on their mortgages can often qualify for special programs, allowing them to purchase a new home immediately, instead of having to wait 2-3 years in the case of a short sale or 5 or more years in the case of a foreclosure.