What Are The Benefits of Doing a Short Sale?

The main reason why a homeowner would do a short sale is to preserve their credit. It is widely viewed that a short sale is better than a foreclosure on a credit report. Homeowners don’t like the idea of having a foreclosure on their credit report for seven years or more, possibly affecting their future applications for housing, credit cards, student loans, employment opportunities, car insurance, medical insurance, and other financial products.

In particular, there is a very distinct difference between a short sale and a foreclosure when it comes to mortgage lending. The two largest mortgage entities are Fannie Mae and Freddie Mac. In their underwriting bulletins, where they provide instructions to mortgage brokers, they clearly state that they will back a loan to a short sale participant in only three years, but people who let their house go to foreclosure must wait seven years.

One recent change in the Fannie Mae policy is in regard to their view of a Deed in Lieu of Foreclosure (DIL). A DIL is when a homeowner voluntarily surrenders the title to their house to their lender in exchange for a full release of liability. Typically, most lenders will not entertain a DIL request unless the borrower has first attempted a short sale. Fannie Mae considers a DIL to be comparable to a short sale in terms of their future borrowing restrictions. Many homeowners still try to avoid a DIL, as it is their impression that a DIL on a credit report is as bad as a foreclosure.

Another main reason why homeowners attempt a short sale is to attempt to get a full settlement on their mortgage debt. In particular, when a homeowner has two loans on a property, there is a good chance the second position lender will want to simply release their lien, but retain their deficiency rights. In many cases, for the cost of 10-30% of the balance, the entire note can be retired during the short sale process

Lastly, there are many homeowners who simply believe it is good practice to try to settle their debts in the most cooperative fashion possible. It is their belief that by cooperating with their lenders, that a more favorable settlement can be reached.

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