Calculate the Real Amount You Owe On A Short Sale

The definition of a short sale – selling your home for less than you owe on it. Simple, isn’t it? Well, slow down, Einstein. For San Diego short sales or Phoenix or Tulsa, Oklahoma — you first have to figure out one important fact: what do you really owe on the property?

The most popular answer for this question when I ask people is: “my mortgage balance.”

But that is not all of it and that’s why I wrote this blog.

First, you do have your primary or first mortgage, mortgage principle balance and any past mortgage payments that you have missed. You will also have interest due, and the penalties that your bank is charging if you are behind on your mortgage payments.

Ok, so this covers your first mortgage debt, but there is so much more.

Do you have a second mortgage on the home? A second mortgage can trip you up before you know what’s hit you. That’s because the second mortgage holder must agree to the short sale, and they have historically gotten the short end of the stick when it comes to short sales, foreclosures and bankruptcies. But that’s another topic, so for now, you can count on having to pay your second mortgage company something to let you short sale your home.

At this point you may be thinking, “that’s it isn’t it?” Well, no it’s not, let’s keep looking.

• Do you belong to a homeowner’s association? Are you behind on the dues, or will you be behind by the time the short sale goes through? The HOA fees that are unpaid are considered part of the debt as well.

• What about your property taxes? If you are behind then add that amount as well.

• Um, do you owe the IRS any back taxes? These could be on your home too.

• Do you have mortgage insurance on your home? If so, you may have to pay a little somethin’ somethin’ to your lender’s mortgage insurance provider to let you out of the loan.

Ok, that is all that I can think of off the top of my head for who you have to payoff while doing a short sale.

Oh, wait – don’t forget the costs associated with the sale. Some lenders will require you to pay the sales costs and other won’t. This includes who is paying the real estate agent representing you in the short sale transaction. For any of these costs you may be able to negotiate with the buyer to pick up some or all of the tab, but you will have to be prepared to pay them if they won’t.

Now, I think we’re to the bottom of my list of folks who may have their hand extended for payment in your short sale transaction. For sure it ain’t just what you owe your first mortgage company.

Do a Short Sale or Foreclose? Either Way Your Credit is Shot and It’ll Be Hard To Get a Loan in the Future!

Whether you foreclose, do a short sale or go through a deed in lieu of foreclosure your credit is shot. The extent to which your score falls may differ, but to any future creditor it is all the same. Not only that but when you apply for credit in a few years, its really important to not have any derogatory items on your credit report for at least 24 months prior to an application. For example lets say you do a short sale this month (June 2008) and you apply for a mortgage in June 2011. Then you should not have any derogatory items (late payments) since June 2009. Also, from the recent changes to credit guidelines it may be well after 2011 that you can even apply for a mortgage loan.

I had discussed this point in response to a visitor question back in December 2007. Recently another reader, who happens to be a very knowledge mortgage broker, left me a comment clarifying the current guidelines and how things are viewed today. I figured it would be to everyones interest to have the comments published as a post. So, below is the response from Catherine Coy to my post from last December “Will “Forgiven” Debt Affect My Credit Score?”

You’re very mistaken as to the impact of foreclosure vs. short sale vs. deed-in-lieu.

As a mortgage broker myself, I get many calls these days from consumers wondering what affect a short sale or foreclosure (or deed-in-lieu of foreclosure) will have on their credit. This is an important topic because the last real estate downturn (during the 1990s) preceded the widespread use of FICO scoring and automated underwriting systems.

Some real estate agents and short sale investors (those seeking to purchase a homeowner’s property prior to foreclosure)–and even some mortgage professionals–suggest to the distressed homeowner that a short sale isn’t as damaging to one’s credit as a foreclosure. Given the inherent conflict of interest—a real estate agent makes a commission on a short sale and doesn’t in a foreclosure—the real estate professional should proceed cautiously when counseling a seller. The practical reality is, short sale or foreclosure, one’s credit will suck either way.

Many mistakenly believe that a derogatory public record such as foreclosure is somehow worse than petitioning the lender to accept less than owed (short sale). In the world of banking, however, lenders interpret either of these events only one way: the customer did not pay as agreed. It matters not to a lender the manner by which it suffered a loss; only that it did. Lenders go to great lengths to alert each other, by way of reporting to credit bureaus, that the defaulting homeowner is someone who, when the chips were down, didn’t honor a contract.

In fact, lately Fannie Mae and Freddie Mac took an even stronger stand against homeowners who renege on their obligation. “Seasoning” of a foreclosure or short sale is now five years.

Fannie Mae Tightens Guidelines Again

In the world of FICO scoring, there are three credit events that will severely sink a FICO score, and they all carry exactly the same weight. They are (1) serious delinquency, (2) derogatory public record or (3) collection filed. A homeowner in default is technically “in collection.” These events are reported to all three bureaus as “Score Factor Code #22.”

A foreclosure will remain on a consumer’s credit report in the “public records” section for ten years. In addition, this fact must be attested to on the loan application under “Declarations,” Section VIII, as follows:

(c) Have you had property foreclosed upon or given title or deed in lieu thereof in the last 7 years? (Y/N)

(e) Have you directly or indirectly been obligated on any loan which resulted in foreclosure, transfer of title in lieu of foreclosure, or judgment? (Y/N)

Because the term “short sale” is not expressly stated, some interpret this as meaning that a short sale is a lesser offense. The truth is, decision makers in the lending industry know that a short sale is no different than a foreclosure or deed-in-lieu. Here are two excerpts from a lender’s underwriting guidelines.

The following items are subject to individual evaluation, no matter how high the
credit score:
• Bankruptcy, foreclosure, deed-in-lieu, short sale.
• Judgments, collections, charge-offs, tax liens.

~ and ~

None in past 4 years with minimum 3 active trade lines more than 24 months old, with no late payments or derogatory credit after the foreclosure.

Definition of Foreclosure: Any 120 day mortgage late within the last 24 months, any notice of default or settlement on a real estate secured trade line (short sale), any deed-in-lieu or forbearance agreements.

To the homeowner with a mortgage he can no longer afford, the decision to voluntarily vacate through a short sale or be forced out by foreclosure can be agonizing. The sterling credit reputation it may have taken a lifetime to establish is gone with a single event. Most landlords with whom I’ve spoken state that, due to the widespread credit meltdown, they would view a foreclosure as not particularly onerous—provided that all other credit obligations were met on time. A credit report riddled with “derogs” over a broad category of obligations would be viewed negatively.

For the homeowner who, if he remains in default, must eventually vacate his home, there may be an emotional advantage to avoiding the social stigma of the “F” word—foreclosure. He can tell himself and his friends, “I’ve never had a foreclosure,” but to his lender and the credit bureaus, foreclosure and short sale are exactly the same.

This article is intended not as a judgment of the motive or character of a homeowner in distress, but to present the facts so that no one is misguided. There’s no credit preservation advantage to short sale over foreclosure. The nation’s two largest mortgage investors, Fannie Mae and Freddie Mac—with certain exceptions—won’t lend again for five years. A consumer’s FICO score will take a huge hit either way until responsible credit behavior supplants the major hit of foreclosure/short sale over a period of time.

This site is for informational purposes only. It is not sponsored or in any way affiliated with the government. If you are in need of a mortgage loan, consult with a licensed mortgage professional. All fair housing and equal housing opportunity laws apply when applying for a mortgage or buying a home. Copyright 2012.