What is a Short Sale?

Indiana’s housing market has seen better times. On a national scale, our state ranks #2 in the number of foreclosed homes. The average dollar loss on Fannie Mae and HUD homes is $36,000. Neighborhoods are slowly declining in value due to the surplus of foreclosed inventory. In fact, according to the National Association of Realtors, Indianapolis only ranks 121st in home appreciation out of 129 other metro areas on a national basis.

These statistics are a harsh reality and are now causing the banking industry to look at other alternatives to defaulted loans in high foreclosure states. One of the more common alternatives is called a PFS (Pre Foreclosure Sale) also known as a Short Sale. A Short Sale consists of a lender satisfying the loan, paid in full for an amount less than the original pay off. For example, if your mortgage is $165,000 and you cannot pay that amount, if your lender approves a Short Sale amount of $145,000 – your loan would be considered paid in full upon sale. The benefits to the homeowner, lender, and the neighborhood are considerable.

For instance, the homeowner can reduce derogatory information reported in their credit file, it avoids deficiencies, avoids a foreclosure, and they receive monetary compensation up to $1000.

For a lender, it reduces non-reimbursable costs, avoids the process of seizing a foreclosure property, reduces their dollar amount of claims that are paid, reduces interest paid, and improves their relationship with the homeowner. After all, they want you to get back on your feet one day…in hopes that they can give you another home loan.

Last but not least, the neighborhood’s value is retained and it helps stabilize the local community. Most foreclosed homes sell below market value which in turn decreases overall neighborhood values. They also tend to sit vacant for several months during the foreclosure process causing them to lack curb appeal and hinder the sale of other homes in the same neighborhood.

To qualify for a Short Sale, you must prove to your lender that you are in financial hardship. This means, you must have no desire to remain on the property and are not able to continue making monthly mortgage payments. In addition, you must be in default a minimum of two or more installments to qualify. Most importantly, you cannot have any money in either your checking or savings accounts.

Once you contact your bank to petition for a Short Sale (it usually helps to have a Realtor at this time to help you through the process) they will send you a package to determine whether you are qualified for the program. Your credit history will be run, and an appraisal will be ordered on your home, and title checked for any liens on your property. Your home must retain an appraised value of 63% or higher to be considered. If it is less, your home will go directly to foreclosure. You will also need to contact a HUD approved credit counselor to work with you through the Short Sale. Once all requirements are met and the lender approves a Short Sale, you have 90 days to sell your home through a Realtor. If your home does not sell within the 90 day time frame, the lender can proceed to foreclosure.

Remember, this is just a brief over view of a Short Sale. There is a lot of time and paper work involved.

If you decide to apply for a Short Sale, word to the wise:

1. You must remain in your home until it is SOLD – do not move out, or the lender will cancel the Short Sale and proceed to foreclosure.

2. Remain in constant contact with your lender – do not avoid their phone calls.

If you would like more information or are considering a Short Sale, feel free to contact me at 317-250-0129.