As unfortunate as it can be when homeowners fall behind on mortgage payments and must face the possibility of losing their homes, short sales and foreclosures provide them options for moving on financially. The terms are often used interchangeably, but they’re actually quite different, with varying timelines and financial impact on the homeowner. Here’s a brief overview.
A short sale comes into play when a homeowner needs to sell their home but the home is worth less than the remaining balance that they owe. The lender can allow the homeowner to sell the home for less than the amount owed, freeing the homeowner from the financial predicament. A short sale is sometimes the route sellers take to avoid foreclosure.
On the buyer side, short sales typically take three to four months to complete and many of the closing and repair costs are shifted from the seller to the lender.
A short sale may be right for many people, but is it the best option for you? With a short sale there is a credit ding, but not as much as a foreclosure would be. Getting a short sale means dealing with the owner of the mortgage (usually a bank), and that in itself can be an unpleasant and nerve-wracking experience.
The best way to avoid this potentially difficult experience and even make it a smooth process is to get a real estate agent who is a short sale expert. Be mindful when choosing your short sale agent. This type of real estate transaction is very complex and should not be trusted in the hands of a beginner.
Don’t expect a short sale to solve your financial problems. Here are some post-short sale conditions to keep in mind:
- Your lender may ask you to sign a promissory note agreeing to pay back the amount of your loan not paid off by the short sale. If your financial hardship is permanent and you can’t pay back the balance, talk with your real estate attorney about your options.
- Any amount of your mortgage that is forgiven by your lender may be considered income, and you may have to pay taxes on that amount.
- Having a portion of your debt forgiven may have an adverse effect on your credit score. However, a short sale will generally affect your credit score less severely than foreclosure or bankruptcy.
Now, a foreclosure occurs when a homeowner can no longer make payments on their home so the bank begins the process of repossessing it. A foreclosure usually moves much faster than a short sale and is more financially damaging to the homeowner.
After foreclosure, the bank can sell the home in a foreclosure auction. For buyers, foreclosures are riskier than short sales, because homes are often bought sight unseen, with no inspection or warranty.
Foreclosure proceedings vary from state to state. In states where mortgages are used, homeowners can end up staying in the property for almost a year; whereas, in states where trust deeds are used, a seller has less than four months before the trustee’s sale.
Almost every state provides for some period of redemption. This means the seller has an irrevocable right during a certain length of time to cure the default, including paying all foreclosure costs, back interest and missed principal payments, to regain control of the property. For more information, consult a real estate lawyer.
Many states also require that buyers give to sellers certain disclosures regarding equity purchases. Failure to provide those notices and to prepare offers on the required paperwork can result in fines, lawsuits or even revocation of sale.
If you have questions about these or other complex home buying or selling situations, give us a call, we have many years of experience and can get you the answers you need.