After the housing market collapse in the mid-2000s, many homeowners found themselves in an upside-down mortgage. They owed more on their house than the actual value of their home (often by a substantial amount). Compiled with the surge in layoffs at the time, it made paying the inflated mortgage payments difficult. Often times, people had to sell their homes while retaining debt following the sale. For anyone suffering from this kind of an issue in Pinellas County, Florida currently, there may be another option known as a short sale.
What is a Short Sale
When someone owes at least one monetary lender money and is unable to pay them back, it may be necessary to begin selling off assets. In terms of a short sale, this typically occurs when the money owed is to the original lender and even secondary mortgages on the property. If someone is unable to repay the bills and, after careful consideration, believes the best way to clear up the debt is to sell the home, a short sale may be an option.
Generally, it is best recommended to look into all possible financial avenues before moving along to a short sale. It is desirable to hold onto as many financial assets as possible, but if it is the mortgage companies requiring payments and a homeowner is unable to make these (and likely has fallen substantially behind in their payments), a short sale is a possibility.
It is important to understand a short sale is not always accepted. A financial counselor may recommend the idea and bring it up when discussing the debt with the lenders. The lenders need to agree to a short sale. It is their full right to go after 100 percent of the debt owed to them. If the banks believe it is possible to reclaim the entire debt, they may block the short sale. So a short sale only works in Pinellas County if everyone agrees to it.
The Process of a Short Sale
A short sale is broken down into several different steps. It begins with contacting the main financial lender and requesting an application for their short sale program. They will need to complete the application and be accepted into this program. If they are not accepted it is not possible to move forward with the short sale. At this time, a lender will look for potential options, such as HAFA (Home Affordable Foreclosure Alternatives) to see if there are monetary government options to help the homeowner make payments. This, at the very least, will buy a homeowner some time and give the primary lender more money.
If there are no remaining government options, the lender may decide to approve the short sale. The monetary incentives and terms of forgiveness are included in short sale documentation. Here it’s generally best to have a bankruptcy attorney (or similar) in order to go over the documents to make sure the homeowner understands everything. Once the main lender approves the short sale and all financial documentation is in writing, it’s necessary to move on to any “junior lien” holders and negotiate payoffs for them as well.
Junior lien holders are more likely to approve and accept a short sale. This is because if it moves onto a foreclosure, the junior lien holder will not receive any money at all, and in their case, it’s better to receive some money than nothing. Like the primary lender, it’s necessary to agree to partial payments in the documentation.
While junior lien holders are more likely to accept a short sale before it moves to foreclosure, all lien holders are able to see what other lien holders have agreed to in terms of monetary payments. Some issues can arise here if one lien holder objects to what another is receiving. So a single lien holder can block a short sale if they do not agree to terms. Due to this, it’s sometimes difficult to agree to a short sale. The more lenders at play the far more difficult it is. Having a financial advisor or bankruptcy attorney who can help negotiate everything and assist in moving the short sale along is well worth the price.
Is There a Difference Between a Short Sale and Foreclosure
Either way, the homeowner will be losing their home to help take care of debts. However, there are major benefits of a short sale over a foreclosure, and it is almost always a better alternative.
The main negative to a short sale is the amount of time it takes to set up such a deal. With varying lien holders and lenders needing to sign off on such a sale, it can take time moving back and forth between lenders. A short sale does come before a foreclosure. However, if someone simply wants to move out and leave as quickly as possible, in this instance (and really the only instance) a foreclosure is the better of the two.
Both short sales and foreclosures impact a credit rating negatively. However, the short sale does not remain on a credit rating as long and does not impact the score by as much. This way, it becomes easier to secure a future line of credit (such as a credit card) following a short sale. However, if the short sale falls through, the only alternative may be a foreclosure.
For Home Buyers
When considering a short sale it is important to look at it from the buyer’s perspective. For someone considering to purchase a short sale or a foreclosure, there are a number of concerns they need to understand.
For starters, a short sale is different from a foreclosure. In a foreclosure, there is a single seller (the bank) looking to move the property. The bank does not want to hold onto the property and would rather sell it. Now, it does take longer to receive approval on a bid put in on a house over a bid for a traditional home. On a traditional home, it may just take a day or two. On a foreclosure, it can take weeks (if not longer) for a bank to go over all the paperwork and determine if it is a suitable price. The bank wants to make as much money back as possible, although it’s also a motivated seller. For buyers looking for a deal, a foreclosure does present this opportunity, if they’re willing to wait.
A short sale is different in several ways. For starters, there are many parties at play here. It’s not just the homeowner and not just a single lender. It may be several (if not more). This can cause a bit of a problem. There may be stipulations on the short sale of how much the property needs to go for. If it doesn’t hit a certain amount some of the junior lenders may not receive the amount of money desired, in which case the sale will not go through. Due to this, a short sale is not always the most motivated seller (at least when compared to a foreclosure).
In many instances, a homeowner doesn’t want to sell the home either. There are times where the homeowner may have been pushed into a short sale due to their financial situation, but they don’t want to leave their home. The process of a short sale can buy a bit more time when looking for ways to secure financing to help pay off some debts and retain ownership, in which case a homeowner may drag their feet when attempting to sell. It’s not always the case, but it is something to consider for anyone on the market to buy a home and considering the possibility of a short sale.
When is a Short Sale Right?
For homeowners in Pinellas County, Florida as in many other areas of the country, facing a short sale is a difficult decision to make. Many times, the reason a homeowner faces a possibility of a short sale isn’t any fault of their own. Whether they lost their job or the value of the property dropped significantly, there isn’t much to be done in these instances. Selling the property may be difficult coming to terms with, but a short sale may end up providing the best financial option possible. If all parties agree to potential terms, it has a way of providing a fresh start without as much baggage as a foreclosure. Either way, it is always best to discuss the situation with a financial advisor or bankruptcy attorney to see if there are other ways to avoid a short sale, including government foreclosure avoidance programs.
A short sale gives homeowners the opportunity to sell their house and wipe clean debts they owe to banks and other lenders for less than originally owed. Wiping clean the debts helps provide a fresh start and allows a former homeowner to move on with his or her lift. Short sales are not a viable option for everyone, but it’s a valuable tool to consider.