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Preserving Your Financial Future
A Short Sale is a great way to sell your home in a tough economic environment. Simply put, a Short Sale allows a seller to sell their home when they owe more than the selling price.
A Short Sale is a great way to sell your home and avoid the detrimental effects of a full foreclosure, preserving your financial future by eliminating the unknown.
Although a short sale does not eliminate damage to your credit rating it is generally agreed that a Short Sale will have substantially less impact on your credit than a foreclosure. The final results of a Short Sale will also give the seller a clearer picture of the potential for further collection.
A Short Sale is when the seller is able to sell their home when the sale price is less than what is owed to the lender(s). Recently it is a common occurrence, and is a legitimate way to sell your home when the sale price has dropped below the amount owed to the bank. There are a number of issues that need to be addressed when considering a Short Sale transaction. The Short Sale transaction process is extremely long and demands that the seller provide a substantial amount of paperwork.
Short Sales Primer
For owners who can no longer afford to keep mortgage payments current, there are alternatives to bankruptcy or foreclosure proceedings. One of those options is called a "short sale." When lenders agree to do a short sale in real estate, it means the lender is accepting less than the total amount due. Not all lenders will accept short sales or discounted payoffs, especially if it would make more financial sense to foreclose. If you are considering buying a short sale, there could be drawbacks. For your protection, I suggest that all borrowers
- Obtain legal advice from a competent real estate lawyer
- Call an accountant to discuss tax ramifications
Homeowner options when facing possible foreclosure
- Do Nothing
- Pay off/Refinance
- Reinstatement
- Loan Modification
- Forbearance
- Partial Claim
- Deed in Lieu of Foreclosure
- Bankruptcy Options
- Sell – Three different options
Qualifications for a short Sale
Consider the following to determine whether you may qualify for a short sale. If you cannot answer yes to all four requirements, you may not qualify for the short sale.
The Home’s Market Value Dropped.
Hard comparables sales must substantiate that the home is worth less that the unpaid balance due to the lender. This unpaid balance may include a prepayment penalty.
The Mortgage is in or Near Default Status.
It used to be that lenders would not consider a short sale if the payments were current, but that is no longer the case. Realizing that other factors contribute to a potential default, many lenders are eager to head off future problems at the pass.
The Seller Has Fallen on Hard Times.
The seller must submit a letter of hardship that explains why the seller cannot pay the difference due upon sale, including why the seller has or will stop making the monthly payments.
A few examples of hardship are:
• Unemployment
• Divorce
• Medical emergency/ Sudden illness
• Bankruptcy
• Death
The Seller Has No Assets
The lender will probably want to see a copy of the seller’s tax returns and/ or a financial statement. If the lender discovers assets, the lender, may not grant the short sale because the lender will feel that the seller has the ability to pay the shorted difference. Sellers with assets may still be granted a short sale but could be required to pay back the shortfall.
For example, if the seller has a significant amount of cash in a savings account, may own other real estate, bonds, of even an IRA account, the lender may determine that the seller has assets. However, the lender might discount the amount the seller is required to pay back.
How Long Does It Take?
The Short Sale process is dynamic and does vary widely from lender to lender. Even 2 transactions with the same lender can vary extensively in the time it takes for the transaction to be processed and the terms that the Lender is willing to accept. Because of this it is extremely difficult to accurately predict the time frame it will take to complete your transaction. Knowing this, it is important that both the buyer and the seller are willing and able to endure the Short Sale process. Patience is a key to the successful outcome of the Short Sale.
A Simple 5 Step Process
Although the 5 steps are truly simple in nature, each step will take longer than seems reasonable. The lenders are understaffed and take an extended period of time to make even the smallest of decisions. Be prepared to be patient and let the process progress at its natural pace. Here is an outline of the 5 basic steps and the time period you can expect.
Stage 1 – Collection of Documents
Time- 3 days – 2 weeks
Stage 1 is complete when all the documents for a Short Sale package have been collected from the seller and the selling agent. Depending on the cooperation level and ability of the seller to provide documents, stage 1 can be completed relatively quickly. Once all of the documents are collected, the entire package of documents will be sent to the lender, for review.
Stage 2 – Document Package is accepted by the Lender
Time – 3 days – 2 weeks
Usually a lender only accepts the Short Sale packages via fax. Typically it takes 2-3 business days for the fax to be loaded into the lenders system, and for the lender to verify they received it. If it does not appear in the lenders system after 4 days, the lender will ask that the package be refaxed repeatedly. This process may be repeated several times before the lender actually verifies the receipt.
Stage 3 – Order BPO
Time – 1-3 months
A BPO (Broker Price Opinion) is similar to an appraisal; it is done by a real estate broker and will give the bank a general idea as to the value of the property.
Stage 4 – BPO acknowledged received by the Lender
Time – 3 days – 2 weeks
This stage is a great demonstration of the lack of urgency on behalf of the lender. What should only take hours can take as long as 2 weeks.
Stage 5 – Review and Approval
Time – 2 weeks – 2 months
There is a tremendous amount of behind the scenes work that occurs within this step. Logic would dictate that the lender now has all of the facts and should be able to make a quick decision, but that usually is not the case. At this point in the process we often find that they have lost documents, or have reassigned your property to a new person. This may trigger the entire process to restart from stage 1. Although this is very frustrating, for all parties, it is the nature of this process, both buyers and sellers need to be prepared to have this process start and stop, it’s a classic case of “hurry up and wait”
WHAT IS THE BENEFIT
The potential benefit for the seller is as follows:
- Less effect on your credit than a foreclosure
- An accurate accounting of what is potentially owed.
When you complete the Short Sale process you will know what the lender is expecting. In some cases the full deficiency is waived.
Short Sale Consequences
A short sale is dependent on a buyer making an offer to purchase. If you do not receive an offer, you will not qualify for a short sale. So even if you meet all the other criteria, it is possible that no one will buy the short sale. It is also dependent on the lender accepting the buyer’s offer. If the lender rejects the offer, a short sale will not take place.
Tax Consequences
If the lender agrees to the short sale, the lender may possess the right to issue you a 1099 for the shorted difference, due to a provision in the IRS code about debt forgiveness. Many situations are exempt from debt forgiveness, according to the Mortgage Forgiveness Debt Relief Act of 2007.
You should speak to a real estate lawyer and a tax accountant to determine the amount of short sale consequences, and whether you can afford to pay the taxes, if any.
Q: Credit Impacts vs. Foreclosure?
A: How they calculate your FICO score is a secret.
How your FICO score, the score that lenders use to evaluate your credit worthiness, is a trade secret. No one other than FICO really knows all of the factors that might affect your score. But the general consensus is that a Short Sale will have approximately ½ the effect on your credit as a full foreclosure. That means that your FICO score will drop ½ as much, and the time it takes to recover the detrimental effect on the FICO score will be about ½ as long, 1 ½ years as opposed to 3-5 years for a foreclosure.
Foreclosure Timeline
First Month Missed Payment:
The first month your payment is missed your mortgage company is likely to contact you by mail and/or telephone to inform you of your delinquent status.
Second Month Missed Payment:
The second month your payment is missed your mortgage company is likely to begin calling the contact numbers that they have for you, in order to discuss why you have not made a payment. It is important that you do not avoid their telephone calls. Try to stay calm on the telephone and explain to them your situation and what you are trying to do to resolve it. You still may be able to make one payment at this time to prevent yourself from falling three months delinquent.
Third Month Missed Payment:
At this point, you are likely to receive a letter from the mortgage company stating the amount you are delinquent, and that you have 30 days to bring it current. This is called your “Demand Letter” or “Notice to Accelerate”. If you do not pay the specified amount or make some form of arrangement by the date given, they are allowed at that time to refer you to foreclosure or accelerate your mortgage. They are unlikely to accept less than the total due without prior arrangements if you have received this letter.
- Foreclosure/Acceleration: This means that they forward your account to their attorneys. You still have time to work something out with the mortgage company.
Fourth Month Missed Payment:
Now you are usually nearing the end of the time allowed in your Demand Letter or Notice to Accelerate. If this expires and you have not paid the full amount or worked out arrangements, then you will be referred to their attorneys. At this time, you incur all attorney fees as part of your delinquency.
The attorney then schedules a Sheriff Sale, which is the actual date of foreclosure. You will be notified of this date by mail, along with a notice taped to your door. This is NOT a move-out date.
Sheriff Sale Date:
This will be scheduled for approximately four to six weeks after the attorney receives your file. You have up until this date to work out arrangements with the mortgage company or to pay the total amount owed (reinstatement amount).
After the Sheriff Sale, if nothing is done to resolve the situation, then you will enter the Redemption Period. State Law requires that this period is no less than 30 days and no more than one year. Most mortgages allow 6 months unless the property is agricultural or more then 3 acres. You will be notified of your time frame on the same notice that states your Sheriff Sale date. This is still your time to reside in the home.
Last chance for Short Sale:
It is best to Short Sale your property before the Sheriff Sale, but you have until the end of the redemption period to try to sell your property.
Important:
This timeline does NOT apply for Manufactured Housing (Mobile Homes) or Land Contracts.
Forget Logic… the Banks Don’t Use It
Short Sale practices are a new phenomenon for the entire industry. Historically the banks are not used to working with sellers to recover the funds that they originally lent. Until recently the lenders only process for recovering their loan was to foreclose. Due to the fact that this entire process is new to their organization they, sometimes, behave in what appears to be a completely illogical manner. Don’t expect this process to follow any logical procedure. The banks act and do things that seem to counter the simplest common sense. What may seem to be a logical choice doesn’t mean that the lender will make that choice. in fact, more often than not, the lender will make choices that may seem contrary to common sense. Keep in mind that the lenders are trying to process thousands of these transactions, with hardly the staff to accomplish this task efficiently. They also may need to get approval from a number of sources internally. Remember that the company that you make payments to may only collect the payments. They may also have to get approval from an investor, someone you have never heard of, to complete the Short Sale process.
The Lender Blame Game
Lenders don’t want to acknowledge the benefit of hiring a consultant to help you complete your Short Sale. They also don’t want to pay the fees associated with that assistance. Don’t be surprised if the lender tells a story about the lack of communication or makes some other derogatory comment about your Short Sale consultant. Although the Short Sale consultant has been in constant contact with the lender, they often make up a story to hide their own lack of competence.
Final thoughts…
Although trained experts will walk you through the entire Short Sale process and handle all of the rigorous and tedious communication with your lender, there is no magic bullet for these transactions.
Although a trained expert who has completed hundreds of Short Sale transactions will be responsible for your transaction, the process may still feel overwhelming. There are instances in which tremendous progress is made and everything looks good, and then suddenly, communication with the lender starts to deteriorate or stop. Changes in internal policy or procedures or changes in personnel, for the short sale lender, can create a situation where a smooth transaction suddenly becomes a difficult one.
There are several reasons why lenders will make changes:
- they may be covering for their own incompetence
- They may have had a change in their internal policies
- They may not want to pay the Short Sale specialist their fee
In any case you need to make sure that you review the facts that you have available to you. Keep in mind that the bank may not know the real facts or is trying to rewrite them.
Edwin St. Aubin & Company uses the services of a professional short sale company.
They have performed several hundred successful short sale transactions, and are a highly regarded provider of short sale negotiation with your lender.
If you feel that you are a candidate for a short sale on your home please contact by email us at edwinwin@mirealsource.com or 586-939-1400 for an interview to determine your eligibility today. |
