What Is A Short Sale?

What Is A Short Sale And How Does It Work?

A short sale is when a mortgage lender approves the sale of a homeowner’s home for a value less than the amount the homeowner owes on their mortgage loan balance. After the 2008 Real Estate and Mortgage Meltdown, real estate values have collapsed where many homeowners who had equity in their homes were left with home mortgages that were higher than the amount they owed on their mortgage loans. Since the economic and the real estate meltdown, many homeowners have seen their home values go back up and many, especially in California, Florida, Illinois, Texas, and other parts of the country. However, there are still homeowners who still have mortgage loan balances that is higher than the balance of their homes. In order to sell their homes, they need to come up with the difference on what they owe from the sales price of their home. With a short sale, the homeowner has the mortgage lender’s blessing to sell their home at the current market value and will often forgive the debt that they owe.

Short Sale Process

If a homeowner is going through financial hardship and they owe more on their mortgage loan balance than the value of their homes, their mortgage lender may accept a short sale. Getting approved for a short sale is a process. Mortgage lenders will want to see financials of the homeowner and the reason why their mortgage payments is a hardship. After carefully reviewing the mortgage loan borrower’s financials and credit, the mortgage lender can approve a short sale. The homeowner can choose a realtor of their choice. The mortgage lender will do their own due diligence on pricing the home and will research recently sold properties in the area. Once a listing price is decided, the homeowner can have their real estate agent list the property. Once a potential home buyer submits a real estate purchase offer, the homeowner has no say so whether or not to accept the real estate purchase offer. The real estate purchase offer needs to be submitted to the mortgage lender who holds the note. Most mortgage lenders take their sweet time in reviewing the real estate purchase offer and sometimes it may take weeks or months before getting back to the home buyer with a counter offer. Short sales are a long process and take much longer to close than traditional home sales because banks and mortgage lenders normally take long.

Can A Homeowners Who Short Sales Qualify For Another Home Loan?

A short sale will definitely affect the credit and credit scores of the homeowner. However, homeowners with a prior short sale can definitely qualify for another home loan after short sale. If the homeowner has been timely with their mortgage payments and all other monthly debt payments up to the date of their short sale for the past 12 months, there is no waiting period to qualify for mortgage after short sale. Unfortunately, most mortgage lenders want the homeowner to skip at least one months mortgage payments for the short sale to be effective and this 30 day late payment on their mortgage payments will trigger a three year waiting period after short sale for FHA Loans and a four year waiting period after short sale for Conventional Loans.

Credit After Short Sale

A short sale will most likely trigger a 100 plus point drop in the homeowner’s credit scores. However, the credit scores will eventually go back up as the short sale ages. Homeowners who had short sale should start re-establishing their credit by adding positive credit and being timely with all of their monthly debt payments. Secured credit cards are the best tools in re-establishing credit after short sale and each secured credit card can boost a consumer’s credit scores by 30 or more points and expedite the credit re-establishing process. Never be late on any monthly debt payments after short sale. Most mortgage lenders will disqualify mortgage loan borrowers who had late payments after short sale, bankruptcy, and foreclosure. One 30 day late payment after short sale can disqualify a mortgage loan borrower from qualifying for a mortgage loan for at least seven years. A short sale will be on a consumer’s credit report for 7 years.

How Solid Is The Pre-Approval Letter?

Importance Of Pre-Approval Letter

Realtors count on a solid pre-approval letter from home buyers. Home sellers normally will not show a property and more importantly, will not accept a real estate purchase offer from a home buyer without a pre-approval letter. A shrewd real estate agent will question the pre-approval letter that they were presented with and will often contact the mortgage lender who issued the pre-approval letter to see how solid the pre-approval letter is and to see whether the mortgage loan originator has thoroughly reviewed the mortgage loan borrower’s tax returns, W-2s, and whether the mortgage loan originator has submitted the mortgage loan applicant’s file through Fannie Mae’s Automated Underwriting System.

Do All Mortgage Loan Originators Qualify Borrowers Same Way?

The pre-approval stage is the most important part of the mortgage loan process. Many mortgage loan officers just issue pre-approvals by running the credit report and seeing whether the mortgage borrower meets the minimum credit scores. They do not review the credit report to see whether they have had any late payments in the past 12 months, see if they have any credit disputes, check for unsatisfied judgments, check to see for any tax liens, or check for any other credit issues that may come up during the mortgage approval process. A sloppy pre-approval is the main reason why mortgage loans get denied. Other more diligent mortgage loan officers will look and thoroughly review the mortgage applicant’s tax returns to see if they have unreimbursed expenses or any other debt obligations such as alimony payments, or child support payments.

Prior Foreclosure

Most mortgage loan officers do not make a mistake with prior bankruptcies from mortgage applicant’s. There is a two year mandatory waiting period after a Chapter 7 Bankruptcy to qualify for a FHA Loan from the date of the Bankruptcy discharged date with re-established credit. There is a four year waiting period after a Chapter 7 Bankruptcy discharged date to qualify for a conventional loan with re-established credit. However, with foreclosures, it is a different matter. There is a three year waiting period to qualify for a FHA Loan after the recorded date of either a foreclosure and/or deed in lieu of foreclosure. The three year waiting period does not start until the date of the sheriff’s sale or the date when the deed of the property was transferred out of the homeowner’s name into the name of the mortgage lender or the name of the new homeowner. It does not matter when the homeowner surrendered the keys to the mortgage lender. Sometimes, years go by where the deed of the property has not been transferred out of the name of the homeowner and the homeowner thought that the foreclosure process was done and that they have met the mandatory waiting period. With conventional loans, there is a seven year mandatory waiting period to qualify for a conventional loan after the recorded date of the foreclosure or the date of the sheriff’s sale. There is a four year mandatory waiting period after the date of the short sale to qualify for a conventional loan. There is a four year mandatory waiting period to qualify for a conventional loan after the recorded date of a deed in lieu of foreclosure to qualify for a conventional loan.