The current U.S. Real Estate Market crunch has affected many people. The fast lending practices of the financial institutes made it easy for everyone to get creative financing. However, the end of this easy money has come. Consumers flexible rate loans are coming due at an increasingly rapid pace and this is putting consumers into a position of not being able to make their mortgage. Does this sound like someone you know? A friend? A family member? You?
If so, please don't despair. There are other options that you can pursue before it comes to foreclosure. These options may allow you to salvage your credit rating and to move from under the loan with little to no additional costs to you. You have options. Talk to a professional. Review your rights and options.
One of the options to consider is a Short Sale. So, what is a Short Sale?
| Short Sales Explained
A short sale can be an excellent solution for homeowners who need to sell, and who owe more on their homes than they are worth. In the past, it was rare for a bank or lender to accept a short sale. Today, however, due to overwhelming market changes, banks and lenders have become much more negotiable when it comes to these transactions. Recent changes in corporate policy and the Obama administration have also improved the chances of getting a short sale approved.
But to be technical, here's a more official definition:
A homeowner is 'short' when the amount owed on his/her property is higher than current market value.
A short sale occurs when a negotiation is entered into with the homeowner's mortgage company (or companies) to accept less than the full balance of the loan at closing. A buyer closes on the property, and the property is then 'sold short' of the total value of the mortgage.
For homeowners to qualify for a short sale, they must fall into all of the following circumstances:
Financial Hardship – There is a situation causing you to have trouble affording your mortgage.
Monthly Income Shortfall – In other words: "You have more month than money." A lender will want to see that you cannot afford, or soon will not be able to afford your mortgage.
Insolvency – The lender will want to see that you do not have significant liquid assets that would allow you to pay down your mortgage.
This seems simple enough, but it is a complicated process that takes the expertise of experienced professionals. Find a CDPE in your area by clicking here. Together, you can identify all possible options and, when possible, a CDPE can assist you in the quick execution of a short sale transaction.
|Do I Qualify for a Short Sale?
HUD says certain criteria must be met to be permitted to pursue a Pre-foreclosure Sale (PFS):
(1) You must be an owner-occupant, occupied, no “walk-aways” or investment properties.
Exceptions: when it is verifiable that the owner’s need to vacate was related to the cause of default (job loss, transfer, divorce, death), and the subject property was not purchased as a rental investment, or used as a rental for more than 12 months. (Investors may use other procedures.)
(2) Your mortgage must be in default as the result of a documentable involuntary loss of income or unavoidable increase in expenses. Have mortgage statement and list of bills when you call.
(3) You must contact a HUD-approved Housing Counseling Agency before making a commitment to a particular method of dealing with your mortgage or financial problems. Call 1-888-995-HOPE.
Every participant in the Pre-foreclosure Sale (PFS) procedure must sign a certification that he or she has received homeownership counseling before a proposed pre-foreclosure sale transaction can be approved. By signing this form, you certify that you have received information regarding options and alternatives that you may be entitled to, or which may be available to you -- other than the sale of your property to a third party -- to avoid foreclosure. (Investors should also call.)
It is important that you, the homeowner, make an informed decision about whether to pursue a pre-foreclosure sale. Call 1-888-995-HOPE for free assistance.
Homeowners benefit by avoiding the effect of a foreclosure on their credit rating.
Owners are required to list house with a licensed real estate agent within 7 days of acceptance.
If, after a “good faith” effort, an acceptable purchase offer is not obtained within the allotted time (ends 30-60 days prior to auction), the lender will usually accept a deed-in-lieu of foreclosure.
A deed-in-lieu is less desirable than a pre-foreclosure sale on a homeowner’s credit record, but is looked upon more favorably than a foreclosure auction. Call 1-888-995-HOPE for free assistance.
Conditions of Participation
If you are approved to participate in the Pre-foreclosure Sale procedure, you will be required to:
- allow your lender to arrange for a title search and an appraisal of your home. There will be no cost to you for these reports except if you reinstate or pay off your loan in full, in which case the cost of the appraisal and/or title search may be included as part of the pay off amount;
- promptly list your property with a licensed Realtor who is unrelated to you;
- assist in every possible way in the marketing of your property;
- pay for all required repairs, maintenance, utilities, and other services during the pre-foreclosure sale period; and
- based on your income, make monthly payments to offset your mortgage obligation in an amount agreed upon between you and your lender. Call 1-888-995-HOPE for free assistance.
You are also agreeing that if your participation is approved, and you sell your home, or if a deed-in-lieu of foreclosure is accepted, you will assign to your mortgagee, all refunds you may be due from any source in connection with your mortgage. Homeowners are advised to consult a tax professional to determine what tax consequences, if any, they may incur as a result of a pre-foreclosure sale or deed-in-lieu of foreclosure, or if the foreclosure auction occurs.
Finally, you must understand that the pre-foreclosure sale must be an “arm’s length” transaction -- the buyer cannot be a family member, business associate or other “favored party,” and the real estate broker cannot share a business interest with the mortgagee. No hidden terms or special understandings can exist between seller or buyer and the appraiser, sales agent or mortgagee.
Under no circumstance should the mortgagor be encouraged to default on their mortgage for the purpose of participating in this Program.
| 7 Short Sale Myths
A short sale can be an excellent solution for homeowners who must sell and owe more on their homes than they are worth. Unfortunately, a number of myths about short sales have developed, and it is important to understand the reality of this process should you find it meets your current needs.
Myth #1 – The Bank Would Rather Foreclose than Bother with a Short Sale
This is one of the most common misconceptions. The reality is that banks do not want to foreclose on your property because the foreclosure process is incredibly costly. Banks, investors, and even the federal government have all publicly stated that if a person is qualified for a short sale, the deal needs to be considered. Overwhelmingly, banks receive more on their investment through a short sale than a foreclosure.
The qualifications for a short sale include:
- Financial Hardship – There is a situation causing you to have trouble affording your mortgage.
- Monthly Income Shortfall – “You have more month than money.” A lender will want to see that you cannot afford, or soon will not be able to afford your mortgage.
- Insolvency – The lender will want to see that you do not have significant liquid assets that would allow you to pay down your mortgage.
Myth #2 – You Must Be Behind on Your Mortgage to Negotiate a Short Sale
While this may have previously been the case, today lenders are looking for verifiable hardship, monthly cash flow shortfall, or pending shortfall and insolvency.
If you meet these three requirements and believe that you soon may be unable to afford your mortgage, act immediately. Any delay could limit your options. Do not wait until the countdown clock to foreclosure has started and you have even less time left.
Myth #3 – There is Not Enough Time to Negotiate a Short Sale Before My Foreclosure
This is a myth that probably hurts homeowners the most. Many do not realize that foreclosure is a process, and that there is time to make decisions that may result in better outcomes.
The foreclosing party—in most cases a lender—can stall a foreclosure up to the final day of the process. Today, many lenders will stall a foreclosure with as little as a phone call from you explaining that you are trying to sell, and almost all lenders will stall a foreclosure with a legitimate contract. For real estate professionals who understand foreclosures and short sales, there is time available until the foreclosure process is complete.
Myth #4 – Listing My Home as a Short Sale is an Embarrassment
It is understandable to have reservations about letting the world know that you owe more on your home than it is worth. However, according to recent estimates, more than one out of eight homeowners in the U.S. is in the same situation. You are to be congratulated for admitting you need help, taking action, and finding a professional who can work with you toward a solution.
With recent estimates showing 40-60% of U.S. sales will be short sales or foreclosures, you are not alone.
Myth #5 – Short Sales are Impossible and Never Get Approved
This is a complete falsehood. Are short sales more difficult to execute? Yes. Do you, as a homeowner, need to learn about a new process? Yes. Are they impossible? Absolutely not.
For example, agents with the Certified Distressed Property Expert® (CDPE) Designation receive thousands of short sale approvals on a monthly basis. These professionals have undergone extensive training in methods to help homeowners in distress and process short sales. While there are no guarantees in any transaction, more and more short sales are being approved regularly. This is far from an impossible process.
Myth #6 – Banks are Waiting on a Bailout and Not Accepting Short Sales
You may have heard this, but the reality is that banks (and the U.S. government) are trying to do anything they can, within reason, to avoid foreclosing on properties. It is preposterous to believe they would deny a short sale in hopes that some future legislation would pass and pay them for losses.
Today, more banks are aggressively pursuing short sales and working with agents who understand how to process them. Freddie Mac recently hosted a national training Webinar for real estate agents where they expressly stated the organizational goal of “eliminating distressed assets through modification or short sale.”
Myth #7 – Buyers are Not Interested in Short Sale Properties
This is a myth that potential sellers hear all the time. Thankfully, this is just not true. In fact, many agents are getting calls from buyers who say they only want to look at foreclosure and short sales.
For buyers, short sales and foreclosures have become synonymous with “good deals.” More specifically, international buyers are targeting these properties. Listing with an experienced agent who is educated in the short sale process will provide you with a great chance of quickly seeing a contract on your property.
In conclusion, Agents with the CDPE Designation have been trained in all aspects of the short sale process, and know how to deal with the parties involved in foreclosures. Finding a CDPE can explain what options you have, and get you on the path to recovery.
| Pitfalls & Solutions
As a homeowner considering a short sale, it is important you understand the process. Following are some of the most common mistakes agents and homeowners make when handling a short sale.
Your Property is Priced Incorrectly
Pitfall: Your Property is Priced Incorrectly
This is the most common mistake made with all properties, and the most common reason a property doesn’t sell.
Solution: Agent Providing Understanding and Transparency
Your real estate agent will go through a detailed listing price strategy with you, allowing you to see exactly where your property should be priced based on its current condition, sales in your area, and most importantly, how much time you have left to sell.
Your Short Sale Proposal is Incomplete
Pitfall: Your Short Sale Proposal is Incomplete
This is one of the most frequently seen causes for the rejection of short sales proposals. Most agents do not understand the short sale process and what your lender will be looking for.
Solution: Understand All Aspects of the Process
Your agent should understand the short sale process in detail and be able to explain it clearly. The agent should also be able to communicate effectively with both you and lenders to produce a complete and cohesive proposal.
There has been Inadequate Follow-up and Communication
Pitfall: There has been Inadequate Follow-up and Communication
As your property goes through each stage of the short sale process, an agent can jeopardize the transaction by not properly communicating with everyone involved. As the homeowner, you may not know that your file has been delayed, and that you again may run out of time to close and avoid foreclosure.
Solution: Select an Agent With Experience
The right agent knows exactly how to follow up to ensure that your lender’s issues are addressed in a timely manner, and will make certain you do not have unnecessary delays.
Not Enough Time
Pitfall: There Isn’t Enough Time
It is critical that your agent understands the foreclosure laws in your area. They should be able to show you an estimated timeline for the process, from start to closing. In addition, they should know how to communicate with your lender. Certain information can be provided to lenders to postpone your foreclosure for weeks or months in order to negotiate a sale.
Solution: Provide Accurate and Useful Information
Make sure you provide your agent accurate information as to exactly how many payments you have missed and any correspondence you have received from your lender. This will allow your agent to understand your situation and work to improve it.
Your Deal is Not Submitted Properly
Pitfall: Your Deal is Not Submitted Properly
If you do not follow the directions you receive for submission, then you are expecting an over-worked, under-staffed department to go out of their way to handle your file. There is very little likelihood of this situation working out in your favor.
Solution: Follow Instructions Closely
If you are instructed to fax your file, fax it and send a backup copy in the mail. If you are instructed to mail two copies, mail two copies. When you reach the point of having a contract, all your information, and a completed proposal, you do not want your deal to fall apart because no one sees it.
The Buyer’s Offer is Too Low
Pitfall: The Buyer’s Offer is Too Low
Many agents will encourage you to submit any offer that comes in. The reality is that a short sale is not the same as a fire sale. In order to have a legitimate chance of getting your deal approved, you must have an offer that is more attractive to the lender than a foreclosure.
Solution: Proper Negotiation
The right agent will work with you to properly negotiate any offer that you receive to get ‘highest and best’ from each potential buyer. This ensures you are presenting the best possible solution to your lender.
The Buyer’s Contract is Not Strong Enough
Pitfall: The Buyer’s Contract is Not Strong Enough
Especially in our current economic climate, willingness to make an offer on a property does not mean that a buyer is truly qualified to purchase. The reality is that buyers need to be preapproved for financing, closing funds must be verified, and their ability to buy needs to be confirmed.
Solution: An Agent Familiar with Qualifying Buyers
Your agent should be familiar with what must be verified in order to qualify a buyer to submit an offer on your property. Otherwise, these offers may have little chance of closing. Don’t risk this process with an uneducated agent who does not appreciate this aspect of short sales.
In conclusion, While these pitfalls may seem troublesome, the right agent can help you navigate your way to a successful closing. Don’t endanger your financial future and the potential sale of your home with an agent who does not fully understand the process. CDPE-designated agents have completed extensive training in the short sale process, and in assisting struggling homeowners who need real solutions. They understand what you are going through, and are here to serve and help save your family’s interests.
| Foreclosure Avoidance Options
|Foreclosure is one of the most devastating financial challenges that a family can face and one that many times can be avoided. The options available to residents for foreclosure are many, including but not limited to short sales. Following is a brief explanation of these solutions:
A reinstatement is the simplest solution for a foreclosure, however it is often the most difficult. The homeowner simply requests the total amount owed to the mortgage company to date and pays it. This solution does not require the lender's approval and will 'reinstate' a mortgage up to the day before the final foreclosure sale.
Forbearance or Repayment Plan
A forbearance or repayment plan involves the homeowner negotiating with the mortgage company to allow them to repay back payments over a period of time. The homeowner typically makes their current mortgage payment in addition to a portion of the back payments they owe.
A mortgage modification involves the reduction of one of the following: the interest rate on the loan, the principal balance of the loan, the term of the loan, or any combination of these. These typically result in a lower payment to the homeowner and a more affordable mortgage.
Rent the Property
A homeowner who has a mortgage payment low enough that market rent will allow it to be paid, can convert their property to a rental and use the rental income to pay the mortgage.
Deed in Lieu of Foreclosure
Also known as a 'friendly foreclosure,' a deed in lieu allows the homeowner to return the property to the lender rather than go through the foreclosure process. Lender approval is required for this option, and the homeowner must also vacate the property.
Many have considered and marketed bankruptcy as a 'foreclosure solution,' but this is only true in some states and situations. If the homeowner has non-mortgage debts that cause a shortfall of paying their mortgage payments and a personal bankruptcy will eliminate these debts, this may be a viable solution.
If a homeowner has sufficient equity in their property and their credit is still in good standing, they may be able to refinance their mortgage.
Service members Civil Relief Act (military personnel only)
If a member of the military is experiencing financial distress due to deployment, and that person can show that their debt was entered into prior to deployment, they may qualify for relief under the Service members Civil Relief Act. The American Bar Association has a network of attorneys that will work with service members in relation to qualifying for this relief.
Sell the Property
Homeowners with sufficient equity can list their property with a qualified agent that understands the foreclosure process in their area.
If a homeowner owes more on their property than it is currently worth, then they can hire a qualified real estate agent to market and sell their property through the negotiation of a short sale with their lender. This typically requires the property to be on the market and the homeowner must have a financial hardship to qualify. Hardship can be simply defined as a material change in the financial stability of the homeowner between the date of the home purchase and the date of the short sale negotiation. Acceptable hardships include but are not limited to: mortgage payment increase, job loss, divorce, excessive debt, forced or unplanned relocation, and more.
This represents only a summary of some of the solutions available to homeowners facing foreclosure. Locate a CDPE in your area for an evaluation of your individual situation, property value, and possible options.
Understanding your options now could mean all the difference in the world.
| Useful Links
New Jersey Foreclosure Info
Foreclosure of Mortgages, Condominium Association Liens