The recent housing bust has impacted every corner of the housing market throughout America. Approximately 15% of all homes are currently underwater which means the value of the house is lower than the outstanding balance on the mortgage. Homeowners are unable to sell because they would be required to bring cash to the closing table for the difference between the selling price and the mortgage balance.
An option for homeowners stuck in this situation is a short sale. A short sale occurs when a bank allows a homeowner to sell the property for less than what is owed on the mortgage. Banks are willing to consider a short sale because it is possible that they will loose less money than if they foreclosed on the property and then tried to sell it as an REO (real estate owned) property. You must get your bank to agree to the sale since they will be forgiving part of the debt that you owe them.
Before a seller considers doing a short sale, he must be aware of these four items and what impact they will have. They may determine whether or not you want to consider pursuing it.
Seller must prove to the bank that they have a bona fide hardship
Banks are in the business of making a profit and for that reason they are not willing to forgive part of the balance of the mortgage for sellers who are underwater. If the bank knows that you can make the monthly mortgage payment then they will expect you to make the payment. On the other hand if there is a financial hardship banks will be willing to work with you so they can limit their loss. Banks will ask you to document your financial hardship by providing bank statements, pay stubs and tax returns. If you do not have a financial hardship, you will not be able to get the bank to agree to a short sale.
Your credit score will tank
When a bank performs a short sale, this action is recorded with all three of the major credit bureaus (Equifax, Experian and TransUnion). The notion in your credit will show that the mortgage was terminated in a short sale. It is not unusual to see your credit score drop anywhere from 100 to 150 points as soon as this notation shows up in your credit report. This notation will remain on your credit report for seven years. Future lenders will be wary of any application for credit with this notation on your credit report. The only saving grace is that your score will eventually recover and it will recover faster under a short sale than if you let the property go into foreclosure.
You may be limited on your ability to purchase another house
Fannie Mae recently changed their lending requirements. If you sell a property via a short sale, you will not qualify for a Fannie Mae financed loan for two years from the date your home was sold. If you will be using Fannie Mae backed financing, there is no exception to this rule. If you want to purchase another home within two years, you may have to seek alternative financing or mortgages that are not backed by Fannie Mae.
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