Tag Archive for 'short sale'

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.

Check out Making Home Affordable

If your mortgage payment (including principal, interest, taxes, insurance, and HOA dues if applicable) exceeds 31% of your gross monthly income, you may qualify. The HAMP Web page gives a lot more details. You'll also need to know if your bad credit mortgage lender is participating in HAMP. You can find that out HERE.

Even if your lender is not a HAMP participant, or you don't meet the program guidelines, you may be able to score a loan mod anyway. Better for the lender to modify your mortgage than to see the income stream dry up.

Lender May Meet You HAFA Way

An alternative to a HAMP modification is the new HAFA (Home Affordable Foreclosure Alternative) short sale program, which rolls out in April. That provides a formalized and streamlined procedure and timeline for short sales and takes the uncertainty out of the process. Should you wish to sell your property, you'll know up front what price the lender is willing to accept and your buyer can have a lot more confidence that the deal will go through.

Finally, try an FHA or bad credit mortgage lender. You have nothing to lose by filling out the form on this site, and you may find a company willing to get you a better interest rate than you have now.

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?

The National Association of Home Builders doesn't think so. And neither do I--here's why. Foreclosure sales are associated with many risks--there is a chance that the title might not be clear, the previous owners may have vandalised the property, and the home is often not worth what the lender initially asks. So the only way to get a foreclosed property unloaded, knowing that buyers are taking substantial risks when they open escrow, is to offer significant discounts to entice an investor. A buyer that would not have to worry about these issues if he or she was buying YOUR house.

Same thing for short sales. There is a reason that only about one in ten of these go through. The banks want to minimize their losses but are also overwhelmed with problem loans and understaffed to deal with them. So the process takes months. Lenders won't even tell the homeowner if they'd consider a short sale until an offer is presented. So the buyer doesn't even know if the bank will allow a sale. Many banks even have a policy of requiring more than one offer before making a decision.

And some just prefer to foreclose and get it over with. A local Realtor here in Reno told me about a short sale home listing that received SIX offers, two of them unconditional, all-cash deals. She called the lender every day for over five months. The employee assigned to the house finally said, "I have had this hanging over my head for months. But I can get it off my desk right now if I foreclose on it. And that's what I'm going to do right now." And she did, and the bank immediately listed the house for less than four of the offers had been. So people who buy short sale property only do it if the rewards are worth the hoops they will have to jump through--a substantial discount Which, again, they would NOT have to do were they buying YOUR home.

So, while I think that the trends in a neighborhood (prices increasing or decreasing, how long does it take to sell an average home, and the percentage of homes in foreclosure) should have a bearing on the lender's requirements, they should not be used to value YOUR actual home. The lender could simply require more equity if your credit, income, assets, or other factors aren't up to snuff. And if you are trying to sell YOUR home, don't you want it to be evaluated based on it's features and condition, rather than an artificial situation created by someone down the street who may have been an irresponsible borrower?

Perhaps indirectly.

A short sale is worked out between you, your lender(s), and the buyer(s). Therefore, everything is open to negotiation. The lender can request a contribution from you as a condition of okaying the deal--but you can say no. Of course the lender will want as much as it can get from you and the buyer. Just as the buyer wants the best deal possible and you would like to avoid being skinned alive.

The lender may request cash from you at closing or demand that you sign a note for part or all of the shortage. But that doesn't mean you have to just fork it over. I recommend having a real estate attorney or bankruptcy lawyer experienced with short sales, foreclosures, etc. help you with the negotiations.

If all parties have dug in and can't be moved, the short sale can't be concluded. This would then probably cost you some money--you'd have to keep making payments to avoid foreclosure, or you may have to cough it up when the lender forecloses. In most states, if the lender can't recover the balance owed by selling the property, it can take you to court and sue to recover the funds. And if you have the money, well, you may have to part with it--this is called a deficiency judgment.

But the lender does NOT hold all the cards. First, if you don't have the money it's pointless for anyone to incur the expense of taking you to court. And agreeing to a short sale saves the lender the trouble of foreclosing, rehabilitating the property, and carrying it on its books month after month. Convince the lender that it will get the most money from a bad situation by accepting your offer. If you are insolvent you could offer the lender a deed-in-lieu of foreclosure. You could also avoid a deficiency judgment by filing bankruptcy--which would protect certain retirement accounts and other assets. Again, a lawyer may be your best guide in this situation.

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. The Ellis family, for example, went through a traumatic foreclosure and moved their family out of the home they had lived in for ten years. They had a first and second mortgage and couldn't make the payments after losing their jobs. The home was sold, the holder of the first mortgage was paid off, and the family was told the second mortgage would be forgiven. And eventually Mr. and Mrs. Ellis found new jobs. The foreclosure was done; now they could start over. Right?

Wrong.

Someone at the first bank lied to them--probably because it wasn't going to lose anything and just wanted to get the deal done. The second mortgage holder never agreed to forgive anything. Unless you have an agreement from both banks explicitly stating that the debt will be forgiven (have it reviewed by an attorney to make sure there are no "weasel words"), you have air. And air doesn't pay the bills.

Workout departments at banks aren't there to serve you and make you happy. Their purpose is to extract as much money as they can get from you. And banks don't willingly leave money on the table. Most of them will want to be paid in full or will want you to commit to repaying whatever deficiency remains after your property is sold. Borrowers who neglected to get a complete walkaway in writing have found that bankruptcy was the only way of escaping deficiency demands from mortgage holders.

Same thing goes for a short sale. Just because the first bank agrees to a short sale or foreclosure doesn't mean the second bank isn't going to come after you with torches blazing and hounds baying. NEVER assume anything is written off (from ANY lienholder) unless you get a formal, signed, written, unconditional release of lien and/or judgment from the lender specifically stating that no further action to collect this debt will be taken.

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.

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 ...