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Information for sellers of distressed property - Short Sales and Foreclosures
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Information for sellers of distressed property - Short Sales and Foreclosures
No one purchases a home thinking "I’ll just do a short sale if things don’t work out." Many successful individuals, families, and investors just like you are finding themselves with no easy way out in troubled financial times. I see this as an opportunity to help people make rational decisions and get out of financial distress with options provided by a professional in the real estate field. Homeowners in pre-foreclosure or a defaulting loan situation need to speak with an educated real estate agent as quickly as possible. For many homeowners, foreclosure is not the only option, but most homeowners don’t get the opportunity to explore other solutions. By dealing with a real estate agent who has earned the Certified Distressed Property Expert Designation (CDPE), you can ensure that the highest level of professionalism and expertise will be provided. I am a Realtor equipped with the knowledge to help.
What is a Short Sale?
A short sale can occur when the borrower’s mortgage company agrees to accept less than the full balance due on a mortgage. The borrower may owe more on the mortgage than the property is currently worth and may not be able to continue making payments due to an economic or financial hardship. (A hardship can be defined as a material change in the financial situation of a homeowner that is or will affect their ability to pay their mortgage)
Example: If you owe $200,000 on your mortgage, but your property is only worth $175,000, your lender may approve a short sale by accepting $175,000 for your property and possibly forgiving the additional $25,000 you currently owe on your mortgage.
| What Qualifies as economic hardship? | ||
| Unemployment | Reduced Income | |
| Divorce | Separation | |
| Death of a spouse or family member | Business failure | |
| Payment increase or Mortgage adjustment | Mandatory job relocation | |
| Severe illness | Medical bills | |
| Damage to property | Military service | |
| Inheritance | Insurance or Tax increase | |
| Too much debt | Incarceration | |
What is a Foreclosure?
Foreclosure is the legal right of a mortgage holder or other third-party lien holder to gain ownership of the property and/or the right to sell the property. In other words they seize the property from you for not making payments. They then can sell the property and use the proceeds to pay off the mortgage. If the lender chooses to foreclose on a property, the lender can lose up to 40% of the mortgage amount because of extra costs involved with foreclosure. Attorney fees, court costs, lost interest, eviction costs, property maintenance costs, and selling costs to name a few. Foreclosing on a property can take up to 6 months or longer in the sate of Florida. Therefore, it is sometimes in the best interest of the lender to accept the short sale rather than to proceed with the foreclosure.
Issue
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Foreclosure
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Successful Short Sale
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Any Future Fannie Mae Loans to buy a Primary Residence (Effective May 21,2008)
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A homeowner who loses a home to Foreclosure is ineligible for a Fannie Mae backed mortgage for a period of 5 years.
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A homeowner who successfully negotiates and closes a short sale will be eligible for a Fannie Mae backed mortgage after only 2 years.
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Any Future Fannie Mae Loans to buy a Non Primary Residence (Effective May 21, 2008)
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An investor who allows a property to go to Foreclosure is ineligible for a Fannie Mae backed investment mortgage for a period of 7 years.
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An investor who successfully negotiates and closes a short sale will be eligible for a Fannie Mae backed investment mortgage after only 2 years.
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Any Future Loan with any Mortgage Company
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On any future financing application, a prospective borrower will have to answer YES to question C in Section VII of the standard 1003 that asks “Have you had property foreclosed upon or given title or deed in lieu thereof in the last 7 years?” this will affect future rates.
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There is no similar declaration or question regarding a short sale.
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Credit Score
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Score may be lowered anywhere from 250 to over 300 points. Typically will affect score for over 3 years.
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Only late payments on a mortgage will show and after sale mortgage will be reported as paid or negotiated. This will lower the score as a little as 50 points if all other payments are being made. A short sale’s affect can be as brief as 12 to 18 months.
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Credit History
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Foreclosure will remain as public record on a person’s credit history for 10 years or more.
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Short sale is not reported on a credit history. There is no specific reporting item for ‘short sale’. A loan is typically reported ‘paid in full, settled’.
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Security Clearances
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Foreclosure is the most challenging issue against a security clearance outside a conviction of a serious misdemeanor or felony. If a client has a foreclosure and is a police officer, in the military, in the CIA, Security, or any other position that requires a security clearance in almost all cases clearance will be revoked and position will be terminated.
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A Short Sale on its own does not challenge most security clearances.
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Current Employment
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Employers have the right and are actively checking the credit regularly of all employees who are in sensitive positions. A foreclosure in many cases is ground for immediate reassignment or termination.
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A short sale is not reported on a credit report and is therefore not a challenge to employment.
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Future Employment
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Many employers are requiring credit checks on all job applicants. A foreclosure is one of the most detrimental credit items an applicant can have and in most cases will challenge employment.
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A short sale is not reported on a credit report and is therefore not a challenge to employment.
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Deficiency Judgment
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In 100% of foreclosures (except in those states where there is no deficiency) the bank has the right to pursue a deficiency judgment.
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In some successful short sales it is possible to convince the lender to give up the right to pursue a deficiency judgment against the homeowner.
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Deficiency Judgment (amount)
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In a foreclosure the home will have to go through an REO process if it does not sell at auction. In most cases this will result in a lower sales price and longer time to sale in a declining market. This will result in a higher possible deficiency judgment.
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In a properly managed short sale the home is sold at a price that should be close to market value and in almost all cases will be better than an REO sale resulting in a lower deficiency.
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Printable version of this form
Foreclosure can quite possibly be the most devastating financial and emotional process a homeowner or family can go through. The reality is that many foreclosures should never happen and homeowners have options…..only they don’t know where to turn for a solution. Below are strategies you can use to possibly avoid foreclosure:
Reinstatement
If the reason you have missed payment was only temporary and it has been resolved, then you have the option to reinstate your mortgage right up to the bank sale. In order to reinstate your mortgage, you must pay all missed payments, late fees, and legal fees that are due up to the date the loan is reinstated. You can request this calculated amount from your mortgage company in the form of a reinstatement letter. This letter will typically expire after thirty days since the amount owed is time sensitive. A simple reinstatement will require a onetime payment of all delinquent funds in full.
Forebearance or Re-Payment Plan
If the issue causing you to miss payments was only temporary and you are not able to make a onetime reinstatement payment, you may be able to negotiate a forbearance or repayment plan. If you do not have the means to repay all of the missed payments and legal fees, this is another option that also reinstates the mortgage. The lender allows you to pay the missed (delinquent) amount over a period of time or they move the missed payments to the end of the amortization of the loan. It is much more likely you will be given a period of time in which to pay delinquencies back.
Sell the Property
If you have equity in your property you can sell it and cure the foreclosure.
Refinance
If you have sufficient equity in your home, are receiving income, and your credit has not been damaged (badly), you may be able to refinance your mortgage. This typically helps reduce monthly payments by lowering your previous interest rate to a new, lower rate in today’s financing market. As long as rates are lower today than when you purchased, refinancing can be a great option to reduce your monthly out of pocket expense.
Mortgage Modification
In some cases where you have the capability to afford your mortgage payments or pay very close to your mortgage payments, the mortgage company may qualify you for a mortgage modification. A mortgage modification is very similar to refinancing at a lower interest rate. The lender lowers your interest rate on the existing loan in turn lowering your monthly payments. You will have to qualify for a modification by sending in proof of income and expenses. If this option is available, it is an excellent opportunity for you to maintain ownership of your property.
Short-Refi
This relatively new phenomenon shows just how far some mortgage companies and lenders are going to avoid foreclosing on a property. This process involves the refinancing of a home with a reduction in the principal balance and often the interest rate as well. You will need to qualify for this process by showing both a hardship and the ability to pay the new mortgage, often through a fully documented qualification process by the lender.
Short Sale
When you owe more on a mortgage than the property is currently worth and one of the above solutions does not apply to you, the option of pursuing a short sale may occur. You must have a valid financial hardship detailing why you can not make mortgage payments. (A hardship can be defined as a material change in the financial situation of a homeowner that is or will affect their ability to pay their mortgage)
Deed-in-Lieu of Foreclosure
A Deed-in-Lieu of Foreclosure is sometimes referred to as a friendly foreclosure since you essentially give the deed back to the bank. This may prevent banks from having to go through a lengthy and costly foreclosure process, and in exchange sometimes forego their rights to enforce a deficiency judgment. The mortgage company agrees to take the deed back in exchange for the property and typically has no further recourse. If you have equity in your property, this is not a good option since you give up any right to the property.
Bankruptcy
A bankruptcy may stop a foreclosure and allow you to reorganize your debt and keep the property. The reality however is that more often than not this only stalls the foreclosure process. If you are not able to make the payments after bankruptcy the house will foreclose anyway. Another drawback to bankruptcy is the difficulty to sell the property once you enter the process.
Service members Civil Relief Act (SCRA)
The SCRA bill was signed into law on December 19, 2003. This law provides certain protection to military personnel that are in foreclosure in specific situations. The law also provides service members other protections. If you are in the military please consult with an internal resource.
As it applies to mortgages the law reads:
The SCRA can also provide temporary relief from paying your mortgage. To obtain relief, a military member must show that their mortgage was entered into prior to beginning active duty, that the property was owned prior to entry into military service, that the property is still owned by the military member, and that the military service materially affects the member’s ability to pay the mortgage.
It is important to note that this relief is only temporary and in many cases the most prudent course of action for a Service member is to sell their property.