Many homeowners are feeling the impact of the regressing home values in nearly every housing market across the country. One trend that has grown very popular over the last 5 years has been “Short Selling” real estate. In a nut shell, a short sale is when a homeowner attempts to sell their home for less than their debt obligation to their lender(s). Years ago, this process had serious tax implications and was difficult to negotiate with lenders. However, the Mortgage Forgiveness Debt Relief Act of 2007 eliminated the major tax consequences of selling a primary residence short (for first mortgages). Coupled with the fact that many lenders are now well equipped to handle the onslaught of short sales hitting their desks, this process has gained popularity.
Most lenders will require that the borrower have a hardship in order to be considered for a short sale. Also, the property cannot be sold unreasonably below market value. The lenders in many cases will order an appraisal of the property prior to approving a sale. Often times lenders will not consider approval of a short sale if the borrower is current with their mortgage payments. Although, there are some instances where approval is granted for non-delinquent accounts. Remarkably, lenders are more responsive on delinquent accounts… For this reason, many homeowners are forced to miss mortgage payments so as to be taken seriously. The unfortunate byproduct is damaged credit.
In my opinion, lenders would be better served to allow these homeowners out of these homes at a reduced payoff without credit impact. In that case, these same owners could repurchase more affordable homes rather than renting. As more and more short sales are approved, the number of unqualified buyers increases. Just the same, when short sales are declined, foreclosure usually results and these would-be homeowners are now out of the home-buying market for years to come.
Short sales are a necessary solution but the process still needs work. If lenders are not going to allow these homeowners out of these upside-down loans, the real estate market will continue to suffer and so will the economy!
The following shows the impact of selling short and how long homeowners will need to wait prior to qualifying for another mortgage:
Short sale with FHA Loan
- Can purchase right away with no mortgage default
- 3 year wait if in default at the closing
- Reduced wait if the borrower has re-established good credit and can show extenuating circumstances
Short Sale With Fannie Mae Loan
- 2 year wait if the borrower puts 20 % down
- 4 year wait if the borrower puts between 10% to 20% down
- 7 year wait if the borrower puts less than 10% down
- 2 year wait if the borrower can show extenuating circumstances and puts more than 10% down
Short Sale with Freddie Mac Loan
- 4 year wait before being able to get a loan
- 2 year wait if the borrower can show extenuating circumstances
Foreclosure with an FHA Loan
- 3 year wait before being able to get a loan
- Reduced wait if the borrower can show extenuating circumstances and re-establishes good credit
Foreclosure with a Fannie Mae Loan
- 7 year wait from the completed foreclosure sale date
- 3 year wait if the borrower can show extenuating circumstances. Additional underwriting requirements apply for 4 years after a 3 year wait-ing period.
- 7 year wait for a 2nd home, cash out re-financing, or an investment property
Foreclosure with a Freddie Mac Loan
- 5 year wait from the completed foreclosure sale date
- 3 year wait if the borrower can show extenuating circumstances
** As a side note a deed in lieu of foreclosure follows the same guidelines as FHA’s foreclosure policy, the same as Fannie Mae and Freddie Macs short sale policy.
When analyzing the difference between completing a short sale or going through a foreclosure in regards to purchasing another property in the future it boils down to the waiting time which is more favorable in a short sale.
If you are considering a short sale and have questions, contact The Healy Team. We have successfully closed several short sale transactions in many cases with minimal impact to the borrowers.
*** The above information for waiting periods before buying a home after completing a short sale and foreclosure was sourced by the Fannie Mae and Freddie Mac selling guides along with the FHA handbook.