Using a Short Sale to stop a foreclosure.
When a homeowner falls far behind on a mortgage and the balance owed on the home loan is higher than the home’s value, a short sale can sometimes stop a foreclosure. A short sale is not the fastest solution and it is not always approved, but it remains a legitimate loss-mitigation path recognized by federal servicing rules and major mortgage investors. Learn more below on what a shore sale is and the entire process/concept of it.
What is a short sale?
A short sale is a sale of a property for less than the total mortgage balance. The lender must approve the transaction because it accepts less than the full payoff. The homeowner lists the property with an experienced agent, gathers financial documents, and submits a hardship explanation to their lender.
The servicer orders a valuation or appraisal to confirm that the proposed sale price reflects the true market value. Once the servicer approves the offer, the lender issues a written agreement that details the approved price, the release of the lien, and whether any remaining balance will be forgiven or collected.
While there are pros and cons to the process, for the bank/lender a short sale allows the lender to recover most of the home’s market value without having to take the property back through foreclosure. The homeowner benefits as well as it one way to give up the home to avoid a foreclosure. As the property owner avoids the credit impact of a completed foreclosure, reduces the risk of a deficiency judgment in many cases, and completes the transition in an orderly way. Servicers for loans owned or backed by Fannie Mae, Freddie Mac, the Federal Housing Administration, the Department of Veterans Affairs, or private investors continue to use short sales when the homeowner demonstrates hardship and all other options have been reviewed.
How a short sale can help avoid foreclosure
An in-process and in particular completed short sale usually stops the foreclosure process because the loan is resolved through the sale and the lender releases its lien on the property. It will halt the foreclosure because the mortgage is settled through the closing once all required investor conditions are met. Most servicers suspend foreclosure activity during the short-sale review period as long as the homeowner is working with them, provides documents on time, and submits offers within the required timelines.
However, be mindful of the timing, as most transactions take several months when factoring the time to apply, sell the home, and closing. The process begins with listing the home and marketing it until a reasonable offer is received. In many markets, it may take thirty to ninety days to receive a competitive offer, depending on price and condition and it is important to understand the foreclosure process.
After the offer is submitted, most major servicers aim to provide a decision within thirty to forty-five days, although it can take longer if there are multiple liens, mortgage insurance requirements, or investor reviews. Once approved, closings usually occur within thirty to sixty days. Homeowners who are facing an imminent foreclosure auction should contact the servicer immediately and request that the foreclosure sale be paused while the short sale is reviewed.
Will a short sale damage my credit?
Yes it will, but most likely not as much as “doing nothing”. A short sale will damage credit, but usually less severely than a completed foreclosure. Short sales appear on credit reports as settled or paid for less than the full balance. The credit score drop varies based on prior history, but most consumer-credit organizations note that a foreclosure generally causes a larger and longer-lasting decline than a short sale. It is possible to fix a credit score though, and find out how to improve credit ratings.
Late payments leading up to the short sale also harm credit and remain on the report for up to seven years. The waiting period to buy another home is often shorter after a short sale. Many conventional mortgage programs require about four years after a short sale, though this may be reduced to two years with verified extenuating circumstances. Federal Housing Administration loans often require about three years after a short sale that involved delinquency, although some borrowers who were not late on their previous mortgage may qualify sooner. As always, borrowers can review their credit for free at https://www.annualcreditreport.com..
Other factors to consider
A major issue in any short sale is the deficiency balance, which is the difference between the mortgage balance and the short-sale proceeds. Whether the lender forgives the deficiency depends on state law and the short-sale agreement. Some states restrict deficiency collection after certain types of short sales. Other states allow lenders to pursue the balance unless the lender agrees in writing to waive it.
The homeowner should always obtain written confirmation of how the deficiency will be handled. The lender may issue a Form 1099-C for any forgiven amount. Homeowners should review current guidance https://www.irs.gov/publications/p4681 to understand how canceled mortgage debt is treated and whether any exclusions apply in the current tax year.
A successful short sale requires organized documentation and early communication. Homeowners should contact their servicer as soon as they know they cannot afford the mortgage. Housing counselors approved by the U.S. Department of Housing and Urban Development can help prepare documents, confirm investor rules, and assist with communication. It is also possible to use non-profit credit counseling organizations, which are available in all states and help people both navigate short sales and any other financial needs they have, with a list of local and national credit counseling agencies on NHPB. They do not charge low-income clients for foreclosure counseling.
It is also possible to get legal advice, sometimes / often for free. Real estate attorneys can explain state foreclosure laws, deficiency risks, and negotiable terms. Experienced real estate agents, often part of government backed legal aid, can guide pricing and prepare offers that comply with lender requirements.
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