Common Short Sale Myths Dispelled
Thanks to key changes in the program, completing a short sale through Freddie Mac is taking less time than ever before. The company's Senior Vice President Tracy Mooney, writing in Freddie Mac's Executive Perspectives Blog, said that despite the improvements and that short sales are an important tool for helping distressed homeowners avoid foreclosure and eliminate their mortgage debt, they remain a mystery to many who might benefit from them. In her occasional column "Dispelling the Myths" Mooney lays out eight misconceptions about short sales and the facts she says every distressed homeowner should know.
The first myth is that the homeowner will be responsible for the entire amount owed on the mortgage. Under the company's Standard Short Sale program, borrowers who complete a short sale in good faith and in compliance with all laws and Freddie Mac policies will not be pursued for the after-sale mortgage balance. However, if a borrower has the financial ability he/she may be asked to make a one-time payment or sign a promissory note for a portion of that balance.
Many homeowners think a short sale is not possible for an investment property or second home. Mooney said the important factor is whether the borrower meets the program's eligibility requirements, not the status of the property itself.
The third myth is that a homeowner must be delinquent on the mortgage to be eligible for a short sale. A homeowner who is current must meet the general eligibility requirements for the program and have a debt-to-income ratio greater than 55 percent. In addition, in this case the property must be the homeowner's primary residence.
Homeowners sometimes presume they won't qualify because of their servicer's strict guidelines about short sales. But Mooney says that Freddie Mac has increased the authority of its servicers to approve short sales for qualifying financial hardships for homeowners who are past due or current on their mortgage. Servicers also now have independent authority to approve short sales without a separate and potentially time-consuming review by the mortgage insurance company.
Myth #5 is that a short sale will affect a homeowner's future eligibility for a mortgage. If the financial difficulties arose from circumstances outside the borrower's control such as job loss or a health emergency he/she may be eligible for a new Freddie Mac mortgage with a minimum of 24 months acceptable credit after the short sale. If the short sale was necessitated by personal financial mismanagement the buyer might need 48 months of acceptable credit to obtain a new Freddie Mac loan. Mooney advises all homeowners to begin discussions with a lender two years after the short sale closes to find out about specific requirements in their individual case.
Many people think that short sales can take a long time but Mooney reiterates that under the new guidelines timelines are shorter than ever. Servicers now have 30 days to make and communicate a decision once they receive a completed application and, once approved, the sale should take less than 60 days to close. She says that working with an experienced real estate agent might further speed the process
It is also a mistaken belief that having a second mortgage will make a short sale impossible. If other eligibility requirements are met a second mortgage is not necessarily a barrier because Freddie's short sale program can offer second lien holders up to $6,000 to release their lien and extinguish the underlying debt
The final myth is that a short sale will ruin a homeowner's credit. While only the credit reporting agencies can determine how a credit score will be computed it is possible that a short sale could be less damaging than a foreclosure. Even if this isn't the case a short sale can give a homeowner time to arrange other housing and exit homeownership gracefully.
Mooney says a homeowner should consider a short sale if
- He/she does not qualify for any options to keep the home;
- Needs to move in order to keep or obtain employment.
- Doesn't think the home will sell at a price that will cover the outstanding mortgage amount.
The first step in the process is to determine if Freddie Mac owns the mortgage by using its Loan Look-up Tool. If it does the next step is to contact the mortgage servicers. Contact information, Mooney says, should be listed on the monthly mortgage statement or in the coupon book.