Recently, Freddie Mac claims to have simplified their short sale process by at least 50 percent. Their stated aim to make it easier and more transparent. But the fact is, the short sale process remains a mystery to many-buyers, sellers, and realtors alike. Simply put, a short sale is nothing but a pre-foreclosure sale.
This happens when you put your home on the market for a price that is not enough to pay off the remainder of your mortgage. The approval of the mortgage company or bank is necessary before you can proceed with the sale. This option is usually chosen by people who cannot refinance, those who have fallen back on mortgage payments, those with debt greater than the market value of their home, or those who can no longer afford their home due to unemployment, divorce, bankruptcy, and so on.
If you decide to initiate the short sale of your home, you will have to work with a real estate agent as well as your mortgage company simultaneously. A sale price will have to be agreed upon by all parties based on the current market value of the property. Once the offers start coming in they will have to be reviewed and then a buyer will be chosen. After this, the terms of the sale will be drawn up. The deal will go through with the involvement of the buyer’s realtor and mortgage company. The time taken for the process will depend on the various factors involved, but 120 days is the norm.
Short Sale vs. Foreclosure
One major benefit of opting for a short sale is that the seller is in control of the process whereas foreclosures are typically at the discretion of the financial institution. It will help offset the negativity associated with foreclosure and help you erase or reduce your mortgage debt. Another area where the impact will be seen is on your credit scores. Lucinda Regan, a senior consultant with ViewShortSale, an aggregator of short sale homes. says, “Both short sales and foreclosures result in negative points on your credit reports, with the former seeming to be a lesser evil than the latter. For instance, a foreclosure may result in your FICO score dropping by 250 points whereas with a short sale this might be as little as 50 points.” The effects on your credit report can be anywhere between one to five years. “A short sale is likely to reflect on your credit report for a shorter time than a foreclosure,” adds Regan.
Short Sales on the Rise
The number of short sales is on the rise while foreclosures are on the decline. The primary reason is the lengthy amount of time taken by lending institutions to process foreclosures. Statistics indicate that short sales during the third quarter of 2012 increased by 22 percent which was the highest in more than a year. California, Florida, Arizona, Michigan, Colorado, and Nevada are some of the states which have witnessed this trend. At the same time, REOs cannot be taken out of the picture completely. “There are a lot of properties that cannot be sold through short sales. These are most likely to get converted into REOs,” opines Regan.
With delinquency rates still high and the economy still lying low, the odds are in favor of more short sales this year. Add to this the fact that short sale listings are a fantastic way of building inventory at a time when there is low supply, and the odds just get better.