Like Foreclosures, Short Sales May Prevent You From Buying a Home for Up To Seven Years

It seems like at least once a week, I get a call from someone either wanting to "Short Sale" their home, or someone about to buy one. Buying a Short Sale is fine, but make sure that when you make the offer, you have a letter from their current lender(s) that they will accept the price you have offered on the property.

Today's blog isn't about buying, but rather selling your home through a "Short Sale." What does that term actually mean. It means that the current lender is allowing you to sell the property and pay them less than what you actually owe on the current loan. Why would they do that? For the lender it can be a less costly option than going through the process of foreclosing on the property and then trying to list and sell the property themselves. It also allows them to decide right now what their loss will be. An offer in hand may be better than 4-6 months of lost payments, the expense of foreclosure, or listing the home and not getting an offer as high as what they are offered today.

What does it mean for the seller of the property. Current lending guidelines will not allow you to finance another home for at least 7 years after a foreclosure or short sale on a property. Many lenders offer home financing after a bankruptcy within 2-4 years, unless a home was involved in the process. If a home was lost due to a bankruptcy, then you could be looking at 7 years before you would qualify for another conventional or government insured home loan. This seven year prohibition from getting another loan is something that sellers are not being told when they try to sell their home through a "Short Sale."

What about the outstanding loan balance? When the lender accepts a payoff of the loan for less than what is actually owed, they can continue to show any loss as an outstanding balance that can be claimed for years to come. Why would they allow this? They allow the property to be sold to get out of the remaining balance on the loan and to eliminate the process of foreclosure. Taking a $10,000 loss now, may be less time consuming and less costly than holding onto the property and taking your chances. Banks manage losses on a daily basis and calculate the cost to sell the property versus the current loss on the loan. As a borrower, that doesn't mean that you are not still responsible for the outstanding balance. Read the documents closely and know the effect it will have on your credit in the future.

A short sale may be the right decision, but at least make it an "informed" decision.

This blog is for informational purposes and is the opinion of the writer. In financial matters always solicit professional advice and legal counsel if necessary.