What's a Short Sale, Who Qualifies & What's the Catch?
Mortgage Credit Problems Columnist
People with bad credit may have a tough time qualifying for a debt consolidation loan or mortgage refinance. As a result, more and more people who are overwhelmed by mortgage debt are hoping their lender will approve a short sale of their home.
What's a Short Sale?
Homeowners facing foreclosure may be able to negotiate the sale of their home for less than what they owe to their lender. Proceeds from the sale go toward paying off the mortgage. However, even if a short sale is approved, some lenders will require borrowers to pay off their remaining debt (called a deficiency) over time. This depends largely on the state the property is located in -- most states allow banks to collect deficiencies, but some like California do not, and others allow it but make it difficult for the lender to pursue. And in almost all cases a deficiency can be avoided in a bankruptcy proceeding.
Qualifying for a Short Sale
Not everyone will qualify for a short sale. Generally, lenders will only consider short sales for people who are behind on payments and demonstrate a real financial hardship. Homeowners hoping to make a deal with their lender will need to be diligent about providing information. Writing a letter to the lender that gives permission to discuss a potential short sale with real estate agents, a title company, and attorney can help get the ball rolling. People who write a hardship letter explaining how they ended up with bad credit and unable to pay their mortgage could sway the lender in their favor. Lenders will also want proof of income and assets, bank statements, and a comparative market analysis.
Impact on Credit Report
Short sales can affect credit reports differently, depending on where and when they take place. If a short sale happens after foreclosure proceedings have begun, the credit report will be affected much as though the property was foreclosed on. However, if the short sale takes place and the lender has not started foreclosure, the credit may not be adversely affected. Finally, if the lender pursues a deficiency and takes the borrower to court, there will be a judgment on the credit report which is seriously damaging, especially as long as it goes unsatisfied (unpaid). Qualifying for a mortgage or other large loan will be difficult for several years, so it may be tough to obtain a debt consolidation loan.
A short sale can help a homeowner avoid foreclosure and free up money to put toward a debt consolidation plan. If a person takes appropriate steps to repair bad credit, such as paying bills on time and not making new charges, they should be able to pay down remaining debts even without a consolidation loan.
About the Author
Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.
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