What is a short sale? In its simplest form a Short Sale occurs when a lender sees that its position on an asset, (home loan) is about to go into default or already is in default due to non payment of the debt by the home owner. When this happens the lender then has two options. One, to foreclose on the property and in today’s market take a substantial loss. Or two, to allow the sale of the home for less than the amount owed on the note and minimize their losses.
Why would a lender do a Short Sale?
Lets face it the banks for the past 50 years have known that 5-10% of their borrowers will face a hardship (divorce, financial , loss of a job, unexpected medical condition, death, loss in income, job relocation, etc)
While most lenders will not be thrilled at the prospect of a short sale they are acutely aware that a foreclosure is usually a far more time consuming and costly option. In a real estate market where housing values are going down it is in the best interests of the lender to liquidate their problem loans as quickly as possible.
With a short sale a property can be sold and the loan taken off their books fairly quickly. If they pursue a foreclosure they run the risk of the process taking a substantial amount of time during which the value of the property is depreciating.
Also, buyers will tend to write low ball offers when they know that a bank or lending institution owns the property. The property will also be left vacant which can result in vandalism and deterioration. Some owners will even gut the house just before the foreclosure sale as a way to “get back” at the lender. This is illegal but nonetheless happens on occasion.
In addition the bank are not in the property management business. If they foreclose they will have to maintain the lawn, utilities, insurance. And in the end they will have to list the home and pay a commission anyway.
How does a homeowner know if they qualify for a short sale?
As the rate of defaulted loans continues to climb, the rules of the game are ever changing. When a homeowner decides to pursue a short sale for the liquidation of their property, a few hard and steadfast guidelines are present. One cannot hope to get a short sale of their property just because they decide to stop making their payments. Short Sales are designed to help people facing hardships, whether due to poor judgments with their finances or the cause of some unforeseen hardship like: loss of income due to death, divorce, illness, job relocation, loss of job, etc. The following is a list of basic requirements for your lender to consider a short sale.
Payment is delinquent. In the past lenders wouldn’t even consider a short sale on a note that is current. Times are changing and some lenders are being pro active and allowing short sales on properties that are current, but exhibit proof that the loan will become delinquent very soon.
The value of the home is such that when the property is sold for fair market value, all the costs associated with the sale such as; closing cost, Realtor commissions, and full payoff of the note cannot be realized.
Example: Your home is valued at $300,000, you owe $300,000. By the time you sell the property for $300,000 the costs for closing and Realtor commissions will total somewhere around $30,000. In this scenario the lender would only receive the remaining $270,000 (not enough to cover the $300,000 balance owed)
A hardship must have occurred. The lender wants to see what changed in the homeowner’s life that warrants the potential short sale. Homeowners wanting to quit making payments for other reasons won’t qualify.
Why would a homeowner pursue a short sale vs. foreclosure?
The simple answer is credit rating and the ability to limit future judgments. Lets look at some of the differences in short sale vs. foreclosure from a homeowner’s perspective.
Court Settlement can be high
Big Attorney Fees
No peace of mind
Hard to buy again with in 10 years
Deficiency could result in civil lawsuit
Negotiate the settlement
No attorney fees
Seller has piece of mind
You can buy again with in 2 years
Sellers can stay in the house longer
Zero money comes from the sellers pocket
As this illustration shows, doing a short sale keeps the homeowner in control and allows the process to be finalized without wondering what might pop up in the future. Another way to look at this is from the position of, what is there to lose in pursuing a short sale? The answer is nothing. If the sale cannot be obtained, the property will go to foreclosure. At least you have the peace of mind knowing you did everything possible to help the situation, rather than just sticking your head in the sand.
What Paperwork will I need in order to do a short sale?
The answer is you will be required to open up your life to a select few in order to get the short sale done. The lender requires proof that you the homeowner NEED a short sale. They will want to see the following:
Financial sheet showing all income and out going payments
Last two months bank statements
Last months pay stubs
Last two years tax returns or W-2s
How much time before the lender forecloses and I have to move?
Typically the short sale process takes 90 days. In most cases once the bank receives the short sale paperwork they will slow down and in many cases even stop the foreclosure once they receive paperwork from us. At that point it normally takes 90 days for approval. We can work with you if you need more time.
What if I have 2 mortgages and or multiple Liens?
We often see this we work with both banks or multiple banks on a short sale and any lien holders. Realize that any junior lien holders that means the 2nd mortgage and any 3rd mortgage or liens of credit or any other liens all are familiar with short sales and we work with each of them to get an agreeble settlement.
What If I cant pay the mortgage?
No problem if you cant pay the mortgage we recommend saving as much as you can for your eventual move. Most banks in a short sale scenario understand that you cant send payments.
What If I can pay the mortgage?
If you are in a position that you can pay your mortgage, that is ok. We process the paperwork and if the lender requires that you be behind in order to do a short sale that will be your choice. We see many cases where homeowners can pay the mortgage but upon their relocation or an upcoming event they anticipate they wont be able to. More and more lenders are allowing borrowers to be current while they evaluate the short sale. There is no cost to you to process a short sale with us and no adverse affect on your credit if you are paying your mortgage and requesting a short sale. The only time your credit is affected is if you dont pay your mortgage and or if the bank approves the short sale and you sell the home at the loss it well then appear on your credit report “Mortgage paid off for less than agreed”.
Implications for the seller/homeowner
When the short sale is finalized there are two main concerns on the part of the homeowner. One is the amount of debt that was forgiven…what happens to it? Example: you owe $200,000 and you get the short sale done for $150,000, there is now a $50,000 deficiency. In the past, the lender issued the homeowner a 1099, meaning the homeowner would be taxed on the $50,000 as if it were income. In January the President signed into law the Mortgage Cancelation Debt Relief Act which negates any taxes owed on forgiven debt. http://www.irs.gov/individuals/article/0,,id=179414,00.html
This bill only applies to your primary residence, not second homes and investment properties. The next concern is the remaining deficiency ( the losses the bank takes) could be sought after by the lender in the form of a deficiency judgment. Most banks now put in writing they will waive the defficiency judgement. While the lender has the legal right to go after that money, many factors play a role in determining whether or not the lender pursues it. One is, if it’s made part of the agreed upon short sale that any deficiencies will be waived then you are in the clear. In the event the lender won’t agree to put it in writing that they waive their rights, most lenders won’t pursue the deficiency judgments because the homeowner is insolvent anyway and the short sale wouldn’t have been authorized in the first place.
How does the homeowner know who to trust when choosing someone to help them?
We get asked this a lot. We recommend that whomever you work with you ask for references, ask them to show you prrof that they received short sale approvals, and it helps if they have helped hundreds of homeowners like we have, and if they are licensed like the staff that we have.
Deed in Lieu VS. Foreclosure
So your buddy’s best friend tells you to just do a deed in lieu rather than a short sale. A deed in lieu of foreclosure is where the homeowner give the deed back to the lender and walks away. No foreclosure right? Not exactly, when a deed in lieu is done your credit report will state; “Deed in Lieu.” In a creditors eyes, it’s no different than a foreclosure, you’ve walked away. Another misconception is that it’s something you can just decide to do. It’s not, the lender has to agree to it. A few reasons they won’t agree is, there’s no equity in the home for the lender to recoup all of their costs. They would rather have you sell it and do a short sale. If there’s more than one mortgage encumbering the property the lender will not accept a deed in lieu. As you can see the deed in lieu really has no real benefits even if the lender does allow it.