Regardless of whether you are in foreclosure, if selling your home will not net enough to pay off your existing mortgages, you may want to consider selling on a short sale. For many years, there were few reasons to sell on a short sale, apart from earning the real estate agent a commission, but times have changed.

 

Why Agents Recommend Short Sales

You’ll hear the myth over and over: “Short sales protect credit.” That’s only partially true. Your credit will tank if you fall behind on your payments. Experts say agents who repeat that mantra without clarification do so out of ignorance or self interest, take your pick.

There is one exception. If you have no 60-day-plus late pays on your credit report, Fannie Mae may still offer you a loan to buy another home. However, most people who sell on a short sale are in default past 60 days, so this exception does not apply to them.

A short sale could ruin your credit rating. It might not happen right away, but sooner or later, unless the bank has specifically agreed not to report the shortage, the bank may report it as a Score Factor Code 22. That score factor relates to delinquencies, derogatory records and collections.

Real estate agents should not give legal advice to clients facing foreclosure nor assure sellers that their credit rating will not suffer adverse affects. Those who insist on this practice may find themselves facing a process server down the road and be praying that their errors and omissions insurance will cover them.

Here are the main reasons why agents encourage sellers to do a short sale:

 

  • Agents get paid by the lender to do a short sale. 
  • Agents don’t get paid if the seller loses the home to the bank by going all the way through foreclosure. 
  • Even if the home never sells on a short sale, the agent gets free publicity (and new business) through signage, open houses, marketing and posting listings online.

 

Benefits for Foreclosure

Although going through foreclosure is often painful and embarrassing for sellers, there are benefits:

 

  • No mortgage payments to make. 
  • Foreclosure proceedings take months to conclude. 
  • The home is still yours until the foreclosure is final. 
  • No strangers are traipsing through your home. 
  • Banks sometimes give cash for keys after the public sale.

 

Drawbacks to Foreclosure

Few people, apart from the sellers who choose to buy and bail, really want to experience a foreclosure. Memories are made in a home, and losing it can shatter future dreams. Here are other drawbacks to foreclosures:

 

  • The right of home ownership is striped away. 
  • Homeowners return to the rental market as a renter. 
  • The bank may post a Notice of Public Sale on your front door. 
  • Your credit takes a nose dive, and a foreclosure will remain on your credit report for 10 years. 
  • Under Fannie Mae guidelines, without extenuating circumstances, you will not be eligible to buy another home for 7 years.

 

Benefits for Short Sale

Of course, you will make your real estate agent happy because agents are happy to take listings. But what about you? What do you get out of a short sale?

 

  • Retain some dignity in knowing that you sold your home. 
  • You won’t suffer the social stigma of the “F” word: foreclosure. 
  • No mortgage payments to make, unless you choose to make them. 
  • You can meet the new owners. 
  • You will be eligible, under Fannie Mae guidelines, to buy another home in 2 years instead of 5 to 7 years. 
  • If your credit report does not reflect a 60-day+ late pay, under Fannie Mae guidelines, you will be eligible to buy another home immediately.

 

Drawbacks to a Short Sale

You may experience some of the same drawbacks as a foreclosure, but they might seem less intense.

 

  • Waiting for the bank to respond to an offer is frustrating. 
  • The bank will want to examine personal records such as tax returns, bank accounts, assets and liabilities, in addition to asking for a hardship letter from you. 
  • Accommodating buyers will mean keeping your home in spotless condition for weeks or months until an offer is received and putting up with traffic through your home. 
  • There is no assurance the bank will accept a short sale offer. 
  • The derogatory credit will remain on your credit report for 7 years.

For many sellers, though, the chance to buy another home in two years is the real motivation to do a short sale. Good credit behavior can supplant bad credit after two years, even though the derogatory will remain.

 

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Replies

  • By the way I have read this article several times and is PRO short sale. Am I missing something?

    • I didn't think our post would be so provocative and invoke such a response... looks like it really got some people going!  Hats off to all of the professionals that took the time to read our post. GS Inc thanks you and we look forward to following discussions in this forum. 

      We're confident that each and everyone of you that took the time to read our post and the ensuing threads is by far a capable real estate professional qualified to assist your clients in your area-  Thank you for your comments. 

       

       

      • Garland,

        Can you please direct me to where this came from?

        "If your credit report does not reflect a 60-day+ late pay, under Fannie Mae guidelines, you will be eligible to buy another home immediately"

        I am in the process of short selling and was approved to buy again immediately after until my investor required that I stopped paying my mortgage to consider the short sale (approved 2 weeks after I didn't pay).  My mortgage broker is saying that per Fannie Mae, I can't buy for 2 years if there are ANY derogatory marks on my credit (I now have a 30 day late reported).

         

        Thanks so much!

        • Grace-

           

          Under extenuating circumstances you "may" get the good graces of an underwriter that sees compensating factors within your loan application that will get you the approval you need. Credit reports are a key contributing factor as to how an underwriter will evaluate the risk of your lending needs compared to their lending criteria.  While some lenders will only approve a 650 with 0x30 mtg derogs, others may still approve your loan application with a good letter of explanation, documentation to support it, big down payment (as the LTV will be taxed by the lender which will require a larger down payment to compensate for the risk of a 1x30 derog on mtg history) and an overall solid loan application that adheres to Fannie Mae guidelines.

           

          Consult your loan officer and I'm confident they will agree that there are instances where lenders will make exceptions.  Unfortunately albeit in the guidelines to allow for extenuating circumstances each lender applies these guidelines to their lending criteria according to their risk tolerance.

           

          If you're not having success with your lender I know some great folks that are lending professionals that deal with these sort of challenges daily in all 50 States-  Feel free to reach out to us GS Inc Real Estate we are at your service!

  • I'm kind of disappointed that this blatant solicitation of business would be included in the newsletter and even allowed to remain on this site. Especially when you read this poster's comments below. This also is very deceptive as this doesn't deal with regional/state laws involving foreclosures. For example...in my state (Washington) ...the first won't hold a deficiency over you in a foreclosure but a second will...so a short sale can deal with that second mortgage which can be a huge benefit to a seller. On the other end of the spectrum...a foreclosure and a short sale have different tax implications...meaning for some people it may be best to foreclose...not short sale.

     

    As we all know each client's needs are different. This is why I won't ever push a client to do a short sale but only strongly encourage them to meet with an outside attorney...who I have no incentive from...before deciding that a short sale is in their best interest. I will never encourage one to proceed with a short sale or a foreclosure...all I will do is help us get through the short sale side once my client has made that decision independently of any advice I give them. I have each client sign an addendum stating that they made the decision to pursue a short sale independent of my prodding...and I spend more time making sure they understand this addendum than any other document we go through.

     

    If you want to write a solicitation in the form of advice...go put it on your personal blog somewhere. This isn't the place for it.

    • Hi Samuel. It was actually my decision to include this article in the newsletter. We welcome opinions on this site and I felt this one would garnish a good conversation. The article itself has zero solicitation in it. It doesn't even have a company name in it. I actually agree with most of the statements made in the article.

      I was hoping our members would chime in and point out any statements that they didn't agree with.

      Open discussion is how we all learn. W can't not post things just because we don't like the opinion being stated.

      If the article had been in violation of the site rules I would have deleted it. But I can;t see that it is.

      I do appreciate your opinion as well. Thank you for participating.

       

      • I actually love this site and appreciate all of the content, advice and contributors. I was a lurker for quite a while and occasionally found myself getting more and more involved. I think my biggest problem...and others is not that the information here isn't overall correct...but it's very much on the side of legal advice and doesn't seem to fit the theme most posts have on this website. It also seems very pointless.

         

        I think every agent's fear in doing short sales is that we will cross the legal line and end up having it come back to haunt us in the future. With every situation being so different it is impossible to ever tell if short sale, foreclosure...or even DIL would be best for the client. I've seen some great discussions on using "short sale expert" in our designations on this website and as is often pointed out...are any of us truly ever "experts" when it comes to short sales. I certainly am not...I'm very experienced but even after several years focused on short sales I still find myself with a bit of anxiety with each new one...always afraid that some small mistake on my end will end up hurting my seller. Yet I still feel like I'm one of the most capable people in my region to guide them through a short sale.

         

        While the post itself was not a direct solicitation the comments below certainly showed the motivation. I appreciate people who come to this site and use it solely to better their business practice and represent their clients in the fullest. Thankfully...that is 99% of the posts and contributors on this site. Thanks again for making an overall great site...the best I've found in the short sale business.

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