If you’re a homeowner who can’t financially sustain making timely mortgage payments, a short sale option could pose a solution to your problem. The bank or lender accepts a sale price lower than your remaining debt, and in exchange, you avoid foreclosure.
However, things aren’t always as they seem, and often more than naught, homeowners are met with numerous problems hindering the short sale. Today we’ll discuss short sales, how they work, and how they are different from foreclosures.
What Is a Short Sale?
A short sale refers to a sale that happens when homeowners who found themselves in financial hardship sell their property for less than the amount due on the mortgage.
The buyer of the property is a third party, in no way related to a bank, and all the proceeds from the short sale go directly to the lender. In terms of what happens to the remaining balance, it depends on the lender.
How a Short Sale Works
A short sale involves selling a home for a lower price than the balance remaining on the mortgage and well under the property’s market value. For example, if there’s $200,000 remaining on your mortgage, you can opt for a short sale and sell your property for $170,000. When everything is finalized, home buyers get their new home, and proceeds from the sale go towards covering your remaining mortgage.
However, it’s evident that there is a notable difference of $30,000 still remaining on your mortgage balance less average closing costs. The lender has two options: to either forgive the difference in mortgage debt or sue the homeowner through a deficiency judgment, which would require you to pay the difference to the lender. It’s worth noting that the difference must be legally forgiven in some states.
Before the short sale process even begins, the lender has to approve short selling, also known as a pre-foreclosure sale. Short sales and short sale transactions can’t occur without mortgage lenders’ approval, and both require documents elaborating and justifying the short sale.
Short sales are often time-consuming, and paperwork-intensive processes and could take a full year to complete. However, they are not as detrimental to your credit score as foreclosures.
What Is a Foreclosure?
A foreclosure happens when a bank exercises its rights to take back a homeowner’s property due to a mortgage loan default. A default occurs when a borrower fails or cannot make mortgage payments for longer periods.
While they sound similar to short sales, foreclosures are very different from short sales in several ways.
<h2>Short Sales vs Foreclosures in Idaho
Short sales and foreclosures look almost identical on the surface, as they present financial options for homeowners late on their mortgage payments. Homeowners have to part with their homes in either case, but the timeline and the consequences greatly vary between the two.
In most cases, you will work with lenders on short sales. However, since lenders stand to make less money than what is owed, they must approve the short sale to begin with. To qualify for a short home sale, you must present the lender with an explanation, such as a financial hardship letter, to justify the short sale of your property.
Next, you should hire a real estate agent to help you put your short-sale property on the housing market for potential buyers to review. Any short sale offers you get have to be reviewed and approved by the lender before you formally accept the buyer’s offer and close the sale.
A short sale will have a minimum effect on your credit score, which can go down as little as 50 points if you continue making payments on your mortgage during the short sale, or up to 200 points if you don’t. Whatever the case may be, getting a new home loan can take as little as two years, provided you put in a 20% down payment or more.
Unlike short sales, which are initialized by the borrower, foreclosure processes are initiated by lenders only, usually as the last option to recover their funds.
When you miss a single mortgage payment, your bank will issue a bank statement notifying you of the delay. If you miss a few more, the bank will initiate a foreclosure process that forces you to sell your home, hoping to recover its initial investment of the mortgage. In Idaho, the lender must wait 120 days before officially initializing foreclosure.
It’s also worth pointing out that many foreclosures happen after you have already abandoned the property. If that’s not the case, you’ll be evicted by the lender. Once the lender gains access to the home, it will order a home inspection and an appraisal and proceed with trying to sell it.
However, before that happens, your lender is obligated by law to issue a notice about the opportunity to request a loan modification only if the property in question is your primary residence. A loan modification will effectively put a stop to any foreclosures and allow you to continue making mortgage installment payments under a new loan agreement.
If you happen to pay the entire overdue amount, including fees and costs, and bring the loan to current, the foreclosure halts immediately. In Idaho, you as a borrower get 115 days after the notice of mortgage loan default to reinstate the loan. Unfortunately, if the foreclose finalizes, you’ll lose your property and anywhere from 200 to 400 points on your credit score.
Pros and Cons of a Short Sale in Idaho
There are several benefits and drawbacks of short sales in Idaho:
- Almost negligible drop on your credit report
- Recover credit score loss faster
- Lenders will allow you to stay in your home until the sale is finalized
- Lenders have Deficiency Rights
Laws of a Short Sale in Idaho
Mortgage lenders have deficiency rights in Idaho, which means that they can ask you to sign a Promissory Note, where you agree to cover the difference between the short sale value and the mortgage debt. This usually takes the form of monthly payments.
However, under Idaho law, lenders have 45 days to file a Deficiency Judgment against you or file a form 1099, which forces you to claim any financial loss the lender suffered as a loss of income in the short sale’s current year.
If your hardship letter proves severe financial hardships due to job loss or injury, it’s highly unlikely for a mortgage lender to exercise its deficiency rights.
You can avoid Deficiency Judgements by filing for bankruptcy and eliminating your debt. This isn’t an adequate solution if a deficiency judgment is your only debt. However, it poses a good option if you have multiple debts you can’t afford to pay.
Working With Estate and Closing Agents
If you’re in a difficult financial situation and can’t make the payments on your mortgage, you should consult with estate and closing agents regarding short sales. That way, you can make sure that everything goes smoothly when the short sale occurs. In addition, your and your buyer’s agents should finalize the deal much faster.
In addition to working with Estate and Closing agents, consider selling your property to companies that buy houses in Idaho, such as Gem State Cash Offer, a company that can help you sell your house quickly and safely, regardless of its condition, and allows selling a house with a lien.
At Gem State Cash Offer, we buy houses in Nampa, we even work as cash home buyers in Boise, and are willing to make you a cash offer in as little as 24 hours.
Will I Still Owe the Bank After a Short Sale?
This depends on whether your lender exercises its deficiency rights or not. If they don’t exercise their deficiency right, they might opt to sell it to a collection agency. However, if your lender opts not to pursue you in any manner and forgives the remaining debt, make sure you have that in writing.
On the other hand, if the lender exercises its deficiency rights, you’ll be charged with covering the monetary difference between the mortgage debt and the short sale amount. You can ask your lender to break the sum into installments for easier payments.
Short sales are the most favorable option if you accrued massive debt due to missing mortgage payments. Despite taking ages to complete, they do offer a degree of control, and the ability to keep living in your home until they finalize, which isn’t the case with foreclosures.
Short sales don’t have to take ages to finalize; you can sell your home to Gem State Cash Offer and sell your house in as little as 24 hours. You take care of the pre-approval letter, and we’ll make sure that the price is right and reflects the property’s value.