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A Short Sale Isn’t the End of The Road; Things to Look Forward To

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When the housing bubble burst in 2008, it was a very dark period for many Americans with almost ten million losing their homes to foreclosure or short sale. With foreclosures on the increase for the first time in almost five years, it’s becoming a real possibility for many people again, but it isn’t as bad as it may first seem. Explore what happens and what you can look forward to in terms of a short sale in the guide that follows.

Firstly, What is a Short Sale?

A short sale is when you sell your home for less than the mortgage you owe on it. This means that the lender doesn’t get all the money that they are owed. A short sale is permitted in several conditions:

  • You are in negative equity, which means that you owe more than the home is currently valued at
  • The home’s value has decreased substantially
  • The lender has given permission

Your lender writes off the difference between the amount you owe on the property and how much the home is worth.

Things to Look Forward To

  1. Your Credit Score Will Recover Quickly

If you keep paying your mortgage until the short sale, then you will be in pretty good standing afterward. Usually, it can take about two years for a lender to accept your application for a mortgage, but some people have bought homes within six months. Your credit score will dip initially, probably by around 150 points, and although that may seem a lot, it’s much less than you would lose with a foreclosure. Think of it as a minor drawback, rather than the end of the world. Plenty of people recover from short sales. A new trend of boomerang buyers (people who lost their homes to short sales between 2007 – 2013) is projected to make up about 17.5% of the housing market.

  1. Help Available

Even when you’re down and out, there is help available. The FHA (Federal Housing Administration) has provisions for those who had to make a short sale because they lost their job. There is a Back to Work loan program which can help you reapply for a home loan in only 12 months after selling your home in a short sale, as long as you can prove that you lost 20% of your earnings. There are lenders out there who are sympathetic to those who made short sales and are happy to consider individual cases. Don’t simply give up!

  1. Becoming Cash Smart

Most people have never been taught about property law or buying a house. They simply learn as they go. It is built into the American dream that you grow up, get a job, buy a house, start a family. However, at school or college, they don’t teach us the basics of how to deal with these. We tend to learn as you go, and of course, mistakes happen.

If you have to sell your home in a short sale, when it comes to buying again, you will know better what you need to do. Anyone who is buying for the second time is better equipped. They know what to expect and the mountains of paperwork required. They also know what went right or wrong last time. If you have lost your home in a short sale, you will probably qualify for some housing counseling, which is invaluable to teach you what you need to know about buying a house.

Five of the most valuable things you learn when you’ve gone through a short sale are:

  • Not to overextend yourself next time around
  • Be more careful about what you buy
  • Planning to stay in a property for longer, at least five to seven years
  • Put a higher down payment on a property, so your monthly payments are more manageable
  • Be prepared for unexpected circumstances, such as death, dips in the property market, job loss etc.

  1. Avoiding Foreclosure

You’re probably wondering, “How is this something to look forward to?” but talk to anyone who has been through a foreclosure and you’ll understand why. Firstly, foreclosure is painful for all parties involved. A foreclosure stays on your record for ten years and it’s usually at least seven years before you can even consider buying another property.

You won’t be able to borrow money from normal lenders, so it could push you further into money problems. It affects your credit rating massively. Also, even with your home gone, you could be held liable for the money owed to the bank. The bank can obtain a deficiency judgment from the court for the monies owed, and you will then need to pay this also. Avoiding foreclosure could be the best thing that you do for your credit.

  1. Going Mortgage-Free

When your short sale goes through, it gives you the opportunity to move to a new area, to try out somewhere you may have thought about or to move near a good school for your kids. When renting you don’t have the same responsibilities as a homeowner and after being through a stressful year or two with money, this can be really refreshing. Although you’ll still have a monthly payment, it’s not as stressful as a mortgage. You aren’t locked into this loan and you have much more flexibility. If you want to move in less than a year, you can. People get caught up in the idea of owning a home, but after you have got rid of one mortgage, you may find that renting is a dream for you.

Peace of Mind

If you weigh it up, selling your home in a short sale could open the door to a different life to the one you have now. You’ll feel so much relief from being free of the shackles of a mortgage that you may never go back to having one. However, if you do want one, then you’ll be eligible for one far faster than if you go through a foreclosure. So, try not to think of a short sale as the end of the road, merely a fork that leads you onto a new road of your choice, full of possibility.

5 Reasons a Short Sale is Your Best Option

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Often people hear about the concept of a short sale and think it means the homeowner is in default on their loan. But that’s not always the case. Default is not necessary with every short sale. And not every short sale is caused by foreclosure.

Short sales occur when a bank decides to take a lower payoff than the overall balance of the loan. The amount of the mortgage is not a crucial component. What’s significant is your home’s price and market value. If your house is worth more than the mortgage, you may do a short sale.

This can be done as long as the net profit is below your loan’s total balance.

Despite common beliefs, your house doesn’t have to be underwater or upside down to do a short sale. An “underwater mortgage” is a home loan that has a greater principle than the value of the house on a free market.

It’s the bank’s net proceeds that determine if the house can be a short sale. If the sale’s net income is less than the outstanding balance owed on the loan, that home will be a short sale. This can happen even if the property is worth more than just the mortgage.

Here are 5 reasons why a short sale can be your best option:

1. You Can Short Sale Without Defaulting

 While many short sales involve a residence in foreclosure, a pending foreclosure doesn’t always mean a short sale.

To prevent making mortgage payments, not every bank needs a short sale. Some people can actually qualify for a short sale without being in financial difficulty.

With banks, just the chance of a default on a loan can qualify the seller for a short sale. The seller doesn’t always need to be behind on the loan.

If a seller can initiate a short sale without reporting late payments on a loan, this can lead to a stronger FICO score for that seller, rather than the alternative ding to one’s credit.

2. You Can Stop Worrying about Foreclosure

 There are numerous reasons why a borrower may not be able to make mortgage payments.  Financial hardships and unforeseen life events are completely understandable.  “Expect the unexpected,” right?

When you fail to make your mortgage payments for anywhere between 3 to 6 months, the failure to pay is usually met with a notice of loan default.

If the borrower wants to try and stop the home from going into foreclosure, they can attempt to enter a settlement of the debt with the lending bank. This settlement is what’s done in the form of a short sale of the home.

3. You Can Save Your Credit Score

 From an individual credit score perspective, a short sale is extremely preferential, particularly when judged against the possibility of foreclosure.

Credit scoring companies take a dark perspective on foreclosures and will file a lower credit score than to someone who carefully examined their options and decided to go with a short sale as the alternative.

Not only does it protect a person’s credit score, but it also keeps them in the playing field and allows for an easier home buying process in the future.

4. You Can Preserve Your Future of Home Buying

In many cases, the largest financial moment in an individual’s life is buying a home and taking on a mortgage. Preventing the worst case of a foreclosure, a home seller can more easily justify a short sale, such as deciding to move elsewhere for example.

On the flip side, buying a home after a foreclosure, and the resulting destruction of a person’s credit will be nothing less than a nightmare and a half!

5. You Can Avoid the Sales Fees

 

With the traditional sale of a house, the seller carries the strain of payments and fees. This includes paying commission rates to employed real estate agents.

These real estate agent fees can generally cost the seller up to six percent of the final sale of the house. But with a short sale, these fees and commissions are paid to the agents by the bank.  Direct savings for the seller!

Short Sales: Summarized

Typically, an interested buyer will make an offer that meets the values of the property. But often a seller is not in the position to accept such an offer, because the bank is the deciding factor.

In these instances, the lender must approve such offers since they are lower than what is owed on the home loan itself. The seller would then complete an application for a short sale along with the supporting information to be submitted to the lender.

This supporting information may include a letter indicating the seller’s hardship and the reasons for the inability to pay back the difference of the potential offer from the buyer.

Often, proof of income, as well as tax returns, are needed to show evidence of the hardship. An appraisal of the home will be done, and if it ends up reflecting a home value that matches the offer from the potential buyer, the bank may choose to accept it.

 

Other Considerations for Your Short Sale

Remember, this is not a quick or easy process.  It usually takes several months to go from start to finish. To make up for its financial loss, the bank will often require that the home buyer pays for the closing costs of the home as well as repairs.

Once your short sale is complete, the debt is settled, and you are free from the debt and payment. To sum it all up, a short sale is much better for your credit score and your future than a foreclosure is. So, remember, your best bet may very well be a short sale.

The Difference Between Buying A New Home And A Foreclosed Home

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Many people are of the belief that the best real estate investment lies in foreclosures. While there is no question that one can find some exceptional deals in foreclosures this does not necessarily mean that buying a new home cannot offer some of the same if not better deals. There are pros and cons for each argument and it would be well worth your while as an investor to understand both sides.

Buying a New Home

The obvious caveat of buying a new home comes with the warranty protection that you will get. New homes have this added protection in the event that something goes wrong with the building that is a result of inferior materials or poor construction workmanship. New homeowners have the luxury of knowing that they will not be responsible for out of pocket repair costs if something were to happen.

Those who choose to buy new homes also have the advantage of better financing options. Some incentives set in place can save you thousands of dollars off the total cost of buying the property making it that much easier to secure adequate financing for the home of your choice.

Finally, when purchasing a new home you can often work directly with the builders to get the home you really want. If you begin the deal early enough you could customize certain features of the home; choosing the right cabinets, floors, and space design well before the home is completed. This means that you can end up with a home that will reflect your personal tastes and personality.

Buying a Foreclosed Home

By contrast purchasing a foreclosed home may get you lower prices overall but you also have to make some sacrifices in the process. There are a number of risks and challenges that come with purchasing these types of property. For the most part these homes come “as is” leaving you with no warranty or protection if something goes wrong.

In many states by law, any home set for resale is required to come with a “full disclosure” clause that should clearly point out any particular problems that the property must have. However, with foreclosures this is not the case so the buyer leaves himself vulnerable to any number of difficulties and challenges that may come along. If something were to happen the buyer has no possible recourse if problems are found later on.

Finally, there are always the many financing challenges that may come up. While you may have the luxury of securing financing after you’ve found the home of your choice, it is strongly recommended by many realtors that you secure your financing well-before you begin your search for the foreclosed property. At the very least this phase must be completed before you begin the bidding process.

There is no way to tell anyone which real estate investment option is the right one for you. Your decision will depend on your personal expectations and circumstances. However, understanding the common misconceptions that come with investing in real estate is a major step that everyone should take to make the transition to home ownership much more attainable.