Sunday, February 15, 2009

Don’t Sell Yourself Short

If the market is a bit slow and individuals are motivated to move on for whatever reason, a short sale might seem enticing. But be careful before making a decision for a short sale…there are repercussions.

I have a client who for private reasons wants out of her home. And she would like to be rid of it quickly. She is a very studious client, and a natural whiz on the internet. So, in her search for an answer to her dilemma, she happened upon the term “short sale”. She thought it sounded like a pretty good deal. You see, a short sale is when you sell your house for less than it’s worth, negotiating with the lender to absorb the loss. So she emailed me and asked my thoughts on the matter.

What the website failed to mention was that the short sale option is usually only a good move when used as a last resort to avoid a foreclosure. The lender who holds the note negotiates for a smaller loss than is anticipated through the loss that would result in the event of a foreclosure. And when it’s all said and done, it doesn’t necessarily settle the remaining balance or loss.

Typically, if you need to negotiate a short sale, you would do so through a lender’s loss mitigation department. Historically, lenders wouldn’t even consider short sales unless the loan was in trouble in the first place – meaning payments had been behind or missed.

However, due to the large amount of foreclosures experienced as of late, lenders are a bit more willing to address short sale requests. Short sales are great for both parties when everyone is aware of the repercussions. However, my client was not. I also had another client who was transferred out of state with his job. He was very motivated to rid himself of his home in Alabama. He was told by his realtor and the lender that his short sale would not show up on his credit report as a foreclosure. So, he thought he had a good deal going. What he didn’t know was that the short sale would show up as “a deed in lieu of foreclosure” on his credit report. And it hurt his credit score. But how it really hurt him was that it affected what type of financing was available to him when he relocated here recently with his family. Although conventional financing would have been the best scenario for him, he ended up having to obtain an FHA loan. This is because FHA will allow a borrower to purchase a new home until 3 years have passed from the date of the short sale. Conventional financing requires 2-4 plus years to have gone by. And there has to be very specific documentation to allow for the 2 year mark. He was adamant that he did not have a foreclosure. And he’s right - he didn’t. But when I explained to him that his lender suffered a loss and someone has to take the fall for it, it dawned on him that perhaps he wasn’t as well informed as to how the short sale might affect him in the future. And, as you can imagine, he as very upset with the situation.

So, typically a short sale is a good option only for a distressed seller. Not just a frustrated seller. If you’re struggling with making payments, perhaps are behind, and are stuck with a house for sale where there are fifteen more just like it for sale in your area, you might consider this option. However, consider all the repercussions before selling yourself short.

Let My Experience Work For You!
Email your home loan financing questions to Kristin Abouelata, Home Loan Specialist with Mortgage Investors Group, at question@kristinmortgage.com or call direct: (865) 567-0113 Toll Free: 1-800-489-8910. For more information visit her website at www.kristinmortgage.com Home Loans Plain Talk.

1 comment:

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