Short Sale Explained
“Foreclosure avoidance” may just be the real estate buzz phrase of the new millennium. An entire cottage industry has sprung up, offering distressed homeowners a variety of remedies to help save their homes and their credit ratings. Short Sale Explained .
While visions of riches dance in the heads of the masterminds of these new industries, homeowners who can no longer make their mortgage payments – for any number of reasons – sink ever deeper into despair and confusion.
What to do ? Where to turn for help and information?
Probably the most heartbreaking moment in the process is when the homeowner, already distressed over not being able to meet his mortgage obligation, attempts to sell the home to get out from under the financial burden, only to learn that his home is worth far less than what he owes the lender.
This financial position is known as being “upside down” or “underwater” on the mortgage, and it aptly describes the distressed homeowner‟s feeling of drowning in a debt she cannot pay. I know it feels as if you‟re completely alone in this underwater nightmare but, believe me, you‟re not. National news articles are full of stories about everyday folks on the brink of foreclosure.
Even the rich and famous haven‟t escaped the real estate Grim Reaper. For example, the NBA‟s Allen Iverson and both the NFL‟s JaMarcus Russell and Terrell Owens all experienced close encounters with foreclosure, and were saved by the short sale process. nowing you‟re not alone in this situation most likely brings little solace.
However, realizing how so many Americans got here helps make sense of the situation. From 2006 to 2009, our housing market saw a 30 percent decrease in home values. Couple that with the recession that brought about high unemployment rates, and the recipe for disaster for millions of American homeowners was complete.
Remember, above all else – with the possibility of foreclosure ever looming for those that miss mortgage payments – time is of the essence if we are to get your home sold. That said, I hope you will take the time to read through the short sale process to become better acquainted with what lies ahead.
What is a Short Sale ?
In this chapter, we’ll take a look at short sales, then and now (i.e., how they’ve evolved over the past five years or so). I will answer the question: “Why would a bank agree to a short sale?” You will learn why banks deny some short sales.
So, what is a short sale? Maybe it‟s easier to tell you what a short sale isn‟t: short. There is nothing about the entire process that is easy or quick, which you‟ll realize as you learn more about it.
A real estate short sale is a type of real estate transaction wherein the lender agrees to accept a payoff of your mortgage that amounts to less than what you owe. Now, why on earth would anyone agree to write off such substantial sums of money?
There are several reasons, the most significant of which is that if the lender doesn‟t agree to a short sale, there is a high likelihood that the property will end up in foreclosure.
Lenders don‟t like foreclosures for the following reasons:
- Lenders are in the business to loan money, not to carry a portfolio of real estate holdings.
- Studies show that lenders realize more money from the short sale than they do when a property is sold after foreclosure. This is mainly due to the fact that homes that are occupied by a homeowner are in far better condition than vacant homes.
- The short sale requires fewer of the lender‟s resources, since the homeowner and his or her agent take over the marketing duties.
- A short sale helps the lender avoid the legal costs incurred from foreclosing on a home.
- Real-estate-owned properties (REO) – those the lenders take back when they fail to sell at a foreclosure auction – are expensive to maintain, insure and secure until they sell.
Lenders didn‟t “get” this until a few years ago.
Back in 2008, when both the job and housing markets imploded, lenders weren‟t quite sure what to do with the massive number of borrowers that couldn‟t make their mortgage payments, and frequently made decisions that ran counter to their best interests.
In fact, although I haven‟t conducted a scientific study, I would be willing to wager that many lenders lost billions of dollars due to such ignorance. A good example of this comes from an agent friend of mine in Las Vegas. He told me a story about a client he worked with back in 2008.
She – let‟s call her Chris – had an adjustable rate mortgage and, as fate would have it, the rate adjusted just as her boyfriend decided to move out of the house, sticking Chris with the entire mortgage payment. Now, this wasn‟t a tiny hike in her payment. Chris‟s mortgage payment went from around $1,600 to $2,200 a month.
Again, fate stepped in, and because the recession brought tourism in Vegas almost to a standstill, Chris was laid off from her bartending job in a well-known, high-end casino. So, here she is with no job, no job prospects, and a $2,200 a month mortgage payment. The first thing Chris did was call her lender.
While today this might be a smart move, back in 2008, it got her nowhere. She begged, she pleaded, she beseeched – over a period of weeks – to get her lender to work with her on adjusting her loan to make it more affordable while she found employment. No dice. The lender simply would not budge, and made it quite clear that foreclosure was looming. Finally, Chris decided to try a short sale. She hired my friend (the Vegas real estate agent), and finally sold the home for $114,000.
Her loan balance? $356,000. If the lender had worked with Chris on modifying her loan, the lender wouldn‟t have lost $242,000. Had the lender actually proceeded with foreclosure, which was exactly what they planned, the home would have lost even more value. Shortsightedness, thy name is lender – at least back in 2008.
Thankfully, the situation is different today. Lenders have learned, through situations such as Chris‟s, how to deal with underwater homeowners. Be that as it may, not all homeowners are provided the short sale opportunity.
Why would a lender deny a short sale request ?
Here are a few reasons:
- The mortgage holder believes it will have a qualified buyer at auction.
- The offer to purchase is too low.
- The short sale package is incomplete.
- The homeowner has enough assets to work out a repayment plan with the lender.
- The buyer doesn‟t qualify for a loan.
- The lender sold your loan, and no longer retains the authority to approve a short sale.
That said, short sale denials are rare. The value of the home, the homeowner‟s hardship, and the buyer‟s qualifications are top priorities when lenders determine whether or not to grant a short sale.
If you qualify for a short sale, and have an experienced short sale expert at the helm, you should have nothing to worry about.
Advantages and Disadvantages of the Short Sale
It‟s bad enough to feel like you are perched on the edge of homelessness; but then to be told that all of your options to avoid this disaster will, in one way or another, impact your credit or add to your tax burden, is downright frightening.
Since we‟re discussing just one of your options when faced with foreclosure, let‟s look at the advantages and disadvantages of the short sale.
Disadvantages of Short Sale
Anyway It ain‟t over „til the fat lender sings. In other words, you can still lose your home to foreclosure during the short sale process.
The mere fact that your home is on the market won‟t stop your lender from pursuing delinquent payments, or even resorting to foreclosure. Time is, once again, of the essence when you fall behind on your house payments and decide to short sell. We need to act quickly and efficiently.
You Are Not in Control
The lender and its loan servicer are in charge of the transaction. You may think the offer to purchase your home is sterling, but the lender may feel otherwise. Even though you are the first to accept offers, those offers may be declined by the lender.
All That Work and No Money
Let‟s say that your best friend is putting her house on the market.Would you volunteer to do it for her? Would you take on the responsibility of cleaning, repairing, staging, hiring an agent and keeping the home immaculate for showings to get the home sold?
Would you do so, knowing full well you wouldn’t get a dime for all of your hard work? That‟s the short sale, in a nutshell.
You will do all the work while the lender gets all the money. It‟s a tradeoff that you must accept, unless you want to spend the entire time the home is on the market feeling cheated and resentful.
A short sale is time consuming.Even with recent legislation aimed at speeding up the process, it still moves at a snail‟s pace. In fact, the average time between the beginning of the short sale process to the close of escrow is 16.6 weeks, according to the National Association of Realtors.
Because the short sales that I helm typically take far less time than that, I‟m of the belief that most of these protracted transactions are led by inexperienced real estate agents that lack a network of contacts with the largest lenders. Agents that aren‟t familiar with the process find themselves in way over their heads, “stuff” falls through the cracks, and the whole process takes longer than it should – if the deal doesn‟t completely fall apart.
The Credit Impact
Short sales impact credit ratings; there is no getting around that. First, there is the matter of the delinquent mortgage payments – late payments have a huge impact on your credit. Since a lender typically won‟t approve a short sale unless you‟ve missed payments, the first credit ding is inherent in the process.
While the Fair Isaac Company (more commonly known as FICO) is just one company responsible for determining your credit score, it is the company most lenders use. Employing a complicated formula, they use data submitted to them by the “big three” credit tracking and reporting agencies:
Equifax, TransUnion and Experian. The credit reporting agencies have no standard method of reporting foreclosures, short sales and deeds-in-lieu of foreclosure; thus, they generally report all three as “Debt not paid as agreed.” FICO, therefore, has no way of knowing whether you foreclosed,used a short sale, or gave the deed back to the lender in lieu of foreclosure.
This is why short sales have the same impact on credit scores as foreclosures. Read on, though, and you’ll find out why the short sale is actually better for your future credit than a foreclosure. That said, one of the items FICO scrutinizes when compiling your score is your payment history. Therefore, the number of late mortgage payments will impact your score.
Time is of the essence.I know I‟ve said this several times, but I need to say it again, especially if you‟re considering a short sale. Make the move, right now. Unless Congress steps forward before the end of 2012, the Mortgage Forgiveness Debt Relief Act will expire. If it does, the tax ramifications of a short sale may be quite painful.
Short Sale Advantages
If your mama was anything like mine, she most likely pointed out to you, over and over, that every dark cloud has a silver lining. The short sale “dark cloud” is no different. Although you‟re in an untenable situation, when choosing whether or not to undertake a short sale, it‟s a good idea to know the best of this bad situation.
Avoid the Alternatives
Choosing to short sale your home, provided you begin the process in a timely fashion, allows you to avoid some of the more onerous options, such as bankruptcy and foreclosure.
Buy Another Home Sooner
When you read that a short sale is “better for your credit” than a foreclosure, what the confused writer is trying to say is that, although the short sale impacts your credit score in the same way as a foreclosure, it is viewed by lenders more favorably. The waiting period to purchase a new home, under Fannie Mae guidelines, is three years after performing a short sale. After a foreclosure? You may have to wait anywhere from five to seven years.
Read Also :
- Benefits of refinancing Your Mortgage
- How to Refinance Your Mortgage
- Things to do before you sell your house : Getting house ready to sell checklist
- How to stop foreclosure at the last minute