Real Estate Law

Short Sale FAQ

A short sale is less common than a homeowner going into foreclosure, but it is an option that can benefit all parties involved. When mortgage payments are getting out of control, you can talk with your lender about the short sale process before deciding to allow your home to go into foreclose.

Will Selling My Home in a Short Sale Affect My Credit Score?

Yes, selling your home in a short sale will negatively affect your credit score. How much it changes your score depends on many factors, such as:

  • Your payment history
  • Your ability to pay other debts
  • The amount of money the lender forgave in your short sale

How Many Points Will My Credit Score Change in a Short Sale?

Typically a short sale home will reduce a borrower's credit score between 50 to 200 points.

In most cases, the short sale will be an entry on your credit report that says something similar to "paid in full; settled for less than originally owed."

Is a Short Sale Better for My Credit Score?

Typically the damage to your credit score from a short sale is much less than a foreclosure or bankruptcy. Having bankruptcy or foreclosure on your record can be seriously damaging to your credit score.

When considering your credit score, most borrowers think a short sale is better than filing for bankruptcy. It will likely preserve your credit history and be easier to repair the damage over time.

Is Short Sale a Good Idea If I Have Other Debts?

Yes, it can be a good idea. Choosing to resolve your mortgage debt problems through a short sale will damage your credit for a while. But, it will likely put you in a much better financial situation. Without the high payment amount of a mortgage, the hope is you can improve your credit score by paying off other debt.

Do I Pay Realtor Sales Commission in a Short Sale?

In a short sale, the homeowner has no money in escrow to pay commissions. The lender ends up paying the real estate agent's sales commission instead. From the moment the short sale happens, the profits belong to the lender, so they need to take care of the fees and commissions. The commission is typically 6% of the home's sale price.

Do I Pay Closing Costs in a Short Sale?

No, you will not pay any closing costs. When the home is sold for market value during a successful short sale transaction, the mortgage lender will take control of the sale and profits. It is up to them to handle the closing costs of the real estate transaction and work with the listing agent and buyer to complete the sale.

What Are Alternatives to a Short Sale?

You may be able to arrange a different option if your mortgage is in trouble. You can consider:

  • Loan modification from your lender
  • Refinance the loan with another mortgage company's lender
  • Bringing your loan balance up by paying the entire amount past due
  • Filing for bankruptcy
  • Use a deed in lieu of foreclosure

What Is "Deed in Lieu of Foreclosure?"

After a "good faith" effort to sell your property, your lender might consider a different approach. A deed instead of foreclosure means the homeowner voluntarily gives up their homeownership and transfers the property title to the mortgage company.

This process is only allowed when the property does not have:

  • Mortgages
  • Liens or lien holders
  • Other encumbrances

When completed, the deed in lieu of foreclosure means the property belongs to the lender, who can sell it. Selling it gives money back to the mortgage company to help make up the money they lost.

How Do I Qualify for a Short Sale?

You need to talk to your lender about not being able to pay your mortgage payments. This can happen because of job loss, illness, financial hardship, or lifestyle changes. You may need to write a hardship letter that explains your situation and your need for a new home that is more affordable.

You will also need to come up with a short sale package. This is a series of documents used to get short sale approval from the bank. You will likely need to include:

  • Federal Housing Administration (FHA) loan documents
  • Past deficiency judgments
  • Documentation from a Housing and Urban Development (HUD) counselor
  • Bank statements and financial statements
  • Tax returns
  • Credit card statements or information
  • A fair market value list price of the property