Posts tagged Mortgage

I have been asked by a few potential clients and acquaintances about short sales. These are complicated transactions, but can help avoid a foreclosure or loosing your home to the bank, which destroys credit, embarrasses the family and can strip an owner of dignity.

A short sale is basically when a property is sold and the lender agrees to accept a discounted payoff. The lender will release the lien that is secured to the property upon receipt of less money than is actually owed.  In a short sale, the bank or mortgage lender agrees to discount a loan balance due to an economic or financial hardship on the part of the mortgagor. Why would a lender agree to payout less than what is owed? A bank will allow a short sale if they believe that it will result in a smaller financial loss than foreclosing. In addition the deficient balance is not always completely forgiven. It can still be owed, just not protected by a lien on your home, and often relaxed payment terms are available to pay at a latter date. In some instances, the debt is forgiven.

How does one “do” a short sale? It is basically a negotiation between a seller and the lender, again, the lender reviews the proposed pay-off, and balances that against the risk/return of funds if they have to foreclose. Lenders have a “loss mitigation” department that will basically handle the negotiations.  These are sophisticated departments that are evaluating their exposure and risk vs. what they can receive from you as payment. In order to be sure you are represented well in these negotiations, you should be working with a number of professionals that will properly represent you. These are common transactions so the cost for representation is low, but you need to be working with a REALTOR that is well versed in short sales, like me , a real estate attorney, and an accountant. There might be specific tax implications that you need to be aware of to avoid surprises come tax time. This might include paying income tax on the deficient balance if it is fully forgiven.

Here are a few key things that you will need to make a great case for a short sale.

• Hardship Letter – This is simply an explanation of why you must sell. Are you being relocated and must sell? Are you no longer able to make the payments due to loss of a job or other loss of income? Why would you not be able to stay in the home and make the payments until the market recovers? Frankly, this letter needs to feel personal and the sadder, the better. Lenders are not inhumane and will react well if they feel a true hardship exists. They will not react well if they sense any type of fraud or sense that the seller is simply trying to undo a situation that they truly can still manage, simply for personal gain.
• Comparative Market Analysis – This is a key part of a short sale, because it is important to substantiate that fact the that the market in your area has declined and property values have fallen. This would be the reason that you cannot sell your home for enough to pay off the lender.  A REALTOR should prepare a CMA for you to include in your submission.
• Proof of Income and Assets
  This is similar material you provide when  applying for a mortgage. In the case of the application, lenders are looking at your debt to income ratio, to be sure you can afford the monthly payments for the loan you are requesting, as well as reviewing your liquid assets which is simply plugged into the risk assessment formula that the lender uses to assign risk to a mortgage.  In similar fashion, the lender will want to see all of this information again to be sure that there are not ways that you can pay back the mortgage in full (for example if you have liquid assets in the stock market) and to see if you really do have to walk away from the home if you are not forced to sell due to relocation. Lenders are not in the charity business, so they will look at this closely, as they want to be sure you are not going to gain financially from their loss. It is best to fully disclose your assets, in order to avoid fraud.
• An Estimated Sales Sheet - This can be prepared by your REALTOR and a Real Estate Attorney. This is basically a net sheet that would include the proposed sale price of the home, the estimated payoffs to other lenders, closing fees, and payoffs to the real estate agent / broker, loan officers, title and closing agents, etc. This will show the lender what their expected payoff will be, and therefore the deficient amount on the loan payoff. This estimate must be backed by the listing agreement, a purchase agreement, and other payoff statements for any other pending loans or balances. Expect the lender to potentially negotiate with other parties like second mortgage lenders in order to disperse losses to other interested parties, or refuse to pay certain items such as home protection plans. Keep in mind that any party can stop a short sale if not paid in full at closing.

Sound confusing right?  So why would one do a short sale. A short sale does adversely affect a person’s credit report, though the negative impact is far less than a foreclosure or bankruptcy.  It is also shows your home as sold and avoids the personal embarrassment of a foreclosure.

I know it sounds daunting, but if you find yourself in a tough financial situation due to your home, feel free to contact me, or a REALTOR in your area. We can help complete a preliminary review of your specific situation, and help you decide if a short sale is a viable option for you to pursue.

Best,

Jill