Short Sales

Bankruptcies and foreclosures can remain on a credit report for 7 to 10 years. There are lenders, however, who will consider an applicant who went through a bankruptcy as recently as two years ago, as long as good credit has been reestablished.

Depending on when the bankruptcy was discharged and what kind of credit a borrower has reestablished since then, it needn't be an obstacle to obtaining loan approval The longer ago the discharge occurred, the better off a loan applicant will be. Also, depending on the circumstances surrounding the bankruptcy, lenders will lean one way or the other. For example, if a borrower went through a bankruptcy because his or her company had financial difficulties owing to, say, defense industry cutbacks, that says one thing to a lender. If, however, a borrower went through bankruptcy because he or she over extended personal credit lines and lived beyond his or her means, that says quite another thing.

A foreclosure or distressed sale begins when the owner stops making the mortgage payments. After the delinquent owner has missed several payments, the lender will record a notice of default against the property. There are typically three opportunities to buy a foreclosure:

  • After the borrower is delinquent on the mortgage payments but before the trustee sale.
  • At the trustee sale.
  • Or from the foreclosing lender after the trustee sale.

Dubbed a "short sale", home sellers who are upside down on their mortgage and the home's value can sell for less than the amount of the mortgage. Sometimes home owners can negotiate with lenders and have them split the difference between the sale price and loan amount, which still must be paid. A short sale may be complicated if the loan has been sold into the secondary market because then the lender will have to get permission from Fannie Mae or Freddie Mac to negotiate a short sale. Fannie Mae says the secondary market giant has a policy of looking at each loan individually. If the loan was a low down-payment mortgage with private mortgage insurance (or PMI), then the lender also must involve the mortgage insurance company that insured the low-down loan.

Sellers sometimes pay for all or a portion of the closing costs involved in the sale of a property, depending on local real estate market conditions, other terms of the purchase contract, the seller's cash and timing considerations.

Seller concessions, as they are known in real estate jargon, for at least part of the closing costs are more common in a buyer's market than in a seller's market. These concessions will typically be agreed upon during the offer, counteroffer acceptance cycle, though sometimes a seller will make further concessions during the escrow process. Such concessions would generally be acknowledged in the form of an addendum to the purchase contract.

In addition, most lenders will allow a credit from the seller to the buyer for the buyer's nonrecurring closing costs. But they usually won't allow a credit that reduces the amount of the buyer's down payment, or that includes any of the buyer's recurring closing costs, which include such expenses as fire insurance premiums, interest on the buyer's new loan, property mortgage insurance and property taxes. Lenders' policies vary on how large a credit for nonrecurring costs they'll allow.