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New Purchase After Short Sale? Uh … How?

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Posted On: 04/16/2014

Question: A few weeks ago you wrote about a couple who had a short sale and then purchased a replacement home six months later. How is this possible? Isn’t a short sale a situation where someone can’t pay their mortgage?

Answer: In the usual case it’s difficult to imagine how someone can have a short sale and then purchase another home just a few months later, but it can happen.

Imagine that the authors of the original letter lived in one of number of states where lenders in certain circumstances cannot get deficiency judgments – that is, the right to go after a mortgage borrower for unpaid debt beyond the fair--market value of the house. So-called “anti-deficiency” rules vary widely, so you need to have a local attorney provide details.

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Faced with the choice of a foreclosure or a short sale – especially in an area with depressed home prices and no ability to extract a deficiency judgment – a lender might actually be ahead with a short sale. Why? Because lender losses from a foreclosure can be substantial, and the value of the property might decline further if the foreclosure process stretches on for months and perhaps years. Worse, if the property finally goes to auction and doesn’t sell to an outside bidder, the lender might wind up owning the home, thus making it “real estate owned” by a lender, which often sells at a substantial discount. Meanwhile, with a short sale, the lender quickly gets the property off its books and damages are limited.

As to the replacement property, our original letter writers did not say they got a mortgage six months after the short sale. They bought the new home for cash and then wanted to refinance in order to get some cash out of the property.

Will borrowers who have had a short sale be able to get financing on the new home? Maybe. A short sale is a tough financial event that knocks down credit scores with an impressive thump, but it may be possible to get a new mortgage in a fairly short time. As an example, with the FHA’s “Back to Work” program qualified borrowers may be able to get a new loan in as little as a year if the loss of the home was the result of unemployment or severely depressed wages. Borrowers who have had a short sale or foreclosure should speak with lenders to determine what financial options may be available to them. For some, the process of financial healing might be surprisingly quick.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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