Realtors, do not advise your sellers to stop making payments on their monthly mortgage when they are participating in a short sale.
Why, you ask.
Banks consider many things when determining if they will accept a short sale and of those many things they consider, the Seller’s Net is the most important.
Now before I get ahead of myself, understand that in a short sale, the homeowner isn’t walking away after closing with anything other than debt and when I say “Seller” I am specifically talking about the bank and when I say “homeowner” I am talking about the actual person residing in the home or at the very least, is responsible for paying a monthly mortgage on the residence.
Ok, with that being said, back on task. The seller’s net sheet is affected, positively or negatively based on the monthly payments or lack of payments by the homeowner. So, if the homeowner isn’t making monthly payments then the amount of loss the bank incurs increases monthly. Let me assure you, increasing monthly expenses on the part of the bank isn’t going to make it easier for them to accept the short sale. Ultimately, they have a bottom line and granted, they aren’t going to share that with you. Because of falling values chances are you priced your short sale to sale in 30 days or less which most likely means you may very well be at the bottom of the banks bottom line, by the time you get the first accepted offer.
In other words, any additional expense the bank is forced to incur because your homeowner won’t pay, can’t paying or isn’t paying his monthly mortgage, the more likely it’s just more cost effective to simply foreclose.
My advice to you homeowners, pay as much of your monthly mortgage as possible so that you have a better chance to close the sale.
My advice to you Realtors, you better be getting monthly updated pay off statements and sending in monthly revised estimated HUD-1’s otherwise, you may get a nasty surprise the day of closing when the bank refuses to close.
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First off, let me just say that a short sale is a lesser of two evils. It should be considered as the nuclear option and only available to those with legitimate hardship. Now, with that out of the way, let us talk about the truth behind what a short sale does to your credit.
If you are considering a short sale, then most likely you have fallen behind in your mortgage. This delinquent arrearages has already impacted your credit negatively. So that is the first thing you need to start considering. Any further delinquency on your part will continue to negatively impact your credit.
Now, one of the biggest differences between a short sale and foreclosure is how it's reported to the credit bureaus. If you foreclose you get "debt discharged due to foreclosure" stamped on your report. A recent conversation I had with a credit expert at Experion enlightened me to the fact that Bankruptcy is the worse thing anyone can do to his or her credit and the 2nd worse thing is foreclosure. She also explained that with a foreclosure it could take you up to 3 years to get a mortgage and drop you credit score about 200 pts or more, considering the previous damage you did by the mortgage arrearages. Where as with a short sale, this message isn't there. Instead you get a message that reads, "pre-foreclosure in redemption". This can result in about a 100 credit score drop or LESS! Not to mention, once the home is sold, it may appear as "discharged" on your credit. It's also important to know, that with a short sale, you can qualify for a loan in as little as 18-20 months later.
All in all, if you have a true financial hardship and the mortgage debt burden is too much for you to handle, then the short sale may be a viable and less credit damaging alternative to foreclosure or bankruptcy.
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