What Is a Short Sale? A Guide for Military Home Sellers
Short and tight PCS timelines often prevent military homeowners from selling their houses for an amount that is more than they owe on the mortgage. You could find yourself trying to pay for two households if you can’t sell your home before the PCS. One solution to avoid financial hardship is to consider a short sale.
What Is a Short Sale?
A short sale is an offer on a property that is less than the amount the sellers owe on the mortgage.
Any money earned from the sale goes directly to the lender, and the seller doesn’t receive any proceeds.
The most common reason homeowners consider a short sale is financial distress or inability to pay the mortgage and, ultimately, to avoid foreclosure. But other hardships include mountains of medical bills, divorce, or job loss. A short sale may negatively affect the homeowner's credit score and tax liabilities, but less so than moving into foreclosure.
Karen Hall, a real estate agent and broker who serves the military community throughout the Washington, D.C. metro area, discusses in this video the advantages and disadvantages of a short sale for military home sellers and buyers.
Video: What Is a Short Sale?
What to Expect With a Short Sale
The short sale negotiation process is heavy on paperwork, time-consuming (expect at least a few months), and challenging. You should work with experienced professionals like an attorney, real estate agent, and tax pro to help lighten the load.
You’re essentially asking your lender to accept less money than what you owe on your home, so they won’t be in a hurry to release you from your obligation, especially if you haven’t missed payments yet. Your lender also might deny the short sale if they think they could get more money from a foreclosure.
Your lender may decide to forgive the balance or move forward with a deficiency judgment that could require you to pay all or some of the difference from the sale. Your location and state affect the short sale’s details.
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VA Compromise Sale
You may have heard a VA Compromise Sale called the “short sale of VA loans.” It’s similar, but with a VA Compromise Sale, the VA pays the gap between the amount owed and the current market value up to the loan guarantee amount so that the private sale can proceed through traditional financing or VA loan assumption.
You’ll have to meet these criteria to be considered for a VA Compromise Sale: (below info from the VA)
- The property must be sold for fair market value.
- The closing costs must be reasonable and customary.
- The compromise sale must be less costly for the Government than foreclosure.
- There must be a financial hardship on the part of the seller.
- On loans that originated on or before December 31, 1989, the lender must be willing to
write off any debt above the max guaranty.
- There must be no second liens or other liens (unless the amount is insignificant). In
situations whereby there are second liens or other liens, the seller can request that the
lien holder consider releasing the lien and converting the loan to a personal loan.
- The seller must first obtain a sales contract in order to be considered for the program.
- To protect the seller’s interest, the seller should make the sales contract contingent and/or subject to the approval of a VA compromise sale.
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Why Should Military Members Choose a Short Sale?
Servicemembers should seriously consider a short sale to avoid foreclosure and damage to their credit. The good news is that in 2012, the Federal Housing Finance Agency (FHFA) changed its short sale policies to protect military homeowners with Fannie Mae and Freddie Mac-backed mortgages.
There’s a good chance if you have a home loan, Fannie or Freddie is involved. You can check Fannie Mae’s Know Your Options or call the Fannie Mae military hotline at 1-877-MIL4566 and the Freddie Mac military hotline at 1-800-Freddie for more information. If Freddie and Fannie aren’t attached to your loan, you’ll have to dig in and find out if your investor allows short sales and, if they do, the details of the process. Not every lender uses the same parameters.
Under the FHFA guidelines, PCS orders qualify as a hardship. They also say:“Servicemembers with PCS orders will be:
- eligible for a short sale immediately, even when they are current on their existing mortgage (the PCS order is treated as a hardship to deem them eligible);
- exempt from deficiency judgments from Fannie Mae and Freddie Mac when receiving permission for a short sale; and
- relieved of any request or requirement for a cash contribution or promissory note so long as the property was purchased on or before June 30, 2012, (to apply personal assets to cover the shortfall after outstanding unpaid principal balance and sales price)."
If you have official PCS orders, you can take advantage of the short sale leniency provided by the FHFA. But to qualify for a short sale, you must meet these eligibility requirements:
- “The person must be in the military and have a PCS order.
- The existing mortgage must be owned or guaranteed by Fannie Mae or Freddie Mac.
- The service member can be current or delinquent on their mortgage to apply for a short sale.
- The property must have been purchased on or before June 30, 2012.”
The Pros and Cons of a Short Sale
A short sale really is a last resort situation, but there are a couple of silver linings to focus on if it's your only option.
Pros of a Short Sale
- Short sales mitigate adverse action on your credit report.
- Lenders generally prefer a short sale vs. a foreclosure to recoup their money.
- PCS orders qualify as a hardship, so you can take advantage of FHFA short sale policies.
Cons of a Short Sale
- The process is intense and could continue for several months to over a year.
- There’s a solid chance your bank won’t approve a short sale even after the process.
- A short sale is not a DIY situation. You’ll need a team of experienced professionals.
A short sale isn’t something you should depend on if you’re struggling with mortgage payments, but it could be a helpful tool in dire straits or if a pending PCS is hampering your sale. Work with qualified real estate professionals to help you make the best decision to avoid foreclosures and credit damage.
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