Is a Short Sale Right for You?

If you’re facing foreclosure, you need to talk to an experienced professional immediately. A qualified expert can evaluate your situation and explore your options with you. Whether you are victim of improper mortgage servicing practices or have just struggled financially in the past, an attorney can help.
One foreclosure alternative that has received a lot of attention lately is a short sale. In fact, new legislation, Prompt Decision for Qualification for Short Sale Act of 2013, was just introduced this March to expand legislation from last year and to improve the short sale process overall. Even if you have received a foreclosure notice, a short sale may be an option.
What Is a Short Sale?
A short sale provides borrowers the opportunity to avoid foreclosure by allowing them to sell their home for less than their mortgage’s remaining balance. If the servicer accepts that less-than-full amount, the house is sold to the new purchaser, and the lien against the property is released. However, the borrower will still owe the remaining unpaid balance of any first or second mortgage on the property.
This can eliminate or reduce your mortgage debt, help you avoid the negative impact of foreclosure, allow you to begin repairing your credit sooner than if you experienced foreclosure, and may give you the chance to get another Fannie Mae or Freddie Mac mortgage in as little as two years. Note that a short sale will negatively impact your credit score, but for many, getting out from under an overwhelmingly burdensome mortgage is worth the credit score hit.
Speedier Short Sales
In the past, short sales were rarer than they are now, because fewer people qualified for them, the market has drastically changed from what it was, and the short sale process was long and frustrating. Now, borrowers whose loans have been purchased or guaranteed by Fannie Mae or Freddie Mac enjoy a standardized and streamlined short sale process.
Short sales used to often fail because mortgage servicers took an inordinate amount of time to make decisions and process paperwork. Potential buyers would make an offer, the servicers would take too long to proceed, and the buyers would get frustrated and back out of the transaction.
A program that took effect last year makes the short sale process take much less time. For federally-backed loans, lenders must decide whether to accept a short sale offer within 30 days, aligning short sales with a traditional home-selling and home-purchasing experience. New legislation introduced just this month seeks to expand this 30-day limit to mortgages not backed by Fannie Mae or Freddie Mac. Speedier short sales means increased closing rates, which allows buyers and sellers to move on with their lives more quickly, and boosts the housing market.
More People Are Eligible for Short Sales
Historically, only delinquent borrowers were eligible for short sales, but an important short sale program went into effect last year. That Fannie Mae and Freddie Mac program allows short sales not only for homeowners whose mortgages are in default, but also for those who are not in default but are encountering a substantial hardship that could push them into default.
Now, servicers may approve borrowers for a short sale even if they are current on their payments if they are suffering a hardship such as divorce or separation, death of a borrower or primary wage earner, borrower or dependant family member having a long-term or permanent disability, natural or man-made disaster, sudden increase in housing expenses beyond the borrower’s control, a business failure, or distant employment transfer or relocation (including Permanent Change of Station orders for service members). This list is not exhaustive, as a servicer may submit a short sale recommendation for approval if a non-delinquent borrower is facing a hardship not listed above. (There are also other, non-hardship eligibility criteria not discussed here.  See Fannie Mae or Freddie Mac for more details.)
Preparing for Short Sale
Collect your basic financial and loan information. This includes your mortgage statements, other monthly debt payments, and income details like paystubs and income tax returns. Then outline why you are having difficulty making your mortgage payments. You will need to explain to your servicer your hardship and why it is a long-term problem. The documentation required to show need is reduced or eliminated for those who have missed several mortgage payments, have low credit scores, and are facing serious financial hardships.
As I mentioned previously, your very first step should be to talk to a qualified professional. An experienced attorney will need the above information to help you determine your best course of action, so it is a good idea to have these materials on hand. But remember, a foreclosure may not have to be your fate, and a short sale certainly is not your only option. For instance, if you are behind on your payments but can afford your mortgage and just need some help getting back on track, consider a Chapter 13 bankruptcy plan to prevent foreclosure and to avoid a short sale. Or, if you have other debts that you cannot manage, a Chapter 7 bankruptcy may help you resolve all of your debts, including the mortgage, in one short process.
See Related Blog Posts:
Fannie Mae Loss Mitigation Options
What is a Qualified Mortgage?
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