Short Sale Overview
What Is A Short Sale?
A short sale is when a homeowner can sell their home for less than the amount owed to the bank. For example, if you owe $200,000 to the bank but decide to sell your home for $180,000 and can't pay $20,000, the sale will be considered a short sale. The mortgage lender would receive less than what it owes. The bank can only approve a short sale.
What Is The Short Sales Process?
You will need to contact your bank if you are unable to make the mortgage payments. The bank will require you to prove that you are unable to make the payments. You must also prepare documents (these differ from bank to bank) that show your inability to pay. These documents include a hardship letter detailing what you are going through, two years' worth of tax returns and W-2s, and a list listing the prices of homes sold in the area that can be used to determine the home's market value.
Lenders will not accept a short sale unless you can prove that you cannot repay the loan or that the proceeds of the sale could not be used to fully repay the amount owed. The bank will approve a short sale, and you sign papers confirming this. The home can sell quickly or take several months. Be prepared to show it continuously. You will have to vacate the property as soon as escrow is closed.
What Does A Short Sale Do To Your Credit Score?
A short sale can damage your credit. In some cases, it may even be worse than if you had foreclosed on your home. Foreclosures and short sales are treated as defaults on loans. Experts believe that a short sale can lower your credit score by up to 200 points. This means that an 800 great score could drop to 600, which is just OK. You'll be charged higher interest rates for any credit cards or loans you apply for.
A short sale that resulted from multiple non-payments will have a smaller impact on your credit score. Note that lenders may allow short sales even if the borrower has not yet missed any payments. This would have the lowest impact on your credit score.
What Is The Time Frame Before You Can Buy Again?
The type of loan you choose and the amount of down payment you make will determine how long you have to wait before buying another home. Fannie Mae requires that you wait at least four years for a loan with a 10% down payment. It also requires you to wait two years for a loan with 80% down. Fannie Mae will require you to wait two years if your down payment is 20 percent. Fannie Mae will also require you to wait two years for a loan with a 10 percent downpayment. Fannie Mae will not allow you to buy if you have ten percent, but you also have exceptional circumstances like ill health. You will usually need to wait at most for a few years before you buy, but in rare cases, you may be able to purchase immediately after a short sale.
Additional Considerations
Sometimes, a short sale can have tax consequences. For example, many homeowners have this happen to them after tapping their home equity during the upswing in the market and using that money to purchase things, such as cars or college tuition, unrelated to their home.
Let's say that you owe $200,000 in your original mortgage, $50,000 on a home equity loan, and $200,000 on your house. These loans were used to purchase items unrelated to your home. You sell your house quickly and receive $190,000. The original mortgage lender is repaid $180,000, and the home equity lender $10,000. The $20,000 that the original mortgage lender will forgive you (the difference between what you owe and what you repay with the sale of the home) is not taxable income. However, the $40,000 you don't repay inequity would be considered taxable income since it was not used to improve your home.
