Thanks to Brandon Brittingham of The KCM Blog, we bring 10 common myths of short sales vs. foreclosures. Here are the highlights of each. To read the entire article, click here.
1.) If you let your home go to foreclosure you can walk away with a clean slate. In most situations, that is not the case. If your property goes into foreclosure, you may be liable for the difference of what is owed on the property versus what it sells for at auction, in the form of a deficiency balance. Here’s the math:
You owe $200,000 on the property and it sells at auction for $150,000. You could be liable for the $50,000 difference if your state law allows it. But a short sale can alleviate your liability to the bank, in most situations. There are exceptions to this, but in most cases banks are releasing homeowners from the deficiency balance on a short sale.
2.) There are no options to avoid foreclosure. Now more than ever, there are options to avoid foreclosure. Besides a short sale, loan modifications along with deed in lieu are also examples of the many options. In most cases (but not all) a short sale is the best option.
3.) Banks do not want to participate in a short sale, or, it is too hard to qualify for a short sale. Banks would rather perform a short sale than a foreclosure any day. A foreclosure takes a long time and creates a huge expense for the banks; a short sale saves both time and money.
4.) Short sales are not that common. At this time, short sales range from 10-50 % of sales in various markets and it is predicted that in 2012 we will have more short sales than any other year, to date. Due to economic changes in the last few years, this is something that is affecting millions of Americans. Short sales are in every market, and are not just limited to any particular income class.
5.) The short sale process is too difficult and people often get denied. Though the short sale process is time consuming, it is not as difficult as the media would have you believe. The problem is that most short sales are denied because of a misunderstanding of the process. It is true that if the short sale process is not followed correctly there is a good chance of getting denied. An experienced agent knows how to avoid this. Short sales require a special skill set – make sure you find an agent that fits the bill.
6.) Short sales will cost me money out of pocket. A short sale should not cost you any out of pocket money. In fact, you could get $3,000 – $30,000 to participate in a short sale. In many ways, a short sale may put you in a better financial position than prior to the short sale. Almost every short sale program now has some type of financial incentive for the homeowner, as long as it is a principle residence, and we are even seeing relocation money being paid on some investment/second homes.
7.) If I am behind on my payments, I can perform a short sale any time. The farther you get behind on your payments, the harder it is to get a short sale approved. The closer a property gets to a foreclosure, the harder it is to convince the bank to perform a short sale. Why? More money is spent, thus deterring them from doing a short sale. If you think you need to perform a short sale, time is of the essence; the sooner you start the process, the better. Waiting too long can trigger the ramifications of a foreclosure, losing the ability to do a short sale as a viable option.
8.) I have already been sent a foreclosure notice so I can’t perform a short sale. Generally, just because you received a foreclosure notice or notice of default, it does not mean that you do not have time to perform a short sale. The timeline and specifics do vary from state to state so as soon as you have receive a legal foreclosure notice, reach out to a professional right away. The longer you wait, and the closer you get to foreclosure, the fewer options you have.
9.) I was denied for a loan modification, so I know I will get denied for a short sale. Short sales and loan modifications are handled by two separate departments of the bank. These processes are totally different in approval and denial. If you got denied for a modification you can still apply for a short sale; in some cases you can get a short sale approved faster than a loan modification, as some loan modifications are denied because they cannot reduce the loan low enough based on the consumer’s income.
10.) If I go through a short sale I cannot buy another house for a long time. The time to buy another house depends on your entire credit picture and can vary from 12-24 months. There are even a few FHA programs that allow for a purchase sooner than that.
