3 Common Problems Short Sale Sellers Face (And How To Avoid Them)

As foreclosures in the U.S keep on being commonplace all through these tough economic periods, several homeowners who are getting overwhelmed by their mortgage payments are looking at pursuing a short sale as an alternative to foreclosure.

A short sale must be approved by the mortgage lender, and not just every short sale applicant will qualify. In other words, while a short sale is a preferable alternative to a foreclosure, it is still a time-consuming, complex process. Sellers considering whether or not to attempt short selling their property need to know the processes and the various issues they may face while going for the short sale option.

What Does a Seller Need To Pursue a Short Sale

If the choice has been made to pursue a short sale, the first steps are to get in touch with a real estate agent knowledgeable in handling short sales in your area and also notify your lender that you will be attempting to short sell the home. But just because you decide to pursue a short sale does not ensure you’ll automatically meet the requirements from the lender. Among some other paperwork, lenders might request the following to determine if they will deem consenting to a short sale of the property:

Letter of Authorization: Contains the home address, name, date, your agent’s name and contact info as well as the loan reference number

Hardship Letter: Describes the need of the homeowner for a short sale (i.e., unemployment, hospitalization, divorce, bankruptcy, etc.)

Proof of Income & Assets: Including any savings, money market accounts, stocks or bonds, or cash and other real estate

Copies of Bank Statements: You will have to show all deposit and withdrawals done over a period of time

Preliminary Net Sheet: An estimated closing statement that displays the predicted sale price, together with all the costs of the sale, unpaid loan balances and outstanding payments due

Comparative Market Analysis: Shows the prices of similar homes sold in that area

Tax Returns: As much as two years of tax returns

 Problems Short Sale Sellers Face & Their Solutions

  1. Seller Without Hardship

The most common short sale problem is when the seller has no hardship. Most sellers realize that a short sale implies the house is under water. You can’t do a short sale on a home that will auction for enough to pony up all required funds and pay the majority of the cost of selling. When there is insufficient value on a property to pay the sum due the bank, the home short sells.

Simply being short to the bank is not really reason enough to do a short sale transaction, in most cases. Generally, the bank expects for a hardship letter from the seller describing:

  • The seller’s trouble
  • What the seller did to fix the problem
  • Why nothing seems to work

If the sellers’ situation is the same as it was on the day the seller took out the mortgage, the lender may be very unlikely to grant the short sale. Many banks insist upon a seller hardship. No hardship is a short sale problem that might lead to short sale rejection.

A solution to the short sale problem is either to try again after a hardship occurs or offer to partake in the bank’s loss by making a seller contribution.

  1. Issue of multiple loans

Some smaller banks have a notoriety for being difficult. Commonly, those banks can go one of two ways. Either the bank will dismiss the short sale or the bank will endorse it, it’s either black or white and your chances are around 50/50 with these banks.

This does not imply that whenever you have a short sale with two loans that the second lender will cause problems, but this is not the case. The reason for the problem with the second lender is often the amount of payoff. The first lender may not want to pay out the second lender in excess of, say, $3,000.

If the home goes to foreclosure, fairly probably the mortgage with the second lender may well get wiped out. But it doesn’t mean the second has no recourse, or that the bank isn’t compensated by the PSA or stand to receive substantial bail-out cash from the federal government.

A solution to the problem is to put pressure on the second lender to accept the short sale or the first lender to contribute more. The first lender might back down and agree to pay more.

  1. No Release of Personal Liability

Apart from eschewing the stigma and pitfalls of foreclosure, many sellers do short sales because they believe they’ll get a release of personal liability. Borrowers deserve to be relinquished from the mortgage, to know the lender will not pursue them for the deficiency after the transaction closes.

Granting the short sale and releasing a seller from personal liability are two different things. A bank can accede to do a short sale and still reserve the right to pursue the seller for the amount unpaid. Generally, if a short sale letter does not categorically address the issue, the seller is not relinquished.

The solution is to insist on being relinquished. The bank will tell you it cannot change the verbiage, but it’s the negotiator who chooses not to be bothered. Banks can and do change the clause. Insist on it. If your agent can’t get it for you, hire a short sale lawyer to obtain the release of liability.

Foreclosure vs. Short Sale

There exists a lot of misunderstandings about foreclosures and short sales. Which should you use and why? Will your credit score be impacted just the same way by both of them?

When you buy a house, you typically make a deposit and then set up a mortgage amortized over a number of years. The house is used as collateral and if the homeowner is unable to make monthly mortgage payments, the credit institution has the right to seize the property in order to recoup their losses.

Now let’s compare these two options:

What is a Foreclosure?

Foreclosure is the means by which a lender gets title to a property because of homeowner’s loan default. The lender recoups their own loan investment by simply selling it at the trustee sale. If there are usually no other potential buyers, the bank takes the exact property into inventory as real estate owned (REO). Banks are not in the business of property proprietorship nor management, and they are legally obligated to sell off these kinds of non-performing assets.

What is a Short Sale?

On the other hand, short sales are properties sold before foreclosure at a discount for the reason that current market value is lesser than the loan amount. The homeowner still has the title but the sale must be endorsed by the bank, who endures a capital loss upon sale. To keep away from the extra cost of the foreclosure process, banks are willing to sell properties at or below market value.

Foreclosure Facts

According to Re/Max, the average price of foreclosed houses was $185, 000 while that of other regular properties was $267, 300 in May 2011. In addition to prices, bank owned properties can be bought much more quickly over a typical short sale made.

Despite the low price, bank owned properties have their share of problems. These foreclosed properties typically sit vacant for weeks or even months, lack regular maintenance, attract squatters as well as copper thieves and need repairs. Most banks promote their foreclosed properties in an “as is” condition. So, anyone who will buy must find what repairs are essential and invest money and time to fix those difficulties.

Short Sale Facts

This type of distressed property is in relatively better condition, and often repairs are not necessary. Since properties are still occupied by homeowners, the house is usually maintained. Roughly 80% of these properties are of good quality.

However, short sales have their drawbacks. This type of foreclosure may take a long process, requiring months to complete. You need to be qualified and have a much longer time horizon to buy the property. Reason for the long process is that all pledgees must approve the sale. But, the short sale process can be sped up if the seller’s agent is experienced in negotiating with the bank and closing short sales.

Foreclosure Process

Depending on the state a borrower lives in, foreclosure may or may not involve the judicial system. Following three to six months of missed installments, a loan specialist will record a notification of default, which informs a borrower that he is confronting foreclosure and gives him a reestablishment period to make things right by paying off obligations or settling any dispute. The length of the reinstatement period changes by state, with a few states giving borrowers a negligible five days to settle disputes and obligations and others giving up to 90 days.

If the home loan’s unpaid balance is not paid off within three months, the mortgage holder gets a notification of sale. The property is then sold at a trustee sale to the highest bidder, who must pay in real money inside of 24 hours. The opening offer is generally equivalent to the outstanding balance and any extra lawyer charges the bank might have incurred.

Short Sale Process

When the market value of the property is less than the outstanding mortgage principal, and the borrower cannot afford to pay the loan, the lender (one or more banks) can choose to accept a short sale. In a short sale, the proceeds from sale of the property falls short of the mortgage balance, which is one reason lenders may hesitate to accept the offer for a short sale. Any unpaid balance owed to the lenders after a short sale takes place is known as a deficiency. Short sale agreements are not necessarily borrowers releasing themselves from their obligations to repay any shortcomings of the loans unless explicitly agreed between the parties.

Distinctions Between Short Sale & Foreclosure

  1. For borrowers: The current government is actively trying to halt the tide of foreclosures in the United States. For this purpose they began the MHA program, which stands for Making Homes Affordable and is an attempt to reduce the mortgage payments on both primary and secondary mortgages. The hope is that more people are able to stay in their homes will be.Those borrowers who are still unable to keep their homes, even with the help of the MHA program can use a short sale as a way to get out from under their obligations to the lender. If this was the primary residence of the homeowner, they are not liable for taxes on the forgiven debt, and may even be eligible for a $ 1,500 to help pay for moving expenses.
  2. For Lenders: Lenders participating in the MHA program are required to reduce the mortgage payments in an effort to make payments affordable. Under this program, lenders can also get up to $ 1,000 in incentives, even without loan modification. To make this possible, the lender must allow a short sale if the borrower prefers this option.
  3. Credit Scores: Neither foreclosures nor short sales offer an advantage over the other in terms of the negative influence on a person’s credit score. Industry experts along with Freddie Mac and Fannie Mae say that this decline in credit ratings will be between 200 and 300 points.
  4. Waiting time between mortgages: Freddie Mac and Fannie Mae guidelines stipulate that a borrower must wait for 5 years before qualifying for any new mortgage following a foreclosure. In the case of a short sale, the waiting period for a new mortgage is merely 2 years.

Conclusion

As a homeowner, if you qualify for aid that will lower your payments, maybe you will be able to avoid a foreclosure. If not, trying to work out a short sale with your lender probably is your best bet.

From the lenders standpoint a short sale might be best because foreclosures might be both costly and time intensive. Ultimately the impact of your foreclosure to your credit rating and ability to borrow later on is reason to choose the short sale above the foreclosure. Lenders will look more favorably on the borrower that tried to cooperate with the bank (via short sale) than one who just walked away.

 

VA Loans And Short Sales

For many years, VA loans have been used by numerous military personnel past and present to obtain home ownership. Considered to be one of the U.S. government’s most successful ventures, the VA loan program has allowed many people to obtain homes for pennies on the dollars via short sale. In today’s real estate market, VA loans and short sales go hand-in-hand, although the procedure can offer both advantages and disadvantages.

Why Use a VA Loan?
In addition to allowing military personnel the opportunity to experience home ownership, a VA loan has a number of other advantages. When purchasing a short sale home, those advantages can include:

  • Zero cash down on some home purchases
  • Low interest rates
  • Up to six percent of closing costs paid by seller
  • No penalties for early or pre-payments
  • No monthly mortgage insurance premiums

In addition to these advantages, no further credit underwriting is needed by the VA when it comes to VA loans and short sales.

Hurry Up and Wait
While there are many advantages when it comes to VA loans and short sales, there are some disadvantages as well. Perhaps the biggest is the gap between the time an offer is made on the property and when the seller chooses to reply with an acceptance or counteroffer. In some cases, the potential buyer can wait 60 days or longer, during which time interest rates can possibly go up. In addition, the VA will not guarantee a property unless its living conditions are safe for occupancy and the sale price is justified.

Buyer Beware
Just like purchasing a used car or other big-ticket item, many homes purchased through VA loans and short sales carry a large amount of risk with them. Most homes that are close to going into foreclosure and wind up as short sales are sold “As Is” to the buyer, which can be both a blessing and a curse. While the price may be bargain-basement, the repairs needed to bring the house back to respectability may be substantial. In fact, some short sale homes are purchased sight unseen, which can be an extremely risky venture. To be safe when it comes to combining these loans and short sales, an inspection of the property should be done prior to any purchase being final.

The Perfect Combination
While there are always risks involved when purchasing real estate, those buyers who combine VA loans and short sales often have much success. The ability to purchase a home at a much lower price than market value, along with needing little if any money down makes the process well worth the time and effort it takes.

Insolvency Clause Tax-Saving Alternative to Mortgage Forgiveness Debt Relief Act in 2015

On December 16, 2014, President Obama signed a bill that extended the Mortgage Forgiveness Debt Relief Act retroactively to cover mortgage debt cancelled in 2014. The Mortgage Forgiveness Debt Relief Act (MFDRA) prevented homeowners who went through a short sale from being taxed on the amount of their home mortgage debt that had been forgiven. For homeowners to qualify for a tax break in 2014, their short sale must have closed by December 31, 2014.

The Act was only extended through 2014. Congress is expected to debate further extension of the Act as part of a larger tax package in 2015. In the meantime, mortgage debt forgiven by a lender in 2015 might count as taxable income.

According to a brief from the National Association of Realtors (NAR), about 5.3 million homes are still under water. In addition, there are still more than 1 million homes in the process of foreclosure. If the Mortgage Forgiveness Debt Relief Act is not extended further, hundreds of thousands of American families who did the right thing by short-selling their home will have to pay income tax on income they never received.

IRS “Insolvency Clause” Offers Tax-Saving Alternative

Short sale sellers can still be exempt from tax liability under the “insolvency clause” of the Internal Revenue Code. The clause states that a seller is exempt from paying tax on any forgiven debt to the extent that they are insolvent. In other words, if the seller’s debts and liabilities exceed their assets by more than the amount tax breaksof debt forgiven, they do not have to pay taxes on the forgiven debt.

Here’s an example of how the Insolvency Clause works:

A seller has a home valued at $300,000, but the mortgage debt is $400,000. We short sell the property for $300K and the bank elects to forgive the debt on the $100,000 shortfall amount. Since debt that has been forgiven counts as taxable income, the IRS would treat the $100,000 of forgiven debt as income.

MORTGAGE DEBT $400,000
SALE PRICE -$300,000
FORGIVEN DEBT
(Taxable income)
$100,000

This is where the insolvency clause formula comes in. Begin by adding up all of your debts/liabilities in one column and all of your assets in another. For this formula, the IRS wants you to include the mortgage debt as a liability, and the fair market value of your house as an asset. Let’s say you have $600,000 in assets and $700,000 in debts/liabilities. You are insolvent by $100,000.

ASSETS $600,000
LIABILITIES -$700,000
INSOLVENCY [$100,000]

Since your insolvency amount of $100,000 equals the forgiven debt amount of $100,000, it’s a wash and you will not have to pay taxes on that forgiven debt. You are shielded dollar-for-dollar on the amount of forgiven debt up to your insolvency number. Let’s say you were only insolvent by $80,000. In that case, you would still have to pay income tax on the remaining $20,000 of forgiven debt.

INSOLVENCY [$100,000]
FORGIVEN DEBT -$100,000
TAXABLE INCOME -0-

If you are underwater on your home mortgage and need to sell your house, what do you do now? Call Robert Chevez’s Short Sale Team at 703-212-3344 today!

 

My Short Sale Buyer Walked… Should I Panic?

Let’s say you are short selling your home; you are underwater on your mortgage and the payments have become next to impossible to make. You have a documented hardship, you’ve hired a qualified short sale agent who may even employ a short sale negotiation team. You’ve gotten your home listed, gotten a contract, and now you are just waiting for the bank to approve the sale.

At some point during the negotiations, however, the buyer gets cold feet. Maybe the bank countered at a number higher than they were willing to pay; maybe their agent didn’t properly prepare them for how long the process was going to take; whatever the reason, the buyer decides not to continue with the contract.

You think to yourself: oh, no! My buyer walked! Is it time to panic?

Short Answer: NO! It is perfectly common to lose one or more buyers during the short sale process. This does not mean your short sale is less likely to get completed. In fact, losing a buyer is normal and can even be helpful to justifying the price to a bank when the next buyer comes along.

Navigating a short sale without an experienced Real Estate Agent can be a scary and trying process. We recommend working with a Short Sale Agent who knows all the ins and outs of selling your home at a short sale. Rob and his team have worked with over 300 short sale clients in the past 10 years. For more information or to speak to him about your situation, you can reach him at 703-587-0995.

Some Updated Info from Freddie Mac on Short Sales

Freddie Mac, Mortgage Insurers Make Short Sales Easier To Process Starting November 1, 2012

Published: Wednesday, Oct. 31, 2012 – 8:34 am

MCLEAN, Va., Oct. 31, 2012 – /PRNewswire/ – Freddie Mac (OTC:FMCC) today announced the nation’s nine mortgage insurance companies have signed delegation agreements so Freddie Mac servicers can approve short sales and deeds in lieu of foreclosure on the insurance companies’ behalf beginning November 1, 2012.  By reducing the potential costs, delays and uncertainty involved in the short sale and deed in lieu process, the delegation agreements should enable more distressed borrowers to avoid foreclosure.

News Facts:

 

  • The delegation agreements authorize Freddie Mac to approve short sales or deeds in lieu of foreclosure for distressed borrowers with Freddie Mac owned-or guaranteed mortgages without a separate and potentially time-consuming review by the mortgage insurance company. Freddie Mac will instruct its servicers to use the delegations to more quickly and efficiently help borrowers through the short sale process.
  • The mortgage insurance companies who signed the delegation agreements with Freddie Mac are CMG Mortgage Insurance Company, Essent Guaranty, Inc., Genworth Mortgage Insurance Corporation, Mortgage Guaranty Insurance Corporation, PMI Mortgage Insurance Company, Radian Guaranty, Inc., Republic Mortgage Insurance Company, Triad Guaranty Insurance Corporation, and United Guaranty Corporation.
  • Today’s announcement builds on recent Freddie Mac efforts to encourage more short sales.  On November 1, Freddie Mac’s new Standard Short Sale will go into effect, streamlining the short sale approval process and broadening the ability of servicers to help distressed borrowers.
  • Freddie Mac’s Congressional charter requires private mortgage insurance if the borrower’s downpayment is less than 20 percent of the value of the home they are financing
  • The Freddie Mac Guide Bulletin announcing the changes can be found athttp://www.freddiemac.com/sell/guide/bulletins/pdf/bll1223.pdf

 

News Quote:

Attribute to Tracy Mooney, Senior Vice President, Servicing and REO at Freddie Mac:

“We applaud the nation’s mortgage insurers for committing to work with us and our servicers to help more borrowers obtain short sales and other foreclosure alternatives.  By paving the way for more borrowers to avoid foreclosure, today’s announcement will support the housing recovery and help reduce taxpayer losses.”

Freddie Mac was established by Congress in 1970 to provide liquidity, stability and affordability to the nation’s residential mortgage markets. Freddie Mac supports communities across the nation by providing mortgage capital to lenders. Today Freddie Mac is making home possible for one in four homebuyers and is one of the largest sources of financing for multifamily housing.www.FreddieMac.com.

SOURCE Freddie Mac

Read more here: http://www.sacbee.com/2012/10/31/4951355/freddie-mac-mortgage-insurers.html#storylink=cpy