Short Sale Information

 


What is and is not a Short Sale?

There are a lot of words being thrown around today that require clarification.  These include short sales, pre-foreclosure, foreclosure, sub-prime loans, deficiency judgments and taxes on the debt or deficiency. 

The information below defines these terms and explains ways to deal with financial distress through short sales.  Also outlined are the real differences between short sales and foreclosures so that homeowners can see the true benefits of a short sale.

A bank-owned house, or Foreclosure, is not a short sale.  A seller deciding to lower their price and take less profit is not a short sale. To have a short sale, one of the parties has to be “shorted;” either the seller or the bank, and for the owner to qualify, a number of criteria must be met (see below).

A “short sale” occurs when the homeowner gets an agreement from the mortgage company to accept less than the full balance of the loan at closing.  The homeowner closes on the property and the property is “sold short.”  This occurs prior to a property entering the foreclosure process.

How Does A Homeowner Qualify for a Short Sale?
There are four criteria a homeowner must meet to qualify for consideration by the lender for a short sale.  These are:

  • There must be a demonstrable financial hardship, e.g., a lost job or material change in the financial situation;
  • There must be a monthly shortfall;
  • There must be insolvency, meaning that the owner does not have the money to pay down the mortgage; and
  • The owner does not have any assets to sell to pay for the shortfall.

What is Considered an Acceptable Hardship to Qualify for a Short Sale?

There must be a hardship that is preventing the owner from being able to pay their mortgage.  Examples include: 

  • Loss of job
  • Business failure
  • Damage to property
  • Death of a spouse
  • Death of family members
  • Severe illness
  • Divorce
  • Mandatory job relocation,
  • Medical bills
  • Military service
  • Payment increase or Mortgage adjustment
  • Insurance or tax increase
  • Reduced income
  • Separation
  • Too much debt
  • Incarceration

What is the Insolvency Requirement to Qualify for a Short Sale?

The owner must not be able to pay down their mortgage.  To qualify for a short sale, the homeowner must be financially insolvent.  This means that they owe more than they have or that they do not have liquid cash or assets that could be used to buy-down their mortgage.

If the owner does have liquid cash or assets they will be expected to use them to pay down their mortgage.  There could be a scenario where an owner made a contribution towards the sale of the property and the lender covers the shortfall.

A short sale is not a way to get out of a mortgage.  It is a tool for a borrower to use when they truly can’t pay their mortgage.

Short Sales vs. Foreclosure: The Short Sale Option

Short Sales offer the homeowner many more benefits than going through a Foreclosure.  In the case of a short sale, the benefits to the homeowner are:

  • Only late payments on the mortgage show on a credit report and after the sale of the home, the mortgage will be reported as paid or negotiated.  This could lower a homeowner’s credit score by as little as 50 points if all other payments have been made.  The affect of a short sale can be as brief as 12 to 18 months.
  • A Short Sale is not reported on a credit history.  There is no specific reporting item for ‘short sale.’  The loan is typically reported as ‘paid in full, settled.’ 
  • A Short Sale on its own does not challenge most security clearances whereas a foreclosure does.
  • A Short Sale is not reported on a credit report and is therefore does not present a challenge to employment.
  • 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, (i.e., payment of the shortfall or the difference between what was owed and what the bank received.)
  • Under the Mortgage Forgiveness Debt Relief Act of 2007, if a deficiency is forgiven or cancelled, the home is a principal residence, and it is worth less than $2 million, the tax on the deficiency will be forgiven.  This benefit applies to homes that are the subject of a Short Sale and a Foreclosure.
  • A  homeowner who successfully negotiates and closes a short sale may be eligible for a Fannie Mae backed mortgage after only 2 yrs.
  • An Investor who successfully negotiates and closes a short sale may be eligible for a Fannie Mae backed investment mortgage after only 2 years.

Short Sales vs. Foreclosure: The Foreclosure Option

In a Foreclosure, homeowners fall behind in their payments and the bank typically repossess the house and sells it.  In almost all cases, the bank pursues the homeowner for the deficiency.  The only real way out of this type of situation is to file bankruptcy.

The Foreclosure process begins with the homeowner missing a payment.  In fact, default on payment of the mortgage is the only way that a property can be subject to the foreclosure process.  Once the lender decided to foreclose on the property, they must notify the homeowner that the process has been initiated.  This can be done through the service of the document on the homeowner or by publishing the information in a legal journal.  The notice tells the homeowner that the property will be put up for bank sale or auction and the date that this will occur.

In the case of a foreclosure, the homeowner:

  • Is ineligible for a Fannie Mae backed mortgage for a period of 5 years.  (For an investor, this period is 7 years).
  • In any future loan application, the borrower has to disclose if they had a foreclosure in the last 7 years.
  • Foreclosure affects a homeowners credit score significantly.  It can lower the score anywhere from 250 to 300 points and this can last for over 3 years.
  • Foreclosure remains as a matter of public record on a person’s credit history for 10 or more years.
  • Foreclosure can cause a person’s security clearance to be taken away and potentially their employment terminated.
  • Employers have the right to check an employee’s credit history.  A foreclosure can be grounds for immediate reassignment or termination.
  • Employer’s ability to check an employee’s credit history can also affect a person’s ability to get employment.
  • In most foreclosures, the bank has the right to pursue a deficiency judgment or collection of the difference between what the homeowner owes and what the bank gets as a result of the sale.  The one benefit today is that in the past, the shortfall was reported as income on a homeowners taxes, significantly increasing their tax burden.  Due to the Mortgage Forgiveness Debt Relief Act, the tax burden is being forgiven for primary residences valued at less than $2 Million.

It is important to understand that if one payment is missed, this does not mean the foreclosure process will begin immediately.  Foreclosure is a legal process process the lender must go through in order to take possession of the property.  This process takes time and there are options.

Pre-Foreclosure – The Time for Opportunity

Pre-Foreclosure is the period of time between when a home owner has missed their first payment and the final bank sale date.  This is the point at which a home owner is in the process but they have not yet lost control of the property.  “This time period is critical since the owner can list the property for sale, sign contracts, and do what they can to avoid foreclosure.” (Certified Distressed Property Institute, 2008)

As outlined in the list above, there are numerous important reasons to avoid foreclosure.  Don’t lose control of your property, serious affect your credit or adversely affect your employability.  Once you know you are in distress, contact a Real Estate professional that is knowledgeable about Short Sales and working with the banks to help you avoid the impacts of foreclosure.

How I Can Help!

Even if you owe more than your home is worth, I can work with you and your mortgage lender to negotiate the sale of your home. This is called a Short Sale and I am experienced in the Short Sale process.

Do not hesitate to call me 402.305.4031 Every moment counts! 

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