What You Need to Know About Short Sales

Basics of a Short Sale

A short sale occurs when a lender agrees to accept less than the amount owed against the home because there is not enough equity to sell and pay all the costs of sale.

Not all lenders will negotiate a short sale, and that is why an attorney can be a tremendous help by contacting the lender’s loss mitigation department to find out and/or negotiate the agreement.

A borrower can’t just wake up one morning and decide he or she is going to sell his or her home at a loss through a short sale.  Typically, lenders won’t even consider a short sale if a borrower’s payments are current.  Lenders will be more agreeable if the borrower is behind in payments or if the borrower is potentially facing foreclosure.

The Impact of Short Sales vs. Foreclosures

Sellers may wonder whether letting a property go into foreclosure would be easier and smarter that going through a short sale.  With a foreclosure, a seller could stay in the property, essentially rent free, for six months to a year before being forced to leave.  However, that fact alone does not mean a foreclosure is better.

According to David Steep, division manager at Vitek Mortgage, sellers will take a bigger hit on their credit report by going through foreclosure or giving the lender a deed-in-lieu of foreclosure.  Sellers will usually take a hit of 250 to 280 points when choosing either of these options.  As an example, if a seller has a FICO score of 680 before a foreclosure, it could dip to as low at 400 afterward.

The affect of a short sale on a seller’s credit report is much less damaging. The ding on credit will show up as a pre-foreclosure in redemption status, Steep says, which will result in a loss of 80 to 100 points.  This means a short sale seller with a previous FICO score of 680 will see it fall to 580 to 600.  That is a much easier number to overcome.

Waiting Period Before Buying Another Home

Steep says a seller who wants to buy another home after foreclosure will end up waiting about 36 months before a lender will offer any kind of interest rate that makes sense.  The good news fore short sale sellers is the wait is much shorter before buying another home.  “They can buy again in about 18 months at a good interest rate,” says Steep.

Short Sale/Foreclosure Deficiency Judgments

The bad news is a seller could be subject to a deficiency judgment for the difference between the loan amount and the amount paid when either the short sale or foreclosure option is chosen.  The lender has the sole discretion whether to pursue deficiency judgments in the instances when they are permitted. 

It is not uncommon for the lender to agree to waive the borrower’s deficiency when agreeing to a short sale.  However, borrowers must be extremely careful to ensure that the lender’s closing documents reflect the deficiency waiver.  The borrower should have a lawyer review the documents prior to executing the short sale agreement.

Depending on the equity in the borrower’s home, it is also likely that the lender will forego its right to pursue a deficiency judgment in favor of a shortened redemption period.  In Wisconsin, if the lender waives its right to pursue a deficiency, the borrower’s redemption period is 6 months.  If the lender opts not to waive the deficiency, the redemption period is 1 year.  Most lenders will opt for the shorter redemption period.

To determine whether a pending foreclosure or short sale is subject to a deficiency judgment, you should consult an attorney.

***Information provided by Nick Vivian of Eckberg, Lammers, Briggs, Wolff & Vierling.  Nick practices in the areas of business transaction, commercial real estate, and municipal law.  Nick represents both debtors and creditors.  If you would like to speak to Nick, we can put you in touch with him.***