A short sale is the sale of a home when the sales proceeds do not fully payoff the existing loan(s) and the costs associated with the sale of the property. This is done to avoid foreclosure.
Things to avoid if you get behind on your mortgage(s) payment(s).
Do not deed your property to someone else without confirmation of the payoff of the existing loan(s). If you relinquish control of the property to someone else that does not make payments, your credit will be ruined even if you do not still own the property. The lender made the loan to you.
Do not pay someone to negotiate a reconstructing of your loan or work to negotiate with the bank. This is something you can do on your own at no charge. Frequently people offering this type of service take the fee and never do any work. The result is the property going to foreclosure.
Do not become immobilized. Doing nothing will not help resolve the problem. Hope is not a strategy. The clock keeps ticking.
Never ignore lenders phone calls or letters. Failure to communicate says you don’t care.
What hardships does the lender consider to be legitimate?
Common hardships frequently accepted by the lender are:
Family illness or injury
Job relocation when the property lacks the equity for the current market
Job loss or significant income loss
Divorce or split of domestic partners
Mortgage payment adjustments beyond the owners capability
Why would a lender agree to accept a short sale?
Legal concerns influence lenders to attempt to resolve situations with borrowers when they have made an effort to arrive at a compromise.
Lenders want to keep a good reputation on the secondary market for the performance of their loans. Therefore a short sale resolves the situation quickly and for a known amount with a justification they can present to their investors and the regulators.
Asset management expenses can be an unknown if they are to take the property back in a foreclosure proceeding. Especially if the market has a lot of competing REO properties. One of the questions lenders will ask is the number of REO’s in the community as well as the specific neighborhood of the subject property.
Lender reserves will be tied up on non-performing loans which will limit the amount of money the lender can put into the market for investment. This dramatically affects their ability to make money.
What can I do to Avoid Foreclosure?
Here are some possible options to avoid foreclosure on your home if you are currently at risk of losing your home.
Reinstate your loan and bring payments current.You have the right to fully reinstate your loan within 90 days of being served with a Notice of Default (NOD).BE sure to call the lender for the total amount necessary for reinstatement.Usually the deed of trust states that you must pay all of the lenders fees and costs.
Repayment Plan: Always attempt to negotiate a repayment plan before filing a Chapter 13 bankruptcy. Usually your lender will not give you a repayment plan after a file of bankruptcy. Have an attorney review any repayment plans you may work out since they could have an effect on future remedies to your financial situation. You can negotiate to have the foreclosure case dismissed during the repayment plan.
Redemption: The act of paying off your loan in full. This occurs either through a sale or a refinance of the property. If you are planning on correcting your financial situation by selling the home, keep in mind the two things the lender will look at if they find themselves owning the property as an REO: Price and Condition. These two factors have the greatest impact on successfully finding a buyer for a property. “Neutralize” the home by painting the walls a neutral white tone and install beige carpet to appeal to the greatest number of buyers.
Refinance: This is an option but usually not viable since the homeowner’s credit is damaged due to their financial situation. Be careful since refinanced loans frequently have prepayment penalties which may impact the sale of your home and be aware of the type of loan and escalation clauses.
Loan Modification: This refers to changing the terms of the loan.These are rare.
Bankruptcy: Filing bankruptcy will stop the foreclosure case.A bankruptcy can be filed anytime before a foreclosure sale.For most people, this should be the last option.
Deed in Lieu of Foreclosure is a surrendering of the property to your lender in full satisfaction of the amount owed. By accepting the deed, the lender releases you from personal liability on the loan. Lenders will not accept a deed in lieu of foreclosure if there are other liens on the property. You will also need to move out of the house shortly after you sign the deed in lieu of foreclosure.
Whom do I talk to about a short sale or any of the other remedies?
The first step is to call the account servicing company to discuss your particular situation. If you are already in default (not making your payments), then you will need to talk to the Loss Mitigation Department. You can get pre-qualified for a short sale.Due to Privacy Issues, the lender will only speak to the borrower of record on the loan.
I have two or more loans on the property, what can I do?
Be talking to both lenders at the same time. If the holder of the second and/or third doesn’t know what is going on they cannot make decisions about protecting their position.
How long do bankruptcies and foreclosures stay on a credit report?
Bankruptcies and foreclosures can remain on a credit report for seven to ten years. Medical bankruptcies and bankruptcies as a result of losing a job or events that were unavoidable, involuntary or beyond your control are considered more favorably than a bankruptcy resulting from living beyond your means. Avoid foreclosure whenever possible.
Are there any tax consequences to a short sale?
Get advice from a CPA regarding the tax consequences of doing a short sale. The IRS may view the deficiency on a non-purchase money loan as income and demand you to pay taxes on that amount.
What does the lender need to consider a short sale?
Packaging your request is EVERYTHING!
These are the items the lender may request.
Your past 2 years tax returns
Letter of hardship (refer back to the items considered by the lender as hardships)
Owner’s financial statements
A property profile with a complete broker price opinion (CMA). Be sure to include the REO and foreclosure competition as well as new construction competition in this report. Remember, these account servicing departments are not usually located in the subject property community so your opinion of value has to educate them on the local market.
2 months pay check stubs
Loan approval letter for buyer’s new loan subject only to appraisal and accepted contract
A complete copy of the contract
Estimated net/cost sheet
Copy of an appraisal if available
Copy of the MLS printout
Preliminary title report
What is a Forbearance Agreement?
A forbearance Agreement is a written agreement with your mortgage company to arrange to keep your home. Usually there are two parts to these agreements. One is to keep your payments current going forward and the second is some kind of plan for making up the delinquent interest and other charges.
Why would the lender do a short sale?
Aside from the other reasons already cited, lenders are concerned about three things: the bottom line of their investors and/or stockholders, their reputation in the secondary market and the impact the short sale will have by the regulatory agencies. Lenders do not want to acquire properties through foreclosure but they must have justification based on fact which translates to the bottom line for agreeing to a short sale. Make your file factual but appealing to the human side of the reviewer.
As a Buyer, what do I need to do to increase my chances of buying a home as a short sale?
Get pre-approved for a loan subject only to appraisal and an accepted contract.
Carefully evaluate the property you are offering to purchase. In these situations you are buying ”AS IS” withno warranties, inspections, or repairs in most cases. Homes in financial distress are usually neglected or deferred maintenance.
Know your new loan and if there are prepayment penalties if you were to sell the home soon after purchasing it.
Know all of the liens on the property and the remedies for removal of these liens. (Consult an attorney on this one.)
