subject: Consent and Credit Implications of Short Sales by Hayes Law Center [print this page] Consent and Credit Implications of Short Sales by Hayes Law Center
Hayes Law Center: Consent and Credit Implications of Short Sales by Hayes Law Center
Short sales are generally different from foreclosures in that a foreclosure is forced by a lender, whereas both lender and borrower consent to a short sale. Hayes Law Center informs that, however, this consent may change at any time, and negotiations may be ongoing between the lender and borrower even while the short sale is on the market. The borrower may also decide to remain and refinance their house, or become obstinate and force foreclosure. The bank may renege as well if they decide to stick with the current borrower, or if they disapprove of the sale price. Hayes Law Center adds that any short sale contract includes a contingency where the bank must approve the sale.
In the state of California, for instance, short sales can be tricky in that it is important for the party handling the deal to advise the seller to seek the advice of an attorney and a CPA. Hayes Law Center explains that there could be tax consequences if the loan(s) on the property are not purchase money (all the funds needed to purchase the property). On the other hand, if the loan and/or loans on the property are purchase money, then Hayes Law Center points out that the loans are considered "non-recourse" and the debt is generally forgiven and satisfied at the end of the short sale.
Changing consent can present a perilous situation for potential buyers. It can waste considerable time and money for a prospective buyer who anticipated a sale. Hayes Law Center has found that, typically, deposits with the bank will be refunded but money for paid inspections or other services cannot be.
There are actually several defenses against this. Hayes Law Center notes that if the seller has moved out of a property, that is a clue that they have no intention of staying or negotiating further with the bank. "Bank Approved Short Sales" are advertised by real estate advertisements, indicating that a real estate broker has verified the selling bank's position. Hayes Law Center goes on to explain that this still does not guarantee acceptance, and it often does not take junior lien holders into account, but it is better than situations where the bank holding the mortgage has only been lightly involved in the borrower's decision.
Credit implications
Hayes Law Center sheds light on the fact that short sales are a type of settlement, and they adversely affect a person's credit report. The negative impact may be less than a foreclosure, but in some cases the effect is the same. Short sales do not show on a credit report according to the Distressed Property Institute, like all entries except for bankruptcy. The credit will restore within 18 months or so. Depending upon other credit information, it is possible to obtain another mortgage 13 years after a short sale, or less if the borrower is current at the time of the sale.
While lenders sometimes forgive the remaining loan balance, Hayes Law Center highlights that other lien-holders likely will not. Further, it is possible for a lender to omit updating mortgage balances zero balance after a short sale. Willfully misrepresenting information on a credit report, however, can constitute libel in some jurisdictions, and lenders may be sued in civil court for engaging in this behavior.
Short sale success rates vary from state to state and from bank to bank. Bank of America short sales, as of 2009, had the longest approval times and the highest failure rate. Smaller "local" banks tend to have their own rules, but will typically approve the short sale in days, not months.
