How a Short Sale Affects a Homeowner's Credit Score

After a Short Sale is completed, the Bank reports the transaction to the Credit Bureau as “Settled for Less.” A Short Sale will bring the credit score down about 150-200 points. Besides the Short Sal, every late payment is reported to the same bureau as 30-, 60- or 90-day late payment, and these actions will bring the credit score down as well. Each late payment will the homeowner's FICO score 10-15 points down.

A good REALTOR/SHORT SALE SPECIALIST has to try to save a homeowner’s FICO score, by simply negotiating with the Bank. In most cases, saving the homeowner's FICO score will not likely happen, but if you do not ask, you will not receive. If the homeowner is short only $10,000 to $15,000, and the homeowner wants to save his/her FICO score (providing that a move is necessary and does not have money to cover the difference), the REALTOR/SHORT SALE SPECIALIST can negotiate with the Bank about the pay off. Usually the Bank will agree to give to a homeowner an unsecured loan for the difference (for this example, $10,0000 to $15,0000) for 5-7 years with 0-1% of interest. Instead the Bank will report the transaction as paid in full and it will not have any negative effect on the homeowner’s FICO score. And the homeowner will be able to move on with life and buy another property if desired.

After the Short Sale is reported to the Credit Bureaus, the homeowner will be able to buy another property after 2 years. If compared to Foreclosure, a homeowner will be able to purchase another property in 5 years; Deed in Lieu, 5 years; Bankruptcy 7 years; Judgment, 10 years. The 2-year wait period to purchase a property after a Short Sale is one of the biggest advantages of the Short Sale compared to the others options listed above.

Another advantage of a Short Sale is that the homeowner will be able to get a better selling price when he/she chooses this transaction (usually 10% below the market price) than if the Bank chooses to do a Foreclosure. How this will benefit the homeowner if no proceeds are received from the Short Sale anyway?

Let’s assume that after the homeowner purchases the property, down the road, he/she pulls equity from the property (majority of homeowners do) as a Second Lien. This makes the the second loan a recourse loan, meaning that the Bank (second Lien Holder) can sue the Seller for the Deficiency Judgment after transaction is over. By controlling the price in the Short Sale transaction the homeowner has a chance to reduce the amount that the second Lien Holder can sue him/her for, and that means the Bank will bring down the deficiency amount as well. Whereas, in a Foreclosure, the Bank will sell the property 30-40% below the market price and the second Lien Holder will be able to sue the homeowner for the full amount of the Second Loan.

Ihor Pochay
REALTOR/SHORT SALE SPECIALIST
Tarbell, Realtors
(909) 629-6186 ext. 339
ihorpochay@hotmail.com
http://www.myrealtorihor.com/

Why Would Banks Choose to Do a Short Sale?

Why would banks want to agree to do a Short Sale?

First of all, the banks are in the business of lending money, not owning properties. They are very motivated to sell the property as soon as possible and get loans off their books.

Secondly, if banks choose to do a Short Sale, they will net (gross proceeds minus sale expenses) more than if they were to go into Foreclosure or trying to sell the property by themselves. Because if the banks choose one of the latter options, they will have to pay for all the utilities, taxes, HOA fees, repairs, asset management fees, etc.

The bottom line is, when banks do a Short Sale, they will usually loose 10%-15% of the market value. But when banks do a Foreclosure, they will loose 25%-30% of the market value, sometimes even more (depending on the market condition).

A bank will evaluate the financial situation of the homeowner, current market value of the property and will then make a decision about the Short Sale case. If for example the bank realizes that the market value of the property is $300,000, but $210,000 was offered for the property, the bank will most likely not approve this Short Sale as it will be more profitable for to Foreclose the property and sell it as an REO (Real Estate Owned by bank).

Ihor Pochay
REALTOR/ SHORT SALE SPECIALIST
Tarbell, Realtors
(909) 629-6186 ext. 339
ihorpochay@hotmail.com
http://www.myrealtorihor.com/

Deficiency Judgment in California

After a Short Sale transaction is completed in the state of California, the Lender, in some ccases, may sue the Borrower for the Deficiency Judgment (the difference between the indebtedness and the fair market value). The Deficiency Judgment will not apply to every case. There are five situations in which the Lender can not proceed with the Deficiency Judgment:

1. Purchase money loan: The Borrower (homeowner) still has the original loan on the property and did not refinance the original loan since purchasing it.
2. Three-month limit: The Lender has three months to sue the Borrower, or let it go.
3. Seller’s financing: If the loan was financed by the seller, the original seller will not have a right for a Deficiency Judgment against the Borrower.
4. When the Lender will do the Trustee’s Sale (sale conducted by the trustee) instead of the Judicial Foreclosure (foreclosure which occurs in the court).
5. The Lender can not sue the Borrower for the amount bigger than the difference between the loan amount and the fair market value.

The Lender may obtain the Deficiency Judgment after the Judicial Foreclosure and/or when the loan is completely wiped out.

For example, let’s say that the Borrower obtained two loans (Trust Deeds) in order to purchase the property – one loan at $400,000, while the other at $100,000 – and then the Borrower decided to refinance the second loan in order to get a better interest rate. Later on, if the property is sold in a Short Sale for $395,000, the second loan therefore will then be completely wiped out. This will not qualify the second loan to fall under the purchase money loan exception to the Deficiency Judgment because of the refinancing. The Lender that provided the second loan may then sue the Borrower for the amount not to exceed $100,000.

You may reach me at:

Ihor Pochay
REALTOR/ SHORT SALE SPECIALIST
Tarbell, Realtors
(909) 629-6186 ext. 339
ihorpochay@hotmail.com
http://www.myrealtorihor.com/

What is a Short Sale?

A Short Sale is when the Lender (bank) agrees to accept less of what is owned on the property. For example if you have a mortgage of $400,000 on your home and the current market price is only $300,000, the bank will end up with the loss of $100,000 if they approve the Short Sale.

Now why would the bank will do a Short Sale and lose money? The answer is simple. The banks are in the business of lending money and making interest on those loans, not in the business of owning houses. If the bank does not approve the short sale, they will have to foreclose the property and try to sell it as a Real Estate Owned by Bank, which will bring them a lot less money than they could receive from a Short Sale. That is why banks are very motivated to do a Short Sale instead.

Why would the seller want to do a Short Sale? The reasons simply are:

• To be able to buy a new home as soon as 24 months from the close of a Short Sale (a Foreclosure will stay on the homeowner's record for 5-7 years);
• To be able to preserve the homeowner's credit score (a Short Sale has a lot less impact on the credit score than a Foreclosure);
• To avoid the Foreclosure;
• To have the opportunity to start all over again.

Ihor Pochay
REALTOR / SHORT SALE SPECIALIST
Tarbell, Realtors
Off: (909) 629-6186 ext. 339
Fax: (909) 629-6710
ihorpochay@hotmail.com
http://www.myrealtorihor.com/