Does a short sale hurt your credit?
In the end, short sales are almost always damaging to your credit, but they do less harm than foreclosures or bankruptcies. A short sale might block you from a mortgage on a new home for two years or so, but a foreclosure or bankruptcy could keep you out of the market for as long as seven to 10 years.
You cannot remove a short sale from your credit report unless the information listed is incorrect. If the entry is an error, you can file a dispute with the three major credit bureaus to have it removed, but the information will remain on your report for seven years if it is accurate.
Is a short sale good or bad for buyers? Short sales can provide a good opportunity for buyers to purchase a home at a bargain price. However, the approval process with the (seller's) lender can sometimes be lengthy, which can be challenging for buyers who are seeking a quick sales process.
All of the proceeds of a short sale go to the lender. The lender then has two options—to forgive the remaining balance or to pursue a deficiency judgment that requires the former homeowner to pay the lender all or part of the difference. In some states, this difference in price must be forgiven.
Just because a seller accepts a short sale price doesn't mean that the lender will, and the list price may be far below what the lender wants. Banks may reject offers when the price is low, the seller or buyer doesn't qualify, the application is incomplete, or the loan has already been sold.
If your score is in the 750-800 range, it could easily drop 150 points in a short sale, maybe even more. If you have an average or even good credit score (something in the 650-720 range), you could lose 100 points after a short sale and fall into what lenders call “subprime” category.
As you can see, both foreclosures and short sales can negatively impact your credit score and make it harder to pursue future financial opportunities. Foreclosures are the result of consistently missing mortgage payments, while short sales may occur due to lack of funds to cover all your debts.
The short sale is often preferable to a foreclosure, but it is not a resolution to all a homeowner's financial woes. Aside from potential tax liability and credit implications, if the homeowner is expected to pay the difference between the sale price and the mortgage, that can compound the financial difficulty.
Short sales are considered a risky trading strategy because they limit gains even as they magnify losses. This type of transaction is also accompanied by regulatory risks. Near-perfect timing is required to make short sales work.
Put simply, a short sale involves the sale of a stock an investor does not own. When an investor engages in short selling, two things can happen. If the price of the stock drops, the short seller can buy the stock at the lower price and make a profit. If the price of the stock rises, the short seller will lose money.
Do you still owe money after a short sale?
After the short sale is completed, your lender might call you or send letters stating that you still owe money. These letters could come from an attorney's office or a collection agency and will demand that you pay off the deficiency.
Banks are businesses and, just like any business, they are seeking to earn a profit. If it costs more to foreclose over agreeing to a short sale, the bank is very likely to favor the short sale. With foreclosure, a bank takes possession of the house, then resells it at a mortgage auction to the highest bidder.
A lender may refuse to approve a short sale in the following circ*mstances: 1) if the homeowner is not in default on mortgage payments yet; 2) if they believe more money can be recovered from foreclosing on the property; 3) if there is a cosigner they can hold responsible for payment.
Short sales are a safer alternative to foreclosures for both sellers and their lenders, which is why you often can find them priced just below market value. However, a short sale transaction is far more complex than your average sale, and can therefore involve a lot more risk.
A short sale can get a homeowner out from under a high-debt home. These sales can offer good deals to home buyers and sellers alike. Homebuyers looking for a good deal on a property purchase can get a price break on a short sale - if they understand the short-sale process completely.
In some cases, banks have been known to approve short sales priced between five and 10 percent under market, but that depends on the property and area. Another aspect of due diligence is calling the listing agent.
They include Alaska, Arizona, California, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah, and Washington. If you live in one of these states, you won't have to pay federal or state taxes on any amount of canceled debt that comes with a short sale.
The lender is presented with an offer, accepted by the seller, along with a completed short sale package and narrative explaining why the short sale is necessary and desirable. The lender approves the offer and escrow closes as usual. No proceeds go to the seller.
The popular belief was that sellers couldn't profit from a short sale. However, there are actually a few ways that sellers can get paid to do a short sale. Not all of them are legal, though, so it's important to do your homework.
The seller could have paid or borrowed too much for the property. The housing market may have dropped, so its fair market value is less than the current mortgage balance. This might sound like a good deal for the buyer, but these homes usually sell "as is" and can take longer than normal to close.
What is the short sale rule?
Under the short-sale rule, shorts could only be placed at a price above the most recent trade, i.e., an uptick in the share's price. With only limited exceptions, the rule forbade trading shorts on a downtick in share price. The rule was also known as the uptick rule, "plus tick rule," and tick-test rule."
A "deed in lieu" is a transaction in which the homeowner voluntarily transfers title to the property to the bank in exchange for releasing the mortgage (or deed of trust) securing the loan. Unlike with a short sale, one benefit to a deed in lieu is that you don't have to take responsibility for selling your house.
One of the main benefits of short selling is more efficient price discovery—the process by which the market determines the price of an asset based on supply and demand dynamics. When short sellers identify securities they view as overvalued, they sell those assets and put downward pressure on prices.
It is widely agreed that excessive short sale activity can cause sudden price declines, which can undermine investor confidence, depress the market value of a company's shares and make it more difficult for that company to raise capital, expand and create jobs.
In fact, short sellers are often reviled as callous individuals out for financial gain at any cost, without regard for the companies and livelihoods destroyed in the short-selling process. Short sellers have been labeled by some critics as being unethical because they bet against the economy.
References
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