Short Sales – Myth Busting

4 Common Foreclosure Myths that cost Homeowners a Fortune

Common Foreclosure Myth #1: No matter what I do, I’m going to owe money to someone. On most short sales, the seller is able to walk away owing the bank nothing. Of course, it’s all up to each individual bank, but eight times out of ten, you can walk away owing nothing. A bank loses way less money on a short sale than a normal foreclosure. In return for you helping them out, they will help you out. Here is why there is this big difference between a short sale and a foreclosure.

On a short sale, the utilities are turned on and someone is living in the house. A vacant house is way harder to sell. The buyer knows the home is bank owned and will adjust their offer down because of that. On a bank owned house, the house sits there for 6-9 months empty before it sells. The bank has to pay to keep it up and insure it. They can’t loan that money out and collect interest. Also, there is the liability if some kid goes into the house and gets hurt. Because of that the banks want to do short sales and are very willing to work with you.

 

Myth #2: A Foreclosure will go off my record in 3-5 years. Yes, you might be able to get a loan after 5 years, but here’s the problem. When you walk away, the bank will come back and get a judgment for the money they lose, and also any money they have to spend. They’ll tack on attorney’s fees, late payments, interest, maintenance, lawn mowing costs, realtor fees, locksmith costs, title insurance, and all sorts of other fees. This judgment will stay with you until you pay it off. Let’s say you owe $200,000 on your home and it’s now worth $170,000. According to a study done on this, if you do a short sale, the bank will lose 19%. But, if the bank takes the home back and waits for it to resell, they will lose 41%. That means you’ll owe them $82,000 on average. That is the judgment amount.    

This deficiency converts to a judgment and, depending on your state, judgments last up to 20 years. Most of the time, the bank itself will not come after you. But, the bank will sell the right to collect the money to a third party collection company. That company will then attempt to collect from you.

The worst thing is that this debt purchasing company will be going after you for years. They will do whatever they can to collect what they think is “their money.” Even your current and future employment might be affected because many employers now require credit checks. 

 

Myth #3: Banks and lenders rarely accept short sales. We are able to get short sales accepted most of the time. Here’s why your bank may have already told you they will only take X amount.  But, let’s say someone owed you a lot of money and they wanted to pay you only half of what they owe. What would you say? You’d probably tell them to pay you the full amount, right? But, if the person came to you with cash and told you they just simply could not afford to pay you any more, what would you do? You’d probably accept whatever you could get, right? Well, it’s the same way with a bank.

The banks often tell you they won’t take a short sale. The reason is because they want you to pay them the full amount. Or, they want to get you to agree to pay them monthly for the rest of your life.   

Myth #4: A Short Sale is no less damaging to my credit than a foreclosure. I can tell you one thing. Fannie Mae and Freddie Mac, who hold the loans on about half of the loans in the country don’t think so. They recently changed their requirements. Fannie Mae only requires two years on a short sale before you can get a new loan. If you give the house back to the bank, you have to wait for five years. Several new requirements now apply that can drag this out to 7 years. These companies are the backers of more than half of the loans issued today. This makes foreclosure more damaging than even a bankruptcy, which requires a 4 year wait. 

Feel free to contact me with any questions about what you read here.

Best,

JLC