Certain paired words send shivers up even the most rugged of spines. “Root canal,” for example. We’ve all encountered this one: “Transaction declined.” Here’s another: “What party?”
But the list-topper has got to be “short sale.” It’s not a crime. But if you’re selling, it’s a massive blow to your confidence, not to mention a scorched-earth farewell to your credit rating. If you’re buying, a short sale may seem like easy money, even knowing that every discounted nickel is soaked in the seller’s tears.
If you haven’t already had the dubious pleasure of first-hand acquaintance, a short sale is what a seller may opt for when more is owed on the home than current market value, and the seller just wants out. If you’re a seller in this sitch, remind yourself that things could be worse.
A lot worse. As a guppy is to JAWS, a short sale is to foreclosure. Foreclosure is an F-bomb you never want to drop, since it’s uber-demoralizing, and the transaction will probably sink your credit score between 200-300 points. By comparison, a short sale usually means a ding of 50 - 200 points, depending upon whether or not you’ve got late mortgage payments on record. Either way, that ding will evaporate, like magic, after seven years. And, yay: you may be eligible to finance a new home purchase within one to four years after your short sale, depending upon your credit score, loan type and down payment. After a foreclosure, the wait will be longer.
GO EASY ON THE SHAME.
A short sale is not a crime, although crime in the form of fraud did result in literally millions of short sales (and foreclosures) in 2008. As with bankruptcy and divorce, the moral landscape of the short sale and foreclosure has shifted considerably, especially after the Bernie Madoff scandal when millions of responsible, well-intentioned homeowners lost everything virtually overnight.
No need to beat yourself up; the experience itself will leave you feeling sufficiently contrite. When you face the fact that you cannot pay your mortgage, you then need to prove it to the lender. Each bank has its own protocol, but regardless of the lender, prepare for a few long, excruciatingly honest conversations before you put it all in writing. Here’s another of those dreadful word-pairs: “hardship letter.” Along with your hardship letter simply stating why you can’t pay (loss of income translating to a spike in the debt-to-income ratio, usually), you’ll need to produce two years of tax returns and W2s, as well as a list of home sale prices in the area to establish an approximate market value for the property that’s no longer yours. If there are any liens against the property, they will need to be fully disclosed at this time. Good times.
If the numbers jell -- meaning that you’ve demonstrated both your inability to pay and proven that the proceeds from selling the home will not fully repay the amount owed -- you and the lender both sign off and the property goes on the market. What happens next depends upon several factors. If the home is highly desirable, meaning in close proximity to Manhattan or Los Angeles, the change in ownership may happen before you can grab your toothbrush, do a quick sage smudge and say Buh-byeeee. If the property is in a remote area, is very large, or just strange in some other way (no bathtub, black walls, weird kitchen, evidence of monkeys), you may be in for a longer wait. The latter is the worse of the two inconveniences since you’ll basically be killing time in a space that no longer feels like home. In any event, you may want to make yourself scarce while the property is being shown, to escape the inevitable bad vibes.
Hopefully, you didn’t tap your home equity to make purchases while you owned the property. If you did this, and used the money to upgrade the property, you may be okay. If not, you’ll probably face some gnarly tax consequences.
Let’s say that in addition to your mortgage, you also owe $50,000 on a home equity loan. If you used the $50K for a new car, a fab vacay, or junior’s next year at Harvard instead of new copper pipes and a new roof, whatever you don’t repay in home equity after a short sale is considered taxable income. Could the timing of this be any worse?
The good news is that you’re probably going to eligible for a Fannie May loan with 10 per cent down, four years after your short sale. If you can put down 20 per cent, you may be eligible within two years. In some rare situations, such as a well-documented serious illness, you may be able to swing a new loan after two years with only 10 per cent down.
THE BOTTOM LINE
Okay, it’s not a pretty picture any way you slice it. Best case scenario: if you simply want out of the mortgage -- call it a hit-and-split -- but haven’t missed any payments, the impact on your credit may not be as dire as it will be if you’re seriously delinquent. Let’s suppose you’re a MLB top draft pick (hey, dream big!) and you need to relo pronto to play for your new team. This situation wouldn’t necessarily be viewed by your lender as a default, especially if you can score a few season tickets for scouts seats behind home plate, in which case your credit should emerge pretty much unscathed.
Most of us, however, don’t fly that close to the sun. In fact, many advisors will suggest to a client who’s considering a short sale to deliberately withhold mortgage payments, to demonstrate hardship. When reviewing your hardship case, your lender will analyze your income and assets. You may want to consider a quick excursion to Switzerland or the Caymans since your lender will demand that you surrender all available cash assets to offset their loss.
In the aftermath of a short sale, you may vow to become a lifetime renter, and you’ll likely have a few years to test out that decision. But these feelings generally pass. As a buyer, the process is pretty similar to a conventional purchase, but you may encounter delays. Securing a rate can be tricky with a short sale. The rate will probably only be locked down for 30 - 60 days, and the seller’s lender may take months to review and approve your offer.
As always: your agent’s expertise is key to navigating the big swells and gnarly rip currents of any short sale. Whether selling or buying, make it a priority to choose a skilled marketplace partner to guide you around major obstacles, keep you out of frustrating dead-ends, and help you manifest the best possible outcome regarding a short-sale.