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What in the World is a Short Sale?
..."you mean I can save my home from foreclosure."
Here is an article on one of the most important subjects in real estate:
What the Heck Is a Short Sale?
Over the last several years a lot of buyers have bought homes, intending to live in them for many years, then something happened - maybe good, maybe bad, but regardless - they don't have a choice. Some owners have to move.
When most homeowners move, they sell their house. Usually, that's not a problem. For some people nowadays, it is a problem.
Because of the easy financing, rampant speculation, flipping, and sometimes fraud, home values skyrocketed most everywhere. That came to an end recently and values plummeted in some areas. Even when values are stable, sometimes there just isn't enough money in the property to pay off the mortgage, then pay all the selling costs and moving costs.
What happens then?
Default, sometimes bankruptcy, and maybe even foreclosure.
Or a short sale.
A short sale is when the lender agrees to accept a mortgage payoff that doesn't cover the outstanding loan.
Why do lenders accept short sales? Lenders almost always lose money when they foreclose on property. In many cases, they will lose less money through a short sale than they would by foreclosing on the home and selling it as a bank-owned property.
However, there are rules.
The borrower must experience a genuine financial hardship. If this fits, call the lender. Talk to customer service or the collection department and let them know what is going on. That way, knowledge of your hardship is communicated to the lender and becomes a part of their files. Keep your own communication log.
Eventually, you will have to document the hardship and your inability to deal with it financially by disclosing all your assets. Bank statements, stocks, bonds, tax returns, pay stubs -- the lender will want to see everything that may document that you are not hiding assets or income.
The lender will not make a commitment based solely on your hardship. You're also going to have to put your home on the market and sell it.
Once you sell the property, you have to supply additional documentation. When the property is listed, your real estate agent prepares a comparative market analysis. You're going to need that and you will need to supply a copy to the lender, along with your hardship letter, the documents mentioned above, a copy of the purchase agreement, and a "net sheet" showing how much you will net (or lose) from the sale of the home.
It may be that you actually want your real estate agent or some other professional to negotiate with your lender. If so, you need to prepare an authorization letter. That letter includes your name, property address, loan number, your representative's name, the date and your notarized signature. Your agent will know almost all of this and have the proper format.
Then your agent submits it all to your lender and...you wait.
Normally, your lender can't make the decision to accept a short sale on their own. If there is mortgage insurance, they get a say-so. Your mortgage has an investor. The investor gets a say-so.
If the deal "makes sense", they believe your hardship is genuine, and you do not own any other property -- you may get a "yes" decision. Your chances go up markedly if you have someone experienced negotiating for you.
Oh yes. If your lender does forgive part of your debt, there is something you should also know. Debt forgiveness is taxable income. The IRS will require you to pay taxes on that income.
Source: ABCs of Real Estate
Here is an article on one of the most important subjects in real estate:
What the Heck Is a Short Sale?
Over the last several years a lot of buyers have bought homes, intending to live in them for many years, then something happened - maybe good, maybe bad, but regardless - they don't have a choice. Some owners have to move.
When most homeowners move, they sell their house. Usually, that's not a problem. For some people nowadays, it is a problem.
Because of the easy financing, rampant speculation, flipping, and sometimes fraud, home values skyrocketed most everywhere. That came to an end recently and values plummeted in some areas. Even when values are stable, sometimes there just isn't enough money in the property to pay off the mortgage, then pay all the selling costs and moving costs.
What happens then?
Default, sometimes bankruptcy, and maybe even foreclosure.
Or a short sale.
A short sale is when the lender agrees to accept a mortgage payoff that doesn't cover the outstanding loan.
Why do lenders accept short sales? Lenders almost always lose money when they foreclose on property. In many cases, they will lose less money through a short sale than they would by foreclosing on the home and selling it as a bank-owned property.
However, there are rules.
The borrower must experience a genuine financial hardship. If this fits, call the lender. Talk to customer service or the collection department and let them know what is going on. That way, knowledge of your hardship is communicated to the lender and becomes a part of their files. Keep your own communication log.
Eventually, you will have to document the hardship and your inability to deal with it financially by disclosing all your assets. Bank statements, stocks, bonds, tax returns, pay stubs -- the lender will want to see everything that may document that you are not hiding assets or income.
The lender will not make a commitment based solely on your hardship. You're also going to have to put your home on the market and sell it.
Once you sell the property, you have to supply additional documentation. When the property is listed, your real estate agent prepares a comparative market analysis. You're going to need that and you will need to supply a copy to the lender, along with your hardship letter, the documents mentioned above, a copy of the purchase agreement, and a "net sheet" showing how much you will net (or lose) from the sale of the home.
It may be that you actually want your real estate agent or some other professional to negotiate with your lender. If so, you need to prepare an authorization letter. That letter includes your name, property address, loan number, your representative's name, the date and your notarized signature. Your agent will know almost all of this and have the proper format.
Then your agent submits it all to your lender and...you wait.
Normally, your lender can't make the decision to accept a short sale on their own. If there is mortgage insurance, they get a say-so. Your mortgage has an investor. The investor gets a say-so.
If the deal "makes sense", they believe your hardship is genuine, and you do not own any other property -- you may get a "yes" decision. Your chances go up markedly if you have someone experienced negotiating for you.
Oh yes. If your lender does forgive part of your debt, there is something you should also know. Debt forgiveness is taxable income. The IRS will require you to pay taxes on that income.
Source: ABCs of Real Estate
For more information about Short Sales, please call 240-737-5024 or send an email to shortsales@bbtrealestategroup.com!
Keller Williams Preferred Properties
9701 Apollo Drive, Suite 102
Largo, MD 20774
Phone: 240-737-5024
EFax: 240-296-5024
Email: shortsales@bbtrealestategroup.com
9701 Apollo Drive, Suite 102
Largo, MD 20774
Phone: 240-737-5024
EFax: 240-296-5024
Email: shortsales@bbtrealestategroup.com
Replies to This Discussion
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Permalink Reply by BBT Real Estate Group on -
Here are some items needed for home sellers looking to do a short sale:
2 MONTHS BANK STATEMENTS
ONE YEAR TAX RETURNS
ONE MONTH OF PAY CHECKS
HARDSHIP LETTER
FINANCIAL WORK SHEET
AUTHORIZATION LETTER
And I would suggest working with a real estate agent to get this done and in a timely manner. Here are the items the listing agent needs:
CMA (Comparative Market Analysis)
Listing agreement
Buyers offer
Pre-approval letter
Copy of deposit check
Proof of funds if there is a down payment
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Permalink Reply by BBT Real Estate Group on
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Sample Hardship Letter
What is a Hardship Letter?
A Hardship letter is very important for a successful short sale. A hardship letter to creditors explains why the homeowner is unable to make payments and why creditors should accept the homeowner's proposal of the short sale.
Here is a sample Hardship Letter:
THIS IS A SAMPLE HARDSHIP LETTER:
More information on Short Sale: Sample hardship letter (of course, each situation if different) your seller should be able to tell you why they are in a critical condition and why they need to short sell their home.
Lender Name Lender Address Lender's fax number
Today's Date
RE: Hardship Letter - Short Sale for _____________________ address
To whom it may concern:
I purchased my home at _____________ in ___________. At that time I was employed by _______and business was very good. My salary and the possibility of a promotion and raise made me sure that I could easily support my mortgage. Unfortunately, a downturn in the market caused my company to reduce its workforce and I was laid off.
After searching for a comparable job, I finally got a temporary position as an office assistant as I continuing seeking other work. I struggled for several months to make my mortgage payment, and was also hit with some medical payments that I did not expect (the COBRA payment was more than twice what I was paying when employed). I knew I would have to sell my home to protect my credit rating and possibly have enough cash left over for moving expenses and some savings. I put my home up for sale by owner in _________, but there were several problems that I did not have enough money to fix, such as the broken fence in the back yard and some pretty severe leaks in the roof which indicated a new one was needed. Over the next three months I lowered the price three times but still had no takers. I am now working with a real estate agent and I believe she will be able to help me sell quickly.
I really love my house, but I know that I cannot afford it. I am a single parent, working as a temporary employee with few benefits and no savings. My financial situation cannot sustain a home mortgage of nearly $2200 per month. I want to sell the home, avoid foreclosure and salvage my credit. I know that a foreclosure on my record will affect me for years to come. I would ask that you please assist me in avoiding this.
Please accept this offer as payment in full. My attorney has advised me to file bankruptcy, but I prefer to avoid further destruction of my credit. I just want to move on and start over.
I deeply appreciate your help and understanding in this matter. If you have any questions, or need anything further from me, please contact my agent or me personally.
Sincerely, Home Owner Name Address and Contact Information
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Permalink Reply by NowUKnow, Inc. on -
A Deed in lieu of foreclosure is an instrument in which the borrower conveys all interest in a real property to the lender to satisfy a loan that is in default and avoid foreclosure proceedings.
The deed in lieu of foreclosure offers several advantages to both the borrower and the lender. The principal advantage to the borrower is that it immediately releases him/her from most or all of the personal indebtedness associated with the defaulted loan. The borrower also avoids the public notoriety of a foreclosure proceeding and may receive more generous terms than he/she would in a formal foreclosure. Another benefit to the borrower is that it hurts their credit less than a foreclosure does. Advantages to a lender include a reduction in the time and cost of a repossession, and additional advantages if the borrower subsequently files for bankruptcy.
Here is one person's take on a Deed in Lieu vs. a Short Sale:
Short Sale vs. Deed-in-Lieu: What’s Your Best Choice?
Homeowners facing foreclosure often have the option of selecting a short sale or a deed-in-lieu of foreclosure as a possible solution to their financial difficulties. But are they? Which is the best choice? Like most alternatives, both have their upsides and their downsides. Understanding these options is the only way to make a truly informed decision.
In a short sale, your lender takes the loss
When you decide to use a short sale to prevent foreclosure, you should understand that the sale must have the lender’s approval and that lenders don’t always agree. What the lender is doing when he accepts, is permitting you to sell your home for less than you owe him and taking the loss himself. If he does go along with the short sale, it will relieve you of the burden (arrearages) as well as the cost, emotional strain and embarrassment of a messy foreclosure procedure. On the upside, a short sale is far less destructive to your credit rating than a foreclosure, as it is supposed to be listed as a “settled debt” on your credit report. However, it is still harmful to your credit score and can reduce it by 200 points or more.
On the downside, the lender could always go after you to collect the difference between the short sale price and what you owed him by getting a deficiency judgment against you. However, more often than not, this doesn’t happen simply because he knows that there is no money to recover and that he will have to pay all the costs of the legal action.
deed-in-lieu may be your fastest way out
A deed-in-lieu of foreclosure is when you give your home back to your lender, take your losses and thereby prevent the foreclosure. Lenders will frequently accept this because it is a less expensive and time consuming process for him than a full foreclosure action. The upside is that a deed-in- lieu is a faster solution than a short sale and that it is more likely to be acceptable to the lender. The ramifications to your credit score are about the same as the short sale.
On the downside, if the lender eventually sells the home for a price that doesn’t pay off the original mortgage amount, he can get a deficiency judgment and try to collect it from you. Once again, however, he knows that you can’t get blood out of a stone and probably won’t proceed if there doesn’t appear to be any money to recover.
Source: DebtKid
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Permalink Reply by NowUKnow, Inc. on
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How is the Seller's Credit Affected with a Short Sale and Deed in Lieu?
According to David Steep, division manager at Vitek Mortgage, Sacramento sellers, as well as sellers in other states, will take as big a hit on their credit report by going through foreclosure as giving the lender a deed-in-lieu of foreclosure, providing you are more than 30 days in arrears. Steep says the points lost on a FICO score are as follows:
Foreclosure or Deed-in-Lieu of Foreclosure
Both of these solutions affect credit the same. Sellers will take a hit of 200 to 300 points, depending on overall condition of credit. This means if a seller's FICO score before foreclosure was 680, it could dip as low as 380.
Short Sale
The effect of a short sale (providing the sellers are more than 59 days late) 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.
Catherine Coy, a mortgage broker in southern California, agrees. "The effect on a consumer's credit report -- foreclosure vs. short sale -- is the difference between being hit by a train or a bus," says Coy, speaking about borrowers who are a few months in arrears.
Waiting Period Before Buying Another Home
Foreclosure or Deed-in-Lieu of Foreclosure
Steep says a seller who wants to buy another home after foreclosure will end up waiting about 24 to 72 months before a lender will offer any kind of interest rate that makes sense.
Coy says, "The good news is a short sale will allow the consumer to obtain an institutional loan for a new home within two years".
Short Sale
Some agents say the good news for short sale sellers is the wait is much shorter before buying another home, and new Fannie Mae guidelines make that a true statement.
Can a seller buy again under two years? Partially true, says Coy, "It's an utter myth that a consumer 'can buy again in about 18 months at a good interest rate.' However, new Fannie Mae guidelines now require only 24 months' seasoning, and that's good news for agents who specialize in short sales."
Note that Fannie Mae guidelines allow a seller to immediately apply for a new loan to buy another home if that seller kept the payments current and had no 60-day late pays or greater on record.
Short Sale / Foreclosure Deficiency Judgments
The bad news is a seller could be subject to a deficiency judgment for the difference between the loan amount and the amount paid. In general, a trustee's sale wipes out the right to a deficiency, except for certain junior lienholder conditions. In California, purchase money loans are not subject to deficiency judgments; however, some hard money loans, equity loans and refinances are, providing certain conditions apply. Some other states have laws regarding personal guarantees, which could also result in a deficiency judgment, if the home owner is held personally liable for loan repayment.
The lender has sole discretion whether to pursue a deficiency judgment in those instances when the judgment is permitted. To determine whether a pending foreclosure or short sale is subject to a deficiency judgment, talk to a real estate lawyer.
Source: About.com
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Permalink Reply by Brian Turner on -
You do not have to be behind to do a Short Sale. Please know that you do not need to ruin your credit to do a short sale. What constitutes a Short Sales is your willingness not to pay or possibly foreclose on the property. At that time, they bank has to make the decision whether its more cost effective to sell the property short or foreclose. In most cases, it's more cost-effective to do the short sale. Send me a message if you have more questions.
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Permalink Reply by Shawn on
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Brian,
I love your articles and thought about trying to sell my currently devalued townhouse and upgrade to a single family home since the rates and prices are low.
I'm not in any danger of foreclosing but having a difficult time refinancing out of an ARM due to the decline in home values.
Any advice would be appreciated.
Thanks!
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Permalink Reply by Brian Turner on
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Have you had the chance to try to refinance since the stimulus went into affect?
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Permalink Reply by Shawna Swann on -
Good Day Shawn,
I wanted to share my experience with NACA. I also, have never been late for my mortgage, but due to the devaluation of my property I could not qualify for the refinancing of my loan. I completed on online application with NACA, whom did not care about my credit score and recieved a 5 year loan with a 3.5% insterest rate. Now NACA attempts to get a fixed 30-year but the bank only approved 5 years. NACA is a for-profit company and also is a mortgage compnay. Had my bank declined any assistance they would have approved by for a loan with them. Now 3.5% for five years is better than a 4% raise in my interest rate which would have happened within a six month period.
My goal is to be out of my home by then, but it gives me time to save and rethink the situation. Not to mention I own two homes, so I thought they would have told me they could not help me. And this was procedure took less then 30 days. Please let me know your result. And do mention you were referred by Shawna Swann, they do not offer a referral fee but I did apply for a position with this company due to their true nature of helping people in this cruel affair of real estate- "predatory lending".
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Permalink Reply by Loretta on -
Dear Ms. Shawna Swann,
I have read your message and it is very interesting. I bought my house in a high priced market that is why I am looking for a lender who could give me a lower rate. Can you please give me additional information about NACA and how I will be able to get in touch with them.
Thanks,
Mrs. Loretta Yutuc
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Permalink Reply by NowUKnow, Inc. on
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NACA
The Neighborhood Assistance Corporation of America or NACA is a not-for-profit organization that provides loans to low and moderate-income people, as well as "sub-prime" borrowers. NACA has commitments from banks and lenders totaling $3.8 billion allowing it to offer mortgage loans with no down payment to borrowers with good or poor credit at below-market interest rates. In addition, participants have the option to lower their interest rate by placing a larger down payment. Specifically, for every $1,000 a participant pays over the required down payment amount of around $3000, your interest rate is lowered by 0.25%.
Borrowers are required to participate in NACA sponsored affordable housing political actions and contribute to a self-insurance fund. The self-insurance fund is used to pay the mortgage for a set number of months for those NACA homeowners who for specific reasons, such as loss of job, are unable to pay their mortgage. Through the NACA program you can finance multifamily residential buildings (up to four units), as well as mixed-use buildings (i.e. store front properties.)
Anyone can participate in NACA’s program – both those with poor credit histories, as well as good ones. Individuals with poor credit will be required to go through a NACA sponsored debt management and credit repair program before purchasing.
Contact the local NACA office at 773.723.6222
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Permalink Reply by Darius on -
Hey Brian, if a home owner is upside down, how can they do a short sale without messing up their credit and showing a hardship?
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Permalink Reply by Brian Turner on
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Inform the lender that you are not willing to pay and let them know that you are willing to let the home go to foreclosure. This can be done without being behind in your payment. At this time, the bank needs to make the decision whether it's more expensive to let it go to foreclosure or do the short sale. Most likely, it is cheaper to do the Short Sale. A realtor can get the bank the paperwork to begin the process.
At the end of the day, it is a business decision for the seller to attempt to do this.
Quote of the Day
Franklin D. Roosevelt
"Men are not prisoners of fate, but only prisoners of their own minds."
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