Times are tough, and if you had bad credit when you got your mortgage, you might still have bad credit and be unable to refinance. However, if your mortgage is causing you some hardship and you are in danger of defaulting, contact your mortgage lender about a loan modification. Continue reading ‘Can’t Refinance with Bad Credit? Maybe You Can Modify’
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Loading ...It’s nearly impossible to refinance your house these days without the lender requiring an appraisal (unless you’re a lucky FHA borrower getting a streamlined refinance–and we’ll talk about that tomorrow). And normally the biggest part of determining what your home is worth is the sales prices of nearby homes. But should the prices of foreclosure and short sale properties be counted when calculating what your property is worth? Continue reading ‘Feeling Undervalued? The National Association of Home Builders Agrees’
(5 votes, average: 4.8 out of 5) Loading ...Perhaps indirectly.
A short sale is worked out between you, your lender(s), and the buyer(s). Therefore, everything is open to negotiation. Continue reading ‘Can My Lender Grab My Personal Savings in a Short Sale Deal?’
(9 votes, average: 4.89 out of 5) Loading ...It’s bad enough that you can’t pay your mortgage and have to go through foreclosure or a short sale. But it could get worse than that if you’re not careful. Continue reading ‘Foreclosure / Short Sale Pitfalls’
(9 votes, average: 5 out of 5) Loading ...Most lenders won’t even consider a short sale until you are at least 60 days in arrears and dealing with the loss mitigation/remediation department (not customer service). And while not making your payments is a sure way to get their attention, it’s a risky strategy that will destroy your credit and may not get you out of your mortgage jam.
And few lenders will even speak with you about a short sale unless you approach them with a contract. So it’s kind of a chicken and egg thing–you can’t guarantee the buyer that your lender will allow a short sale, and you can’t discover the lender’s position unless you have an offer….
Which bring me to the real purpose of a short sale from the lender’s point of view. It’s not to relieve the owner of the burden of a bad investment decision. It’s to minimize the loss to the lender. Period. So if you want to get a short sale approved, you have to show your lender that a short sale will produce the best outcome. This means proving that foreclosure is probably inevitable and that a short sale will save the lender the costs of maintaining and disposing of the property. Here are the factors that make a short sale more attractive to a lender:
• The borrower has insufficient income to make the mortgage payment (job loss, health issues, or other catastrophe is a good reason–too much credit card debt or an expensive Ferrari habit isn’t).
• There isn’t enough equity in the property, due to reduced values, negative amortization, or high loan-to-value ratios to be able to pay off mortgages by selling the property.
• The homeowner lacks the assets to pay the lender in full if the property sells for less than the balance of the loan(s) against it.
To increase your chances of being approved for a short sale, you need to prove the above-mentioned points. Do this by furnishing the following:
• Documentation of income (or lack of). Provide your tax returns, current pay stubs, unemployment compensation, etc. Include a medical diagnosis if applicable. If income reduction is permanent, obtain necessary documentation to prove your claim.
• Document the property value. Get a market analysis (CMA) from a real estate agent, your property tax assessment from your county, even a new appraisal if you think it’s needed to show a drop in your property’s value. If you can get a settlement statement (form HUD-1) prepared to show the estimated expenses and proceeds from the sale it can speed up the process. Include a copy of an offer if you have one. Also, if working with a real estate agent or attorney, put a letter together authorizing them to work on your behalf and allowing the release of personal information between the lender and your representative.
• Document assets. Provide copies of statements (all pages) for every account you have–checking, savings, investments, and business. Don’t leave anything out; your lender will likely notice the omission (remember, you listed your assets when applying for a loan, so it’s not like they can’t check). If your assets are insufficient to offset your deficiency you have an excellent chance of having a short sale approved.
And finally, any request for short sale should include a “hardship letter” which explains why you need to do a short sale. Don’t make it a sob story, but explain what happened and why you are unable to fulfill your obligation as a borrower. Spell out what selling price you are asking the lender to approve and what closing costs and real estate commissions will be involved. Ask the lender to forgive the difference between what is owed and the proceeds of the sale. If the lender doesn’t forgive the balance you could be sued for it in most states. In other cases, the lender may approve the sale but only if you agree to repay part or all of the deficiency over time.
Short sales can work but they take time, effort, and more than a little luck.
(6 votes, average: 5 out of 5) Loading ...Frustration mounts on all sides. The desperate homeowner wants to sell a home and dump a mortgage he can’t afford. The lender wants out with its skin on. The buyer and her agent want to proceed as soon as possible (and they want a good deal to compensate them for the hassle of entering the transaction). And yet the deal doesn’t get done, the home goes into foreclosure, and everyone is disappointed (and a little poorer). Why can’t short sales work even when they are clearly in everyone’s best interest?
One problem is the number of parties involved. To unload your home in a short sale, you have of course the primary lender to placate. But you can also involve a second mortgage holder, a mortgage insurance company, a title company, a secondary investor (like Fannie Mae or Freddie Mac), or a government agency like HUD. And every one of these parties is likely to be swamped with inquiries and understaffed to deal with them.
So first everyone needs a chance to look at and approve the deal. And there are conflicts of interest to deal with–for example, a first lienholder who will be repaid in full will be more enthusiastic about a short sale than the second lienholder or mortgage insurer who will end up writing off the deficiency.
Then, there is the amount of information needed, and the scrutiny required. Lenders won’t consider a short sale for borrowers who are making their payments successfully; those 90-120 days in arrears are likely to get their attention first. Ditto for homeowners with assets who could bring in the difference when their home is sold. Much of the initial approval process is devoted to making sure that a short sale is the lender’s best chance for minimizing loss. The advantage for the lender is in reduced costs–no attorney fees, no having to put the property on its books, maintain it, and arrange for its sale. But short sales aren’t the first resort when there is a chance of collecting the full amount from the borrower.
Then, there is the issue of mortgage insurance. In some cases, the mortgage insurer has to approve the short sale–one more group to check out the offer, verify the homeowner’s hardship, and negotiate a better deal for itself. And sometimes, the obstacle is the primary lender–if it can get more by foreclosing and collecting mortgage insurance proceeds than by allowing a short sale, you won’t get your short sale. And if you are a borrower relying on a short sale to save you from foreclosure, and the deal doesn’t close, you could be really stuck–trashed credit, evicted, and perhaps a deficiency judgment against you.
So a short sale isn’t the great solution it’s cracked up to be. Even the ones that fly through smoothly take at least 120 days. So how can you, as a borrower / seller or as a potential buyer move the proceses along more quickly? That’s the topic for the rest of the week. Feel free to add your questions any time.
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Gina Pogol writes for an online media company about mortgage and finance. In addition to a decade in mortgage lending, she formerly consulted for Experian and other credit bureaus, and worked as a tax accountant for Deloitte. She has a BS in Financial Management from the University of Nevada.
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