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Short Sale Possibilities

Short Sale Sign Ahead

What is a Short Sale?

If you owe more on your mortgage than the house is worth, and you can't afford to keep it even though you want to. You get to start over again without bringing the big obligation along. This won't destroy your credit; just walking away from your home will.

Basically, your lender will accept a lump sum payoff that is less than your principal balance for only one reason; your only other choice is to file bankruptcy and without the reduction it would be impossible to resell your home courtesy of the current actual market value. You can always trust the lender to look out for their own interests, (that is to take a small loss and avoid the lengthy and costly foreclosure process.)

In a Short Sale, the lender agrees to let you sell the home for a specific amount that is less than you still owe on the mortgage, without holding you responsible for the difference.

In a Short Sale, everyone wins. You escape bankruptcy, the new owner gets low cost housing, and the lender gets a non-performing asset off of their books with a minimal loss (which improves their own rating.)

Do I Qualify?

From this scenario, it should be obvious that your lender will not be motivated to accept a lesser amount if you can handle the current mortgage payment. Furthermore, the title needs to be clean. So if your home has any secondary liens on it (especially from a different lender,) the approval of your Short Sale will depend on the willingness of the other lender to forfeit all or at least part of the money you owe them.

Just the same, if your lender wasn't open to modifying the loan, and foreclosure or bankruptcy are your only other options, then you have nothing to lose. Prepare a verifiable explanation of your financial situation and how it got that way; then back it up with bank statements, tax returns and pay stubs for loss of income, copies of your bills for cost of living expenses, an current appraisal to show the need for a reduced price sale, and any documentation of a specific household hardship to be considered. This is called a 'Hardship Letter'. Then present your request to the lender for a Short Sale.

  • Notice: If you happen to be one of those homeowners talked into choosing a very low starting payment on an option ARM that didn't even cover the low interest rate offered, you have what is called a "Negative Amortization" loan which is putting you even further into debt. These loans have been determined to be 'predatory' and are one of the main reasons for the HAMP, HARP and HAFA government programs mentioned elsewhere throughout this site. A Negative Amortization loan may also be grounds for suing your lender.Need a Real Estate Lawyer?.

Precautions:

So, if you decide to pursue a Short Sale, there are a few precautions you will want to take. First and most importantly, be sure to get all the terms in writing; especially a statement that the Short Sale will release you of all of your debts to the lender, including the deficiency.

You will want another statement explaining how the lender will report the sale to credit agencies. They have a choice between "Paid in full" and "Paid in full for less than full balance." Try for "Paid in full" to protect your credit score. "Paid in full" will allow you to buy another home pretty soon; whereas "Paid in full for less than full balance" will normally put a two year delay in your new home chances. By the way, foreclosure will usually cost you at least five years, often seven, and bankruptcy and its side effects stay on your report for seven to ten years.

Also be advised that your the lender could issue you a 1099 for the deficiency amount, which you would have to pay taxes on. Fortunately there are a few ways out of that. Due to the Great Recession, the IRS will waive that for certain years. If you have a 'recourse' loan and you can show that you were 'insolvent' at the time of your Short Sale, then you usually won't have to pay taxes on it. Or, if you have a 'nonrecourse' loan (where the loan is secured by the property) the shortfall on the sale is not your responsibility. Professional tax advice from a tax attorney would be useful here to make sure of your loan type, and any specific differences in state law.

Closing Costs & Other Fees:

Although it is customary for the buyer and seller to split the Closing Costs, when doing a Short Sale, the buyer usually pays most of them. The sheer volume of Closing Costs can come as quite a surprise if you decide to do a "For Sale By Owner", so here is a typical list you can check out. It is also common for a Short Sale to be "As Is" which affects some of those costs.

Some of the most common closing costs include:

  • Appraisal Fee
  • Attorney Fees
  • Home Inspection
  • Lead Paint Inspection
  • Radon Inspection
  • Mail and/or Courier Fees
  • Mortgage Discount Points
  • Mortgage Satisfaction Fees
  • Property Photographs
  • Real Estate Agent Commission
  • Recording Fees
  • Repairs Required by Code
  • Revenue Stamps
  • Survey
  • Termite/Pest Inspection
  • Title Examination
  • Title Insurance

Expenses that are commonly pro-rated include:

  • Assessments
  • Heating Oil or Gas
  • Homeowner Association Fees
  • Interest on Assumed Mortgages or other Associated Funds
  • Interest on Deposits
  • Prepaid Extended Warrantees
  • Prepaid Mortgage Insurance and other Escrow Items
  • Prepaid Service Contracts
  • Rents Collected
  • Taxes Paid
  • Utilities

The Closing Costs above may not cover any needed repairs, deferred maintenance and other expenses that might come up.

HELP:

If a Short Sale is right for you, you will need help. If you'd rather not handle your own Short Sale, we would be glad to arrange professional services for you. For a no-obligation review of your situation, please feel free to send us an email with your contact information and a brief description of what you need. You will be directed to a reliable Short Sale professional that will be glad to help you.

Or, you can go here to get help!

HAFA

On April 5, 2010, the U.S. government started the Home Affordable Foreclosure Alternatives Program. HAFA is part of HAMP and is designed to help homeowners who are unable to retain their home with HAMP to take advantage of Short Sales and Deeds-In-Lieu of foreclosure options. The main benefits to you include 6 months to sell the house at a discount, partial mortgage payments during the process, $1,500 to help you move, up to $3,000 to help clear secondary liens, and it fully releases you from further liability.

HAFA is a complex government program with 43 pages of guidelines and forms. To help you better understand the process The National Association of REALTORS® (NAR) has put together a summary of the new HAFA Program with an FAQ. Below is a brief overview from that summary:

The HAFA Program:

  • Complements HAMP by providing a viable alternative for borrowers (the current homeowners) who are HAMP eligible but nevertheless unable to keep their home.
  • Uses borrower financial and hardship information already collected under HAMP.
  • Allows borrowers to receive pre-approved short sale terms before listing the property (including the minimum acceptable net proceeds).
  • Prohibits the servicers from requiring a reduction in the real estate commission agreed upon in the listing agreement (up to 6%).
  • Requires borrowers to be fully released from future liability for the first mortgage debt and, if the subordinate lien holder receives an incentive under HAFA, that debt as well (no cash contribution, promissory note, or deficiency judgment is allowed).
  • Uses a standard process, uniform documents, and timeframes/deadlines.
  • Provides financial incentives: $1,500 for borrower relocation assistance; $1,000 for servicers to cover administrative and processing costs; and up to a $1,000 match to investors for allowing a total of up to $3,000 in short sale proceeds to be distributed to subordinate lien holders.
  • Requires all servicers participating in HAMP to implement HAFA in accordance with their own written policy, consistent with investor guidelines. The policy may include factors such as the severity of the potential loss, local markets, timing of pending foreclosure actions, and borrower motivation and cooperation.
  • Does not take effect until April 5, 2010, but servicers may implement it before then if they meet certain requirements. The program sunsets on December 31, 2012.

If you qualified for the HAMP loan modification, but failed in that modification attempt for some reason, HAFA may be a streamlined option out of your predicament.

Keeping the Faith:

Having to go through this life changing process can be one of the most trying experience you will ever endure. When we buy the home we expect to retire in, lose it, and then have to start all over again, it can be destructive to our self confidence. To take some of the edge off of it you may want to remember this quote written by Liz Pulliam Weston in her column on MSN Money: "Understand that this, too, shall pass. Nothing is permanent in life, and that certainly applies to your financial situation. The hit to your credit scores and your wealth may be severe, but you can rebuild over time."

If you do go forward with a HAFA Short Sale, your lender has the option of attaching the Deed-In-Lieu of Foreclosure option to the Short Sale Agreement just in case your home doesn't sell within the designated timeframe. The Deed-In-Lieu of Foreclosure option can also stand alone and be implemented after a failed Short Sale attempt.

Update!

Freddie Mac's new short sale program is designed to cut short sale timelines in half! Freddie Mac recently announced that thanks to its Freddie Mac Standard Short Sale program (launched November 1, 2012), the short sale process "will decrease by approximately 50% to 75%" according to Tracy Mooney, senior vice president for Freddie Mac.

Whether you qualify for the government program, or just go directly through your lender, we hope this information has been useful to you and given you a better understanding of your options. You may use this link if you would like more information on Deed-In-Lieu.

If you are currently meeting your monthly mortgage obligations and can continue to do so indefinitely, then a Short Sale program would be very difficult for you to get approved. In that case you may want to consider your other options.




FAQ: Things To Consider

Creditworthiness 'After a Short Sale' versus 'After a Foreclosure':

One of the most commonly asked questions about a short sale is how it will impact credit and the ability to purchase a home in the future. Whether you are a buyer, seller or investor, it's advisable to educate yourself on this all important aspect of credit. You will want to become fully informed before making a final decision that impacts your financial future. Here to help sort through the confusion is a quick overview on credit after a short sale or foreclosure. Remember, every situation is unique in some way, so these estimates represent the average experience of most individuals...your own circumstances may vary.

Average Time it Takes to Rebuild the Credit to Purchase a Home:

  • Five to seven years when after a foreclosure.
  • Three to seven years after a foreclosure with extenuating circumstances such as disability, death of a spouse, etc.
  • Four to seven years after a Dead in Lieu of foreclosure.
  • Zero to two years after a Short Sale.

Future Credit Concerns:

A lower credit score means auto and other loans are likely to come with much higher interest rates, and credit card issuers may charge more interest or refuse to issue you a card. In addition, many states give lenders varying degrees of scope to seize bank deposits, cars or other assets belonging to people who default on mortgages.

Short Sales Win Hands Down:

Sellers wishing to minimize damage to their financial future clearly come out ahead when using a short sale, but it's still possible to further decrease the downside by avoiding a 60-day late payment through working closely with the lender. The objective is to achieve a quick price agreement while setting aside enough funds for 20% down on a new (smaller) loan. In fact, homeowners that maintain a solid payment history and work-out an agreeable short sale deal early enough may find it possible to downsize to a new home with no visible ding in their credit. Without PMI and a reduced debt-to-income ratio, sellers are finding it possible to take advantage of lowered property values to immediately purchase another home for a fraction of the cost (and debt burden) owed on their prior home. It's a win-win for all involved, but only if you understand the benefits and work aggressively to seal the deal.

Options:

If you are in need of a Short Sale, and also need some help, we would be glad to arrange professional services for you. For a no-obligation review of your situation, please feel free to send us an email with your contact information and a brief description of what you need. You will be contacted by a reliable Short Sale professional that will be glad to help you.

If you are currently meeting your monthly mortgage obligations and can continue to do so indefinitely, then a Short Sale program will not work for you. In that case you may want to consider your other options.



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