If you're like a growing number of American homeowners facing foreclosure, you'll want to read this information.
As a Realtor, I am seeing a high number of homeowners with interest-only loans, falsified appraisal values and exaggerated borrower income ratios. These factors are contributing to an increase in mortgage defaults. And because of this, a growing number of homeowners face high mortgage debt and the possibility of foreclosure. DON'T LET THIS HAPPEN TO YOU!
Consider a Short Sale. A short sale is the sale of real property where the fair market sale price is less than the loan balance.
Statistics indicate that almost 421,000 mortgage loans enter foreclosure each year nationwide. EACH and EVERY default has the potential to be salvaged from foreclosure through a variety of alternate means, including an equity-deficient Short Sale.
Why Short Sales Work...
Because mortgage loans are big investment business on Wall Street, lenders are under continual pressure from regulators to reduce the amount of defaulted homes they actually take back and subsequently own. A kinder, gentler mentality by lenders toward their borrowers has revved up the growing trend for lenders to cut their losses now. This makes it a win-win for everyone involved: the seller, YOU as the borrower, the buyer, the lender and me, the Realtor!
WARNING: This is NOT a PREDATORY practice that is out to "rip anyone off", like some questionable investor techniques such as Quitclaim Deeds for an upfront fee. INSTEAD, the Short Sale Transaction is a legal and honest alternative to foreclosure. Banks and Lenders are motivated to accept Short Sale offers to avoid the costly foreclosure process. The Short Sale is a Win-Win situation for all parties involved:
- Win #1: The SELLER wins by getting out of their financial predicament with pride and a salvaged credit score.
- Win #2: The LENDER wins by avoiding timely and costly foreclosure proceedings that could lead to an even more costly expense of REO (Real Estate Owned) property by the bank.
- Win #3: The BUYER wins by getting a property at good market value. Great for new and senior investors!
- Win #4: And ME, the Realtor - I win by getting a commission paid by the bank
PART II
What is a Short Sale?
A "Short Sale" is a pre-foreclosure solution that allows you to negotiate a discounted mortgage payoff with the lender(s). In other words, a Short Sale is the sale of a home when the sale proceeds do not fully pay off the existing loan(s) and the lender(s) accepts a discounted payoff to fully satisfy the loan.
The best part, the existing lender pays virtually all sales costs, including commissions, escrow and title fees and repair costs. You get your home sold, the loan(s) paid off and you avoid foreclosure thereby saving your credit.
How does a short pay off work?
Imagine your home is worth an appraised value of $200,000 today, but you owe $220,000 on it. As you know, savvy Buyers don't buy houses above the appraised value. So to sell you house you must offer it on the market for $200,000. When it sells you will net $184,000, or $36,000 less than what you need to pay off the $220,000 loan. With a short pay off your lender will forgive a portion or all of the difference or short amount.
What lender would just write off that type of money?
Just about all of them will, with proper justification. Justification might mean a substantial loss of income that would prevent you from paying the mortgage, therefore being forced in a position to sell the home. Attempting to sell short so you can upgrade to a larger property is not justification.
How will this affect my credit?
Depending on how you negotiate the transaction, it could go on your credit report as, debt settled, short payoff, or paid. It depends on the lender and their regulations or guidelines.
Are some lenders harder to deal with than others?
Yes. If you have a Freddie Mac loan, Freddie Mac will probably want you to contribute to the short sale, get your agent to reduce brokerage fees, and get the buyer to take the property as-is. Some lenders will even just ignore you.
What will my lender require from me in order to consider participating in a Short Sale?
Packaging is very important. When you place the property on the market it is very important to go with an experience Realtor. They will know to send the lender the following:
- Your past 2 years tax returns
- Letter of hardship showing justification
- Completed financial application
- Preliminary Title Report
- Listing contract with proper disclaimer
- Copy of MLS printout
- A proposed marketing plan for your home
- A Broker Price Opinion (like an appraisal)
When you have an offer, all of the above should be enclosed with the offer (except for the marketing plan) plus the purchase agreement, and a good faith estimate as to what the lender will net after the close of escrow along with Escrow Instructions.
Why should I list with an agent? It seems if I can save the brokerage fee that the lender would net more and be more inclined to accept any offers that come in.
You are correct. If your loan is current, you may be able to get a qualified buyer yourself. If your loan is delinquent, or in default, you don't have time to play around with getting your home sold. You need as much exposure as possible.
What happens if my lender say's "No," and I'm in foreclosure?
This is one situation where "No," means, "Maybe, you just haven't convinced me that participating in a short sale is to my benefit." Keep hammering your lender, and do not take your home off the market until your lender agrees to a sales price and the prospective buyer has formal loan approval.
Should I try to hide assets in order for the lender to consider participating?
No, don't hide assets. Most assets are traceable, except for personal collections (guns, coins, etc.). If you own another property, it will show up on your credit report. Your lender may back track to your original loan application to see if there are any other assets. If your lender discovers you're not dealing honestly, they'll never co-operate.
Can just any real estate agent handle a short sale?
Most will say they can. There's no real way to tell if they can. If your home goes into foreclosure, you'll get flooded with a ton of mail. There's a good bet that most of the mail is from people who have experience in helping out in these situations. Interview the person you choose to deal with. Ask questions based on the information outlined here. They should know these requirements.
Note: I'm sure the following info won't be added to most real estate FAQs. Actually, this is a good example of a misnomer in the foreclosure arena so I've added it as a trick question for you to find out how experienced an Agent actually is when you're interviewing them.*
How can I assure a non-purchase money lender won't go after me after the short sale?
When any lender agrees to a short pay, they are relinquishing their right to pursue the borrower in the future. Therefore, it is very important to gain written short sale approval from all parties involved to limit your liability.
* FYI - There are no deficiency rights in California for Purchase Money Loans. This is the loan that you obtained in order to purchase your property. Your loan is secured by the property, so the bank cannot go after your assets to make you pay the remaining balance of the loan.
Exceptions - Once you refinance the property, take out an equity line of credit, obtain a consumer loan that is secured by the property, this rule no longer applies. The lender has the right to go after you in a deficiency judgment, even if a senior lien holder takes the property back and a junior loses his security instrument.
As you can see, this is a process where Experience Definitely Pays! It is well worth your while to use the services of someone that is experienced in Pre-Foreclosures and Short Sales. I'm sure you can see where the lack of experience can seriously cost you in the long run.
Are there any tax ramifications?
Yes. According to IRS Section 108 a-e, there are debt/income interpretations that may come into play. The IRS may view the deficiency on a non-purchase money loan as income and demand you to pay taxes on that amount. If the short pay transaction resulted in a net loss of $20,000 to the lender, your tax liability could be around $6,350. So it's important to speak to a CPA when filing your taxes to offset this.
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So why would I want to do a short sale only to owe the IRS money?
To limit your tax liability, in some cases the senior lien holder will allow for some funds to be allocated to the juniors, making it possible to settle their debt for a lesser amount as well. If you allow the property to just go into foreclosure, and the juniors lose 100% of their money, you can get taxed on the full amount. You should really contact a CPA concerning this part of the Tax Code.
I have an FHA loan. They won't do a short pay. Any suggestions?
There are certain regions where FHA will not participate in short sales. One region is the state of California. If you are in foreclosure on an FHA loan in California, you may want to approach HUD to see if they will consider a loan modification such as lower interest rate, or some type of repayment schedule until you get back on your feet.
PART III
What We Do ...
And What We Don't Do
Getting your Short Sale approved - that is our number one goal. It is our job to prepare you for the Short Sale process, once you determine that is your best option. Along the way we will take the time to help you understand the process and we will keep you completely informed so you know what progress is being made. In order to help you select the solution that is best for you, we will need information. Sometimes we have to ask tough questions. We will not, however, lose sight of who we are serving. The trust of our customers and clients is our most valuable asset. This trust is built, in part, upon the proper handling of personal information. Your personal information will never be shared or discussed with anyone that is not directly involved with this transaction without your express consent. At all times, your interests come first - you have my word on it.
What We Do
- We listen to you, so we understand how to help
- We provide guidance, so you can move in the right direction quickly
- We put together a great Short Sale file so your lender wants to work with us
- We PUT YOUR INTERESTS FIRST at all times!
What We Don't Do
- We don't try and buy your property to profit off of your equity
- We don't recommend that you deed your property to a 3rd party and give up control of your home
- We don't ask for any up front fees - ever!
- We won't lie to you, make excuses or run down the clock on the short time you have
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