What's a Short Sale?
A short sale is a real estate transaction in which a home is sold for less than its mortgage balance. This would not be an issue if owners brought in a check to make up the difference, but in practice few people have the tens of thousands of dollars -- and sometimes a lot more -- needed to make-up the unpaid shortfall.
Lenders Don't Want to Be Suckers
Short sales are unhappy financial events, situations in which homes are lost and lenders are not fully paid off. You can bet that lenders see red flags when a short sale shows up on a credit report. However, the good news is that today, more borrowers are able to quickly get new real estate financing -- even after a short sale in many cases.
Lenders have traditionally opposed short sales (and what are sometimes also called pre-foreclosure sales), but with the mortgage meltdown things began to change because it turned out that short sales were -- can we say it -- "less worse" for lenders than foreclosures. You can still see this today: The April existing home sale figures from the National Association of Realtors show that a short sale typically sells at a 10 percent discount, significantly less then the 16 percent write-off that's typical with foreclosures. To make a short sale work, the seller and the property buyer need the lender's approval. Because the lender is the one taking the loss, it's not surprising that short sale approvals often involve difficult and lengthy negotiations.
After a Short Sale
Once a home has been sold through a short sale, things can be fairly grim for past owners. A short sale usually creates a huge credit ding. It may even impact credit scores in the same way as a foreclosure. However, by making a contribution toward offsetting your mortgage lender's losses, you may be able to negotiate a better code (like "paid as agreed") than if you lay all the losses at the lender's door.
"The common alternatives to foreclosure, such as short sales, and deeds-in-lieu of foreclosure are all "not paid as agreed" accounts, and considered the same by your FICO score," says credit score developer Fair Isaac.
12 Months to a New Mortgage
Because short sellers often have substantial credit issues, thoughts of a new mortgage might seem like a distant dream. However, the marketplace has begun to change, in large measure for two reasons: First, people with historically-good credit who have lost their homes with short sales have often faced conditions beyond their control such as a job loss, reduced hours, a medical emergency or a divorce. In other words, a short sale does not reflect the real credit standing of such borrowers. Second -- and not to be overlooked -- lenders expect that refinancing activity will fall 60 percent this year. With fewer loans to be made, application standards have been eased.
So where do short sellers stand when it comes to getting a new mortgage? Surprisingly, there are some good opportunities out there: Until last summer, the FHA typically wanted a three-year cooling off for short sellers, but with its new Back to Work program, the wait can be as little as a year. Under Back to Work, the FHA says that short sale borrowers may be eligible for a new mortgage if they were hit with an economic event that reduced their income by at least 20 percent for six months and that they have since re-established their credit.
In such circumstances it may be possible to get new financing after 12 months. Short sellers who want conventional financing may also be able to get new financing after two years with good credit and 20 percent down or four years with 10 percent paid up-front. However, be aware that some lenders have additional requirements, called overlays, that go beyond the general standards. For more details and information, speak with lenders to review the available options. Also, keep looking because requirements change and new standards may come into the picture.