First a short sale will do less damage to your credit than letting a property go to foreclosure or doing a ‘friendly foreclosure’ (deed in lieu). Nobody seems to know exactly how much better for your credit score a short sale is rather than a foreclosure, but I consistently hear that your score will drop 100-200 points (I know that’s a big range. . . but nobody will commit). I’ve also heard (and read) that you can purchase a new home, depending on how quickly your credit score recovers, within 6 months to a year if you had good credit prior to the short sale (again note the ‘heard and read’- I haven’t actually seen anyone do it, probably a bit of fear factor after going through this process of ever owning a home again).
I’ve had people ask me should I miss my mortgage payment? Well, no one is going to tell you to miss your payment, however the catch 22 is why would a lender talk/work with you about doing a loan modification or short sale when you’re still able to afford your payment (you could take this as a subtle hint)? On that note: If you find yourself suddenly not being able to afford your mortgage, should you immediately list your house and try and do a short sale? The answer may be no. First thing you should do is contact your lender and see if they’ll work with you and do a loan modification to reduce your payment. It sounds so easy, but it might not be. Some lenders will have you fill out their loan modification package and then have you submit it to them and then submit again, and again, and again. Some lenders it seems can’t keep track of the paperwork, but hang in there. . . it may actually work. I’ve had clients that were able to get their loan modified by several hundred dollars and now are getting back on their feet. I’ve also had several clients however that have gone through the process only to find themselves running out of savings because it took so long and they end up having to do a short sale anyway. Keep in mind it could take 6 months for a lender to actually work out the loan modification with you, in the meantime you could go through your savings and still end up losing your home.
So then the question is do you skip the loan modification and go straight to doing a short sale? Maybe, however in most cases the lender is going to be basing the short sale approval on you having little or no savings. Remember, you’re in financial distress and that’s why they’ll work with you to do a loan modification or short sale.
If you’re at the point where even if the bank were able to do a loan modification you still wouldn’t be able to afford the home or you know it’s time to move on and cut your losses, then the first step is to find a knowledgeable REALTOR who handles short sales. The REALTOR will help you put together a short sale package that will be submitted to the lender. In the meantime your home will be listed, typically 5-10% below market value. Once you have a Sales Contract for your house the ‘short sale package’ will be submitted to the lender along with your contract and Market Analysis showing the history of the sale of your property and value. Usually it takes about 2 to 4 months for the Bank to begin reviewing your file (picture thousands of files on a person’s desk and yours is wedged in the middle). Once they begin reviewing your ‘package’ they will order a BPO (broker price opinion) to determine the value. They’ll have you sign forms, send more paperwork and then finally they will submit your package to an ‘investor’ who actually owns your mortgage to see if the ‘investor’ is willing to accept the short sale/loss. If they accept, within 30 days you go to settlement. . .if not then you may be facing a deed in lieu, also known as a ‘friendly foreclosure’.
The key to the whole process is to work with all parties involved-your lender, buyer, REALTOR, etc. Communication is the key especially when it comes to your buyer. Keep them in the loop. Remember your buyer is going to be waiting 3-6 months to buy your house. Try not to lose hope and always remember in this economy you’re not the only one going through this. I always tell my clients look around the grocery store. Just about everyone you see right now is going through some type of financial hardship. . .and this to will pass. One of my clients had a great point. . .with so many people going through this, when we get to the end of this economic crisis will credit scores really matter anymore? Just makes you think.
Feel free to visit my website: http://www.elkesellshomes.com/ for more information on short sales and foreclosure information. As always I would love to hear your questions, just email me at Elke@ElkeSellsHomes.com