A short sale is a real estate term that describes a home owner being approved by their lender to sell a property for less than the amount owed on the original loan. In most cases, the lender that agrees to the short sale will agree to forgive the remaining debt.
There was a time when banks would not authorize a short sale unless a person’s account was in default, but those times have changed. The economic climate has led banks to a point where they will approve a short sale as soon as a home owner even thinks that they might not be able to make their payments on time. Since banks try not to make a habit out of forgiving debts, they want to make sure that a request for a short sale is legitimate. Many banks will require the person requesting the short sale to provide a written letter outlining the hardship that is requiring them to pursue a short sale. Don’t feel bad for the banks, they will try every possible angle to make back some, if not all, of their losses from a short sale. One popular tactic is to list the house below market value in an effort to attract more bid offers, which will drive the cost of the home back up.
One popular question that folks have who are thinking about a short sale is something to the effect of “will this hurt my credit”?
The short answer to this questions is: It depends. There are some who make the argument that a short sale won’t hurt a credit score, others say that it will, and some say that it will but not a lot. In all honesty, each case will be different. We have to remember that other factors affect credit scores. A person who defaults by 60 days before making a short sale may have less of a damaged credit score than a person who defaults 120 days before making a short sale. Also keep in mind that many folks don’t consider a short sale until they become delinquent in payments, so their credit score is already under attack, even without the short sale.
One has to weigh the benefits and costs of conducting a short sale. Most people consider being able to get the debt collectors off of their back as a benefit. It may also be possible for a person who resorts to a short sale to request another home loan after 2 years or less, instead of the 5 to 7 year wait for foreclosures.
Keep in mind that if a person is considering a short sale, then things are already bad and probably getting worse. Most real estate professionals would agree that more damage is done to a person’s credit score when they fail to act and choose to ignore their problems, forcing a bank to pursue foreclosure, than when they accept their position and attempt to do something about it. If the option is going to be given, a short sale should always be pursued before a foreclosure. If anything derogatory is going to show up in a personal financial history, then why not make every effort to ensure that the derogatory comment causes the least amount of damage possible.