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What is a Short-Sale in Real Estate
What is the purpose of a short sale of a home? What does it mean by a short-sale in real estate? Can you give a case scenario of a short-sale in real estate? Do real estate agents get paid on a short-sale? Can you go over several case scenarios of the short-sale real estate process? Can a person qualify for a new mortgage after they had a short-sale on a home? What do homebuyers need to know about short-sales? Risks and rewards of buying a short-sale home. Is short-sale bad for the homebuyer? Is it a good idea to buy a short sale house? What is the difference between a short-sale versus a foreclosure? What are the eligibility requirements on getting for a mortgage loan after a short-sale and foreclosure? What are the different loan programs I can qualify for and get pre-approved after a short-sale and foreclosure?
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What is The Purpose of Short Selling A House?
In a short sale, the owner sells their property for less than what they owe on the mortgage. The aim is to prevent foreclosure by letting the homeowner avoid it and enabling the lender to recover some of their loan balance. Generally, this happens when people are not in good financial health and can no longer keep up with payments.
What Does Short Sale Mean in Real Estate?
In real estate, short selling means that the lender agrees to accept less than full payoff on a mortgage to facilitate its sale. They forgive the remaining debt after receiving reduced payment amounts. This method helps prevent foreclosures among homeowners while minimizing losses suffered by lenders.
Real Estate Short Sale Case Scenario
Scenario 1: Financial Distress
Homeowner: Jane owes $300,000 on her mortgage.
Home Value: The home is now worth $250,000 due to market decline.
Situation: Jane loses her job and can no longer afford her mortgage payments.
Process:
- Jane contacts her lender, informing them about her inability to pay and the possibility of a short sale deal.
- Jane also lists the house for $250k.
- The lender approves the buyer’s offer at the current market value ($250k).
- The lender constitutes a total debt reduction of fifty thousand dollars ($50k).
- As a result, she does not face foreclosure.
- They mitigate their losses through this transaction, which the buyer gets cheaply.
Do Realtors Get Paid On A Short Sale?
Yes, realtors get paid on a short sale. However, commission rates are typically negotiated between the seller’s agent(s), listing brokerages, or agents representing buyers who negotiate with sellers during settlement discussions. Usually, these fees are included in closing costs paid by borrowers themselves. Still, sometimes lenders may cover all or part thereof depending upon agreed terms between various parties concerned. This type, level, and extent are required from each party involved during the said process. This can be worked out depending on the specific situation.
Real Estate Short Sale Process Case Scenarios
Scenario 2: Medical Emergency
Homeowner: John has had large medical bills that completely wiped out his savings.
Home Value: John owes $200,000. However, the current market value stands at $180,000 only.
Process:
John requests a short sale from a lender. John must show an updated personal financial statement and all relevant documents (e.g., medical receipts) indicating severe financial distress arising from such unforeseen health-related issues. After the mortgage lender’s workout department verifies the factually correct position he’s presenting, the lender agrees. Now, John lists the property for sale through a realtor or agent specializing in this area of the housing business. As the homeowner, John can choose the listing real estate agent.
The homebuyer offers $180k and accepts it since there will still be some money left over after paying off the remaining balance owed to the mortgage holder.
Foreclosure is avoided when a buyer gets a cheap home purchase opportunity.
Scenario 3: Job Relocation
Homeowner: Mary needs to move quickly because she got a new job far away from her current location and can’t afford two homes.
Home Value: Owes $150,000, but market values show only about $130,000 being worth currently.
Process:
During a conversation with a representative(s) employed by the Bank, which offers loans secured against properties like hers, Mary explained the urgency of the matter and its financial implications. Considering the circumstances surrounding the request, the Bank agreed to make an urgent need for quick action before things got worse, causing more losses than necessary. Therefore, they allow short sales under these conditions, too.
The property is listed on the market. An interested buyer offers an offer equal to the present appraisal figure ($130k). A lender accepts the buyer’s proposal and forgives the twenty thousand dollar shortfall owed from the loan agreement signed with Mary earlier.
She moves away without having foreclosure hanging over her head. This is because she cannot simultaneously meet the repayment obligations of owning two houses.
Due Diligence: It’s important to conduct home inspections and title searches to find any hidden problems or liens.
Risks and Rewards of Buying a Short Sale Home
Risks:
More time is required for approval from the lender.
Potential issues with the condition of the property.
Additional liens or encumbrances may exist.
Rewards:
- Lower purchase home purchase price.
- Opportunity to buy in popular areas at a lower cost.
Is a Short Sale Bad for the Homebuyer?
No, a short sale is not bad for the homebuyer but can present some challenges. Disadvantages of buying a short-sale home include waiting longer. Other cons include potential issues with property conditions. With adequate due diligence, buying through a short-sale process can allow you to get homes at discounts!
Is it a Good Idea to Buy a Short Sale House?
Buying a short-sale house is worth considering if you are prepared for what may come your way during those transactions. One big disadvantage of buying a short-sale home is waiting times that could be months. Homebuyers need to realize that the actual seller is the Bank. The Bank needs to give final approval on short-sale home sales. Banks take their time, and there is a lot of red tape during the homebuying process. A short-sale home can take up to six or more months to close. Another disadvantage of buying a short-sale home is the house is normally purchased as is. The Bank will not negotiate to fix the house to the homebuyer’s standards. The short-sale house can have potential defects. The house could come with possible condition problems with the properties themselves. While risks are involved, such as those mentioned above, short-sale homes can offer buyers great deals since most sellers want out their mortgage payment obligation. This holds even if it means selling below market value, which requires careful thought and professional help from agents who specialize in these types of sales. Banks are not property owners or property managers. Banks do not want anything to do with REOs in their inventory. Banks want as much money as possible for their collateral and minimize their losses from the housing event.
Difference Between a Short Sale and Foreclosure
Short Sale: A homeowner sells their property for less than what is owed on the mortgage with approval from their lender; this helps them avoid foreclosure while limiting damage done to their credit rating, which should have been worse had they gone through all stages (the Bank taking over).
Foreclosure: When banks take possession because homeowners fail payments – affecting future ability to finance other big-ticket items like cars or homes due to poor credit scores caused by the foreclosure process itself, which starts when people stop paying mortgages altogether, leading up until the final stage called “sheriff sale” after that bank auctions off said home publicly but this has much longer lasting effects on individual’s financial stability than just about anything else.
Eligibility Requirements for a Mortgage Loan After a Short Sale and Foreclosure
Short Sale:
HUD Guidelines After a Housing Event on FHA Loans: Typically, there is a 3-year waiting period after a housing event on FHA loans, except when extenuating circumstances exist.
Veterans Administration Guidelines After a Housing Event on VA Loans: Generally, two years should pass before applying again for another VA Mortgage Loan after experiencing either a short sale or foreclosure event.
Fannie Mae and Freddie Mac Guidelines on After a Housing Event on Conventional Loans: Four years’ waiting time is required, but if only two years have elapsed since the occurrence, it is possible, depending upon the situation (extenuating circumstances).
Foreclosure: To qualify for an FHA loan, there is a mandatory waiting period after a short sale, foreclosure, or deed-in-lieu of foreclosure.
FHA Loans:
- Three years must elapse before an individual can obtain another home loan insured by the Federal Housing Administration if they went through foreclosure previously.
- However, this rule does not apply in some cases where extenuating circumstances exist.
- Extenuating circumstances include death and serious major medical issues that have affected the borrower’s household income.
- Extenuating circumstances are only valid if the reduction of household income was due to financial hardship that prevented them from making timely payments on their credit lines, including mortgage payments.
- Other extenuating circumstances allowed by HUD, the parent of FHA, are job loss, natural disasters, or an act of God beyond their control.
- Extenuating circumstances are any financial hardship beyond the borrower’s contract that leads to defaulting on mortgage payments, which can result in the forced sale of property due to the inability to meet financial obligations.
VA loans: Two-year minimum requirement between foreclosure event ending date and reapplication date for another VA Mortgage Loan unless there were any “extenuating circumstances.”
Fannie Mae and Freddie Mac Guidelines After Short-Sale or Other Housing Events on Conventional Loans: Fannie Mae and Freddie Mac Guidelines after a short-sale or deed-in-lieu of foreclosure is a year’s waiting period to qualify for conventional loans. There is a seven-year period after a standard foreclosure to qualify for a conventional loan.
Extenuating Circumstances on Conventional Loans
Is the standard wait time between having gone through foreclosures before one becomes eligible again under conventional lending guidelines, though three-year waits may be enough with ‘extenuating circumstances.’ Please do not count on extenuating circumstances for a shorter waiting period after foreclosure because it is very difficult to get a pass.
Different Loan Programs After a Short Sale and Foreclosure
FHA Loans:
- FHA loans are available three years after a housing event (short-sale, deed-in-lieu of foreclosure, or foreclosure).
- Sometimes exceptions can be made based on their policy provided certain criteria are met by applicants.
- Examples of exceptions include paying down some debt balances over time.
- Generally speaking, most people will need at least three full calendar years since such unfavorable economic hardships occurred before qualifying once more through an FHA program.
- FHA loans cater to individuals who want help to rebuild credit following financial setbacks caused largely by mismanagement of finances leading towards these situations happening).
VA Loans: Individuals who have had either a short sale or foreclosure may apply for another VA loan two years after the event, provided they meet all other eligibility requirements.
Conventional loans: Conventional mortgage financing is available for four years following short sales or deed-in-lieu of foreclosure. A seven-year ‘time-out’ period applies when considering someone who has undergone three back-to-back foreclosures. Again, these are subject to change based on the underwriter’s written consent and specific lender overlays.
Non-QM Loans After a Short-Sale, Deed-in-Lieu of Foreclosure, or Foreclosure:
Non-QM loans have no waiting period after a short sale, deed-in-lieu of foreclosure, or foreclosure. However, non-QM loans require a 10% to 30% down payment versus a 0-5.0% down payment on government and conventional loans.
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