Facing Foreclosure? A Short Sale May Be the Answer

Millions of Americans took advantage of an eviction and foreclosure moratorium offered by the federal government during the Coronavirus pandemic. At the highest point, more than 3 million homeowners used the program to delay mortgage payments.

Some borrowers could face foreclosures once the eviction and foreclosure moratoriums end. The Federal Housing Administration (FHA) extended the foreclosure moratorium through September 30, 2021. This means that if you’re on the brink of foreclosure, you have a little more time to figure out a plan.

What is a short sale?

A short sale allows a homeowner to sell their house for less than they owe. A short sale is a voluntary agreement between the homeowner and the lender. The homeowner sells the property to a third party, and the money from the sale goes to the lender. The lender can either forgive the remaining balance or require the borrower to pay some or all the difference between the sales price and the total owed. Most states, including Utah, allow the lender to sue for the remaining balance.

What's the difference between foreclosure and short sale?

A foreclosure is not voluntary. In a foreclosure, the lender takes the home from the homeowner. Lenders will typically initiate foreclosure after three to six months of non-payment. A foreclosure is a legal action. During a foreclosure, the lender will evict the tenants from the property. The bank takes control of the home, obtains an appraisal, and sells the home.

Short sales often take a bit longer because the bank wants to get as much money as possible from the sale of the property. Short sales can take from weeks to a year to complete. While they take longer, short sales aren’t listed on a borrower’s credit report. A foreclosure is listed on the borrowers’ credit report and can stay on the report for up to seven years. Foreclosures can also happen within a few months.

If your lender does accept your short sale, they may list that the debt was paid off for less than agreed. While this could hurt your credit score in the short term, it’s not as substantial or long-lasting as a foreclosure.

Do I qualify for a short sale?

Before a lender agrees to a short sale, the homeowner must be far enough behind on their payments that they cannot catch up on their payments. Additionally, short sales are more ideal for borrowers when the housing market doesn’t favor their property. Essentially, the borrow should owe more on the home than it’s worth.

It’s important to note that your lender is required to approve the final sale. Just because you accept an offer from a seller doesn’t mean your lender must. Short sales can take a while because the lender must approve all the sales terms before the sales process.

The Short Sale Process

The typical short sale will look something like this:

  • First, the homeowner will talk with their lender and a real estate agent to determine if a short sale is the best option. The homeowner must prove that they are no longer able to make their mortgage payments and have no assets that could be used to catch up on their late fees. 
  • Once the lender approves the short sale process, the homeowner can list the home for sale. When a buyer makes an offer, the homeowner can accept the offer and submit the contract to the lender for approval. The lender can accept the offer, reject the bid, or reject their offer with a counteroffer. 
  • If the lender chooses to adjust the loan terms, the buyer can decide whether they want to move forward. Once both parties agree, the sale can close, and ownership will transfer to the new buyers. 

Note: You cannot go through a short sale if you file for bankruptcy since bankruptcy law doesn’t allow any collection activity while bankruptcy is in process.

If you’re struggling to make payments and worry that you could face foreclosure in the next few months, we can help. We pay cash for properties. Let us help you get out of your home without hurting your credit score. Call us today to learn more about our process.

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