Frequently Asked Questions:
Often, once you have received a default or foreclosure letter from your lender, you don’t know where to turn for help. It clouds your ability to focus on strategy and raises a confusing mix of options. That’s why I’m here. I will help you figure out the best option for you (whether it means list with me, buy with me, or not). This page is just a start. There are more pages explaining the foreclosure process and the various options other than a short sale.
What Does Short Sale Mean?
A short sale occurs when the negotiation is entered into with a homeowners mortgage company or companies to accept less than the full balance of the loan at closing. A buyer closes on the property, the lender’s release their leanings, and the property is “sold short.” The term “short” refers to the situation where a borrower owes amount on his property that, when combined with closing costs and commission, is higher than the current market value of the property. A short sale is a dignified solution to a financial problem.
Who Qualifies for a Short Sale?
In order to qualify for a short sale, the seller must prove to the bank one or more of the following conditions:
- Loss of job, and difficulty in finding new suitable job
- Job Relocation, when equity is deficient
- High medical expenses due to disability, injury or illness in family
- Divorce
- Unable to afford the loan from the beginning
- House needs unexpected major repairs
- Overextended Credit
- Changing Economy
- Adjustment in mortgage payment due to interest rate or an unforeseen increase in living expenses
Incidentally, these are also the most common reasons for a foreclosure.
Why Would a Lender Accept a Short Sale?
Why would a lender accept less than they are owed? Because the alternative is a foreclosure. Just as with the borrower, there are significant consequences to the lender if they foreclose.
- The legal costs of eviction and repossession,
- The loss of loan payments during the foreclosure process until it is re-sold
- A foreclosed house will need work before it can be resold
- After the foreclosure, the bank has two options: Sell it at the courthouse steps, or try to resell in the market. If they resell in the market, they are penalized by the government by freezing 3-10 times the loan amount so that the lender cannot lend those funds to another borrower.
Will my lender consider a Short Sale if the mortgage is current?
Sometimes, some lenders will accept a Short Sale file for approval on loans that are not delinquent. Other lenders will not accept the file until the loan is delinquent.
Do lenders approve all Short Sales? NO.
What if a property needs work, can I still apply for a Short Sale?
Yes. In fact, lenders are more motivated to do a Short Sale on a property that needs work than on a property that doesn’t. The lender knows the risk of loss goes up when they foreclose on a property that needs lots of work.
What is a Short Sale Packet and What Needs to be in It?
A short sale package it used to determine whether a homeowner can afford the property. Most lenders already have a standard package which they will send to the borrower upon request. The borrower is expected to provide financial information to include income and household expenses. The seller must fill out forms with the Listing Agent to be submitted to start the Short Sale process – and submitted with any offer. These forms include:
- The Listing Agreement
- Authorization to Release form (to allow agent to discuss with bank)
- Hardship Letter (see “How to Qualify” above)
- Financial Statement
- Seller Net Sheet (a copy of the HUD form with offer)
- Contract (when offer is accepted)
- Buyer’s Proof of Funds (with offer)
The Buyer must provide additional items as well. Full details can be found at “Preparing an Offer on a Short Sale“, but the basics are:
- Earnest Money check of at least 1% of sales price.
- Special Stipulations form
- Proof of Funds
- Contract stating buy “As Is”
What are the Tax Consequences to the Seller of a Short Sale?
Before, the Seller was sometimes required to declare the difference between the loan principal and the amount the bank received as income on their tax forms, and pay tax on it. In November 2007, a law was passed that changed this. Effective January 1, 2008, “Forgiven Mortgage Debt” (the difference between the principal and the amount the bank received) is excluded from taxable income. There are restrictions. In order to qualify for this exclusion, the house must be occupied by the owner as a principal residence (not a summer home, vacation house, rental property, etc.). Investors do not qualify. Read this IRS Publication for full details.
What is a Deficiency Note and what if my lender wants me to sign one?
A deficiency note is like a promissory note agreeing with the lender that you will be responsible for paying some or all of the difference between their net proceeds and the mortgage balance. Every state has different laws covering when a Deficiency Note can be required, but lenders may try to get borrowers to sign them even when they are not required. Second mortgages try this most often, and if it is a Line of Credit they are sometimes successful in requiring it. This is why it is best to have an experienced agent working at your side.
I have more than one mortgage on my property. Is that a problem?
No. Subordinate lenders are more flexible than 1st mortgage holders.
What if I have 2 mortgages held by different Lenders?
When you have 2 loans with the same lender, it is more beneficial to them, as there is no need to negotiate with another lender. When the two loans are with different lenders, the process is a little longer, but the second lender is the one who has more to lose if they don’t reach a settlement. This is because if the property goes to foreclosure, the first loan is the first one to be paid and the second usually nets nothing.
Do I have to be past due on my mortgage to be able to get the benefit of a short sale?
No, but it is likely that the lenders’ guidelines will prevent them from formalizing a short sale if the loan is not past due,. This means, for them, that the borrower has the means and can continue to pay on the loan each month. Please understand, however, I AM NOT RECOMMENDING THAT ANYONE STOP PAYING THEIR LOANS. In the current market conditions, it is possible that a bank would accept a short sale, even when the borrower is current.
What is a BPO?
A Broker Price Opinion (BPO) is when the lenders contact their own Broker/Real Estate Agent and pay them to render an option on the condition, value and time on market for the property. This is because many lenders do not have the knowledge of the market in Georgia, because their offices may be in Texas for example.
If a lender saves so much money working out a short sale arrangement, why do they request so much information and why does it take so long for them to work a file?
The lender wants to make sure that a borrower is truly having financial problems and is not one of those people who for various reasons just wants to stop paying for the property and the mortgage debt. If the borrower has liquid funds, the lender will want the borrower to use them in the sales process. The lender also wants to make sure the borrower is not selling the property to a related party for the sole purpose of locking in a reduced pay off. The bottom line is that the lender is going to manage the transaction with the objective of recovering the most money for the lender. The time frames involved cover a multi-step negotiation process between the borrower and the lender with either the lender or borrower objecting to certain terms and making various counter proposals before coming to an agreement. Third party inspections and BPOs will also need to be done before the negotiations can be formalized in an agreement.
What is a hardship letter?
This is a letter that explains the borrower’s current financial circumstances. Which circumstances have changed from when the house was purchased, and why the mortgage payments can no longer be made. These circumstances are what led to a borrower’s inability to make payments and to pay off the loan in full. This letter must be written by the borrower, and be sincere in demonstrating (with documentation) that it is the truth.
What types of information does the lender require the borrower to submit?
Along with the Hardship letter, each lender will have different forms that we will need to complete. All lenders generally require various items such as two months of bank statements, pay stubs, past tax returns, W2, etc. Usually each Short Sale package that I submit is over 70 pages long.
How many short sales are there out there?
Well, first, it is not just short sales. There is a market category called “Distressed Properties”. In addition to Short Sales, these include Foreclosures, Estate Sales, and other situations where events in the seller’s life have made them decide to sell the property under conditions where they normally would not. Distressed properties reduce the market value of the entire neighborhood where they are available. The presense of distressed properties in a subdivision will lower the market value of the entire subdivision by as much as 10%. High quantities of distressed inventory increase that downward pressure on prices. While we have an abnormally high number of distressed properties on the market at this time, there are always a certain percentage of properties in distress on the market. It is a permanent feature of the market – bad things happen to good people, and they happen all the time.
How long does it take to complete a short sale?
The time frame for the lender to receive and evaluate the short sale proposal is about 8 weeks from the time the offer and Short Sale Package are received. Buyers need to realize that this is a lengthy process. This is why it is very important to work with a Short Sale Specialist who knows how to manage the transaction. The other agent and the buyer may get cold feet at the end, and the transaction may fall through.
Why does the bank accept less than they are due?
They lose less on a short sale. On average, lenders lose tens of thousands of dollars less on a short sale versus a full foreclosure. It is simply in their best interest.
Can a borrower do this for themselves?
Yes, but doing it alone and on the phone with the lender leads to inconsistent results that are, frequently, not acceptable to the borrower. Working with us, with written negotiations, yields more consistent results.
Why Lenders Prefer to Work with Experienced Agents
In steeply declining markets, short sales are booming. Selling a home for less than the underlying mortgage often provides troubled home owners with their best chance of avoiding foreclosure and ruining their credit. A cottage industry of bankruptcy specialists and other self-described loan mitigators are trawling for clients, but lenders would often prefer to work with real estate professionals in negotiating short sales for clients. Here’s why:
- Agents are licensed by the state.
- Agents adhere to a code of ethics.
- Agents carry errors and omissions insurance.
- An Agent has too much at stake to cut corners. A licensed professional is not likely to commit fraud that could put their entire career at risk.
- An Agent specialized in Short Sales does not need extensive training by the lender’s loss mitigation department. Many departments simply move the file to the foreclosure stack when they realize the listing agent is not experienced in short sales because they have hundreds on their desk and do not have time to train the agents.
This is why many of my fellow Real Estate Agents refer their in-trouble clients to me, they know I can help their clients navigate the waters they would have to learn first. So let me help you get through it. Give me a call.
I owe more than my home is worth. Is a short sale my only option to get out of foreclosure?
You have other options, like a Deed in lieu of foreclosure. That is a perfect case to demonstrate to the lender that if they do not accept a short sale, they are going to lose even more money than they are now.
How long does the foreclosure process take?
Please see “Foreclosure Laws” for your state.
What are the implications of a deficiency judgment?
Check to see if Deficiency Judgments are allowed in your state. If your state permits a deficiency judgment, this can allow a lender to garnish your wages, attach your other properties and aggressively collect for years to come any amount that remains unpaid after a sheriff’s sale of the property.
I keep hearing about Strategic Default on the news. What is it?
Strategic Default is the idea of simply walking away from your house and letting the lender foreclose – in essence accepting defeat. In some cases, the home owner mails in their keys to the lender – called Jingle Mail in the industry. This is rarely the best option – usually only with extremely short-sited and stubborn lenders. If the lender is willing to listen to any strategies to decrease their loss, the other options yield a better result for you and your financial future.
What consequences can I expect if I do a short sale?
Your credit rating will suffer, there is no getting around that. A foreclosure can lower your credit score by a devastating 300 points which will take years to recover. A short sale will still cost credit score points, but significantly less. Several sellers are able to buy again in about 3 years.
In addition, you can actually have difficulties where you work – if you require a Security Clearance (Government, military, government consultants), or a clean financial record (working for financial institutions or in positions where you are responsible for large sums of money). In these circumstances, you should contact your HR department before you place your property on the market, or before you are late on your first payment. In most cases, your clearance is not in jeopardy – but if you are considering a short sale, you cannot take any more chances with your income stream, so check to be sure.
Where can I find out more information?
One couple documented their own journey selling their house as a Short Sale in a book called “Upside Down“. If you order it using SSQueen as your Coupon Code, you’ll save $7 off the current price.
