What can you tell me about short sales?

[b&c'smama]

Has anyone done a short sale on their house? We are in our home upside down and want to sell for a variety of reasons ~ financial and quality of life. We don't want the bank to forgive anything, just want them to carry a note we could then pay back. We tried applying for a loan for the difference ahead of time and were declined due to debt-income ratio (have a large amount of debt due to husband's business), and a recently dropped FICO score (our score is not really low, just not as good as it used to be due to late CC payments, which I am now kicking myself for :!) Bank suggested waiting several months until FICO score improves. Then our realtor came back with the idea of a short sale. If we sold the house, our debt income ratio (not to mention our overall financial situation) would be significantly better because we would be able to live in our other home mortgage free. Would love to hear pros and cons from those of you in the know!

[SleeplessMommy]

Since you have another house to live in, a short sale sounds like a good idea. I am not a fan of owning houses just to wait for their value to increase. Is the home currently on the market? Your agent should be able to advise you about how to negotiate with the bank.

[b&c'smama]

Thanks SleeplessMommy!

No, our home is not on the market yet. We didn't realize a short sale was an option for us, so we had tried going to the bank first to get pre-approved for a loan for the difference between the selling price and the two mortgages on the home. When they said no we thought we'd hit a dead end. When I called our realtor to tell her we wouldn't be able to list the house after all, she suggested a short sale. She said that the bank will not necessarily tell you about this option.

From our vantage point, it doesn't seem like there are any down sides to short selling, but I'm concerned that we're missing something. As I mentioned in the OP we are not interested in the bank forgiving some of the second mortgage (we would have ethical issues with that), we just want to restructure the remainder into a loan. Does a short sale impact your credit rating, etc in any way?

[annethcz]

Yes, a short sale does impact your credit.

[b&c'smama]

Can you explain how? My Realtor said it did not, but I wasn't sure if she was correct.

[b&c'smama]

Yikes!!! I googled "short sale" and "credit score" and found this:
http://homebuying.about.com/od/4clos...07SScredit.htm

According to this article:
"The effect of a short sale on a seller's credit report is identical to that of a foreclosure. The ding on credit will show up as a pre-foreclosure in redemption status, Steep says, which will result in a loss of 200 to 300 points. This means a short sale with a previous FICO of 720 will see it fall from 520 to 420."

Not good, I think we will stay clear! Thanks Annthcz!

[SleeplessMommy]

Can you take a home equity loan on the paid-off house to cover the difference?

[b&c'smama]

Originally Posted by SleeplessMommy

Can you take a home equity loan on the paid-off house to cover the difference?

Thanks for the idea, but right now we are turned down for any loan due to debt-income ratio; We took on a lot of debt to buy dh two franchises, which are generating enough income to pay down on the debt... but nevertheless the bank looks at the total debt and our lowered FICO score.

We are actually OK, compared to many people right now. We definitely are feeling the pinch and dh's restaurants sales are down a little due to the recession, but we're staying afloat. I will get a part time job and we will try again when our FICO score improves. Our banker said that once it gets to 720 there won't be a problem.