Short sales (selling at a loss)

Selling Your Home – Selling at a Loss

When you owe more on your home than it’s worth and you need to sell, the transaction is called a short sale. You need your lender’s approval to do a short sale because they’ll be accepting less than they’re owed at closing. If you’re a buyer, a short sale can enable you to buy at a discount because the seller is distressed and has fewer options. Let’s review how short sales work for sellers and buyers.

How does a short sale work for sellers?

When you owe more than your home will sell for, you can’t just list your home. 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.

Once the lender has approved the short sale, you can list your home 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.

Once approved by the lenders, the short sale can close as soon as the buyer can get their loan approved, funded and closed.

The short sale will stay on your credit report for seven years, but you can finance a new home purchase within three to four years of a short sale depending on credit score, loan type and down payment. Ask your lender to advise on options.

How does a short sale work for buyers?

Making an offer on a short sale is the same as offering on any other property. You work with your agent to identify fair market value based on recently sold comparable homes nearby, and write your offer price accordingly.

The short seller’s lender will often require that you make a loan application with them to ensure you’re qualified, but that lender cannot require you to use them.

Most rate locks are only for 30 to 60 days, but the seller’s lender can take months to review and approve your offer. As such, you won’t be able to lock your rate right away.

Advance the loan process while waiting to lock. Appraise and inspect the property as your lender requires, because the seller’s lender may also require these reports. Taking these steps ensures that when the seller’s lender has finally approved the short sale, your loan will be mostly done and you’ll be able to close quickly.

When does foreclosure begin?

Lenders will initiate foreclosure proceedings when borrowers become delinquent in their mortgage obligations, usually after three payments are missed. The lender will then notify the borrower in writing that he or she is in default. Unless the debt is satisfied, the lender will foreclose on the mortgage and proceed to set up a trustee sale.

If the former owner refuses to vacate the premises, the court can issue an unlawful detainer that allows the sheriff to come out and evict them. Borrowers should do everything they can to avoid foreclosure, which is one of the most damaging events that can occur in an individual’s credit history.

How long do bankruptcies and foreclosures stay on a credit report?

Bankruptcies and foreclosures can remain on a credit report for seven to ten years. Some lenders will consider a borrower earlier if they have reestablished good credit.  The circumstances surrounding the bankruptcy can also influence a lender’s decision.

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