Is a Short Sale Really in the Best Interest of the Homeowner?

While a home with a white picket fence may be the American dream, in reality, one in 200 American households will be forced into foreclosure. Yet there may be a way to save your credit score and sell your home for less than a market value-the short sale. 

A large amount of debt and no emergency plan is the norm for many Americans. In fact, 43 percent of Americans are spending more than they earn each year and 42 per cent of Americans don’t have enough cash flow to support themselves for 90 days in the case of a sudden inability to work.1 This combination can often result in many families losing their homes each year.

Choosing a variable rate mortgage can also lead to an unexpected spike in your monthly mortgage payment with the rise in interest rates. Those who buy when the market is high can find themselves in a home that’s worth much less when the demand grows soft. This combination can result in a mortgage that’s higher than the home’s worth and the need to sell. 

The Benefit of a Short Sale

A short sale is the sale of a home where the mortgage lender agrees to sell the house for less than the amount owed on the mortgage.2 While many falsely believe that this type of sale is only offered by lenders on the sale of foreclosed properties, homeowners actually initiate a short transaction to avoid a foreclosure. 

Foreclosure vs a Short Sale

There are benefits and drawbacks to making a short sale for both the lender and the property owner. 

Credit Score

Both options will negatively impact your credit score. Here is a breakdown on how a disruption in your mortgage payments will affect your FICO score.

  • 30 days late: 40 to 110 points
  • 90 days late: 70 to 135 points
  • Foreclosure, short sale, or deed-in-lieu: 85 to 160 points
  • Bankruptcy: 130 to 240 points

While some lenders may consider a short sale even if your payments are current, not all lenders will consider this their best option. They’re not interested in losing money on the sale of your home. Lenders will also look at all your financial assets that could be liquidated before making their decision. 

If you’re behind on your payments, the combination of late fees and a short sale could have the same impact as a foreclosure on your credit score. 

Living Arrangements

Your living arrangements during a short sale are like those during a regular deal, except it may take much longer. Homeowners are expected to keep their home in good condition for viewings and will need to regularly vacate the home for showings and open houses. Failure to pay your mortgage during this time will cause you to lose more points off your credit score. 

Free Rent

If you choose to do a foreclosure, you can live in your home up to four months free in many states. This can allow you to save up some much-needed cash for a deposit on your next house. 

While this may seem like the best way to save up for your new purchase, it will usually take about 24-72 months before you’ll be offered a reasonable interest rate after a foreclosure or short sale. 

There would be a respite to this if the seller was able to keep the payments current before and during the short sale. A new guideline was put forward in 2010 by the FHA4 that a seller can qualify to buy a new home immediately if they stayed current with their payments during their short sale. 

Cash for Keys

After the real estate market crash in 2007, banks found themselves with an influx of foreclosed homes.3 With this rise came the introduction of pay for keys as a standard procedure. Banks quickly learned that lengthy court proceedings and hefty repair bills cost more than offering occupants a sum of money to vacate the property and return their keys. 

While this isn’t always offered, occupants can often negotiate a small amount. Negotiations are to cover moving expenses as well as the cost of first and last month’s rent. In exchange, occupants must leave home in a good clean condition without leaving any pets behind. 

No Viewings

Another advantage of foreclosure is that you’re not expected to keep the home up to standard for viewings. Since you’re able to continue to live in your home until you’re forced to vacate, you’re not expected to vacate for any showings or open houses. 

Is Buying a Short Sale a Good Idea?

While it may not always be in the homeowner’s best interest to initiate a short sale, purchasing a short sale can be a great way to get instant equity in your home and a great price. There are many questions to ask during a short sale as well as items to consider. 

What Condition is the Home in?

Short sale homes are often left in better condition than foreclosed properties, but this isn’t always the case. Many of these properties may be missing items like appliances, curtains, and light fixtures. Some homes are even stripped of things like their copper fittings. 

Homes left in poor condition could require extensive cleaning, fumigation and even repair. 

How Long Will It Take?

Short sales tend to take longer than traditional sales. To complete, it often takes as long as three to four months or longer. Many real estate agents are experienced with short sales and can advise you along the process. 

While this isn’t an ideal situation for those who need to move into their new home quickly, it can be a good option. Short sales are often a good option for those who’re able to extend the time in their current home or are willing to stay with friends or family between dwellings. 

Consult Those with Your Best Interests at Heart

Before making any decisions, it’s important to speak to a professional who has your best interests at heart. Keep in mind that a real estate agent would only receive a commission on a short sale and not on a foreclosure, so it’s in their best interest you sell your home. 

Your decision will also affect your next tax return. You can consult a tax professional to fully understand the impact your choice will have on your finances. 

No matter what you choose, losing your home isn’t the end of your homeownership dream. By selecting the options that make the most sense for your family, saving for a deposit and minimal spending you’ll be working towards becoming a homeowner again. 

https://www.fdic.gov/about/comein/files/foreclosure_statistics.pdf
https://www.nat.com/News-Info/NAT-TV/Home-Buyer-Seller/What-is-a-Short-Sale.aspx?15347-What-is-a-Short-Sale
https://www.thebalance.com/cash-for-keys-1798485
https://www.thebalance.com/reasons-to-short-sale-over-a-foreclosure-1799172