When a homeowner is unable to make their mortgage payments or owes more on the home than it’s worth, a short sale can be a viable option that avoids the negative implications of a foreclosure for both the homeowner and the mortgage-holder.
However, common perceptions of short sales as difficult, lengthy, restricted to specific circumstances, and harmful to personal credit cause many to shy away from the option.
While short sales have been known to drag on in the past, Freddie Mac’s Standard Short Sale requires servicers to approve or deny a homeowner’s application within 30 days. After approval, the short sale should close within 60 days, according to Mooney.
Misperceptions regarding eligibility requirements are also a barrier, Mooney says. She clarified that short sales can be an option for owners of investment properties or second homes, those with second mortgages, and homeowners who are current on their loans.
Those who are current on their loans must meet general eligibility requirements, “the property must also be your
primary residence and your debt-to-income ratio must be greater than 55 percent,” Mooney said.
For those who have second mortgages, Mooney said Freddie Mac is “offering up to $6,000 to subordinate lien holders—who are like second mortgage companies—in exchange for releasing the subordinate lien, extinguishing the underlying indebtedness, and waiving the right to pursue deficiency.”
Another major source of concern for homeowners is the impact a short sale will have on their credit scores and their ability to obtain another mortgage in the future.
“While only the credit reporting agencies that calculate your credit score will know for sure, it’s possible that a short sale might be better for your score than a foreclosure,” Mooney said.
“Even if it isn’t, a short sale gives you time to find a more affordable place to live and exit gracefully from your obligation,” she added.
Mooney also assured homeowners that in most cases, they will not be on the hook for the full mortgage loan amount, though they may be required to pay a portion of the unpaid balance after the short sale closes.
When a borrower enters into a short sale, the impact on his or her ability to obtain a new mortgage depends on the circumstances, according to Mooney.
Those who enter into a short sale after a financial hardship such as a medical emergency or loss of income must wait 24 months to re-establish credit and apply for a new mortgage loan, while those who opt for a short sale due to “personal financial mismanagement” must wait at least 48 months before applying for another mortgage, according to Mooney.
Mooney recommends homeowners consider a short sale if they do not qualify for other loss mitigation options, need to move to obtain or maintain their jobs, or are underwater.