Short Sales Offer Advantages over Foreclosures

I recently came across one of the better articles I’ve seen yet advising  sellers in pre-foreclosure.  Tara-Nicholle Nelson’s piece “Short Sales, Tall Benefits” was featured on Inman.com.  The article also address buyers, and she reiterates a point made earlier on this site…problems in banks’ foreclosure processes have led to title issues for buyers.  The advantage to the buyer in a short sale is that there should be no question if the title is insurable.

Applying for a Mortgage After a Short Sale

But back to the advice for sellers…the first advantage of a short sale versus a foreclosure, according to Nelson:

…with some loan products, the post-short-sale waiting period before you can qualify to buy another home may be shorter than the post-foreclosure waiting period.

And the waiting period may be even less if the seller hopes to secure an FHA loan, which typically require lower down payments than a conventional loan.  FHA loans may even offer lower interest rates than conventional loan products.  In fact, today I received an email from a Realtor representing a client in their purchase of one of my (non-short sale) listings.  The buyer, who sold his own home via short sale about 18 months ago, was pre-approved for a rate of 4.25% on an FHA loan.  The conventional loan rate at the same lender is 4.875%.

In some cases, the seller may not have to wait at all to secure an FHA loan after a short sale…this is rare, and would apply to a seller who was not in default during the short sale process.

Nelson goes on to explain that most non-FHA (conventional) loans will require a 2-year waiting period after a short sale, but that the same loan programs will require a 7-year wait after a foreclosure.  FHA loans only require a 3-year wait after a foreclosure.  But the point is that regardless of the loan desired, the waiting period after a short sale is up to 3 years, while the waiting period after a foreclosure is up to 7.

Reducing or Eliminating Deficiencies

Now on to the meat of the matter…in almost every short sale I’ve seen, the main goal of the seller was to minimize their liability.  In some states, the foreclosing lender can sue the borrower down the road for the deficiency (the difference between what was owed and what the lender was able to sell the home for after foreclosure).  However, in a short sale, a seller can negotiate for the lender to waive this right, even in regards to junior liens and equity lines.  As the article goes on to say:

This can be a very big deal; even in non-deficiency-judgment states — these subordinate loans and lines of credit expose the former homeowner to liability for years following a foreclosure.

However, this is not always a given, and not necessarily easy.  But, it should be the goal, and in all cases, the seller should have an attorney representing him/her.  And in the case of selling to a retail buyer, junior liens can (and usually do) prove to be a monkey wrench in the deal.  Unfortunately, buyers in this type of short sale often walk, and when they do, the property is at greater risk of being foreclosed.

I’ll close with my favorite part of Ms. Nelson’s article…I just wish more real estate professionals would offer this type of advice:

Whatever route you go, I would advise any seller considering a short sale to consult with a local real estate broker, mortgage professional, attorney and certified public accountant (yep, all of them) to get a personalized analysis of your situation and recommendations that take your whole financial and life picture into account.

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