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Yesterday afternoon I was in an attorney’s office and a gentleman came in for a real estate consultation. Unfortunately he fell way behind on his mortgage and he had to face the fact that a short sale was his only option. He then asked me, “How will the short sale affect me when I try to buy another home?” Well, it ain’t pretty, so let’s see what we can do.
A short sale is a sale of real estate in which the sale proceeds fall short of the balance owed on the property’s loan. It often occurs when a borrower cannot pay the mortgage loan on their property, but the lender decides that selling the property at a moderate loss is better than pressing the current debtor. Both parties consent to the short sale process, because it allows them to avoid foreclosure, which involves hefty fees for the bank and poorer credit report outcomes for the borrower.
When bankers look at your credit report, the biggest concern is how timely are your payments, especially your mortgage payment. The issue with the short sale is, although you were not officially foreclosed upon, your credit report still says “foreclosure” in the mind of the banker. How could that possibly be when you haven’t been booted out of your home? It’s very simple. With most, if not all short sales, the homeowner is at least four months behind on his mortgage. Actually, if the homeowner wasn’t at least that far behind, the short sale would probably not be approved by the homeowner’s bank anyway–keeping in mind the bank must give its approval to consummate the short deal. So, in the banker’s mind, being four months behind on your mortgage is tantamount to being in foreclosure. I know, selling short is technically not the same as foreclosure, but it can be considered the same thing when a bank is deciding to lend you a couple of hundred thousand dollars.
So, back to the original question of how will a short sale affect any subsequent purchases? If on your credit report it shows something like “11/09-120” regarding payments on your mortgage, the translation is “in November of 2009 you were 120 days late with your payments”. Red flags go up and your possibility of getting a home in the near future will probably go up in smoke. When I say the near future, let’s say approximately the next four years. Many lenders won’t touch you with a ten foot pole for at least that period of time after the foreclosure, if you’re looking to make another purchase (refinancing is a different issue). However, that period of time isn’t written in stone. The policy is lender specific, so it may be longer or shorter.
So, if you’re forced to sell short, speak to as many lenders as possible about their short sale policies regarding purchasing a home. It all depends on your situation. Let’s say you fell behind and you’re selling short because of the physical incapacitation of one of the breadwinners in your household, who could no longer work. However, when you go to purchase your next home, you could afford the purchase solely on the income of the one healthy breadwinner who is still working. Maybe an explanation like that would appease a lender when considering your mortgage application. In today’s economic climate it’s hard to predict from one day to the next what the new rules will be, so hang in there until the storm subsides.
The real deal is to not be in a position where you need a short sale. Obviously that’s easier said than done, but here are a few obvious tips to save some money so you can make those mortgage payments:
Cut back on some seemingly necessary expenses. My better half and I have cut way, way back on some things we thought were absolutely necessary a few years ago. As an example, we just found out we won’t bore each other if we don’t have cable TV.
Stop eating out. If you haven’t done so already, make your home your favorite restaurant. I love to wine and dine my wife, but I think she’s actually starting to appreciate culinary artistry, especially when we can eat like royalty for less than $10, and have left overs.
Turn the heat down or off when nobody is home. I live in the northeast and it’s about to get freezing cold really soon, which means my heating bill is about to get sky high. However, my better half and I are not home at least ten hours of the day during the week because of work. It makes no sense to keep the furniture warm.
Kirk Charles, a.k.a. The Mortgage Confidant, is a mortgage consultant and author of The Real Deal: How to Get a Mortgage During & After the Subprime Crisis