Selling a Short Sale Property

    What You Need to Know About Selling a Short Sale Home

    Here are a few things you should know about selling a Short Sale Property before you start the process:

    – If your loan is an FHA loan, then to qualify for the short sale the home must be owner-occupied until close to the actual closing date. If the home is owner occupied, this also qualifies you for a possible relocation incentive. You may still qualify for a short sale if your home is vacant, but HUD is picky about what reason qualifies as a proper reason for a “forced relocation.”

    – If your loan is a conventional loan, and your home is owner-occupied by the time of closing, then you could qualify for the HAFA relocation incentive.

    – The process is LONG.

    1. List your home and decide that the short sale is your best option
    2. Contact your lender and inform them you want to do the short sale
    3. Write up hardship letter and assemble short sale package
    4. Submit short sale package to bank
    5. Receive an offer
    6. Wait for lender to review. This is the long part; it includes:
      • Bank doing financial audit
      • Bank ordering appraisal and title search
      • Bank possibly asking for more financial docs/information
      • Sending file to bank underwriters
      • Bank underwriters negotiating offer
      • Sending to loan investors to approve

    This process will look different depending on loan type/investors and bank.

    – Possible delays or unexpected issues:

    1. Could be that you have liens against your home, even if the lien holder didn’t notify you. If you know you’ve had problems paying off a debt, there could be a lien against your home or a judgment against your name. This makes sure they get paid.
    2. Some conventional loan investors are requiring using an auction process instead of ordering an appraisal in order to verify the fair market value of your home. So far only Ocwen Loan Servicing and NationStar are enlisting the help of an auctioneer.

    Homeowner Short Sale F.A.Q’s

    What is a Short Sale? A short sale is a sale of real estate in which the sale proceeds fall short of the balance owed on the property’s loan. It often occurs when a borrower cannot pay the mortgage loan on their property, but the lender decides that selling the property at a moderate loss is better than pressing the borrower. Both parties consent to the short sale process, because it allows them to avoid foreclosure, which involves hefty fees for the bank and poorer credit report outcomes for the borrowers. This agreement, however, does not necessarily release the borrower from the obligation to pay the remaining balance of the loan, known as the deficiency.

    When should I start my Short Sale? It is best to begin a short sale as soon as you realize you can no longer afford the mortgage so that your property can be marketed properly and you can receive an offer. The earlier you start, the higher the likelihood of success. Contact us to see if you have enough time. 

    How long does it take for you to complete a short sale once we fill out the paperwork? Once we have an offer and have submitted the paperwork to your lender, we typically get it approved in about 2-6 months. If you have a foreclosure sale date approaching we will attempt to complete it sooner. We have often found buyers quickly and have used our relationship with the banks to postpone your foreclosure date.

    What is a Deed In Lieu of Foreclosure? The property is deeded back to the lender with the approval of the borrower prior to foreclosure. This process will still have a negative impact on the borrower’s credit, similar to a foreclosure

    Why should a lien holder accept less than the outstanding debt? After the lender does an appraisal on the property and discovers that the value is less than the payoff, the lender will decide if it is worth further legal actions and cost. A business decision is made to either continue foreclosure action or accept the short sale offer.

    What is a BPO? It is a Broker’s Price Opinion. The bank will hire an agent to give them a comparative market analysis on the home. Some banks will chose this option over an appraisal because it costs less. Most banks will determine what sales price they will accept based on the BPO or appraisal.

    What is a HUD-1 Closing Statement? A form used at closing that gives an account of the funds received and paid at closing, including the escrow deposits for taxes, hazard insurance and mortgage insurance. Most banks will request this form with the short sale package, which I will provide through our title company.

    What is Loss Mitigation? Loss Mitigation is a process to avoid foreclosure; the lender tries to help a borrower who has been unable to make loan payments and is in danger of defaulting on his or her loan. A loss mitigator or negotiator is someone who works for the bank in the short sale department and is the person we will negotiate the short sale with.

    What is Loan Modification? A mortgage modification is a loss mitigation option that allows a borrower to refinance and/or extend the term of the mortgage loan and reduce monthly payments. See http://makinghomeaffordable.gov/ for information on HAMP, a government program to help with home loan modifications. 

    What is a Forbearance Plan? It is a loss mitigation option where the lender arranges a revised repayment plan for the borrower that may include a temporary reduction or suspension of monthly loan payments. The difference in this option vs. a loan modification is that in a forbearance plan, the lender can immediately continue the foreclosure process where it left off before. In a loan modification, the foreclosure process starts over at the beginning.

    How long is the short sale process? Depending on the mortgage company, a short sale process can take between 2-6 months.

    What is the difference between a Satisfaction of a Lien vs. a Release of Lien? A satisfaction is a total release from the debt owed. A release is when the lender releases the lien from the property to allow the home to be sold, but the borrower may still be required to repay the balance or a portion of the debt.

    How does a foreclosure and a short sale show up on my credit? Foreclosures show up as a FORECLOSURE, and can stay on your record for 7-10 years. Anytime you apply for a new loan or have your credit run, the foreclosure will show up and is usually a required disclosure you must make on most credit and job applications. A deed in lieu of foreclosure will stay on your credit for 5-7 years. A short sale is listed as SETTLED DEBT, and is much less harmful on your credit. The short sale will stay on your credit for 18 to 24 months. Please consult a credit company for more information.

    What liability do I have when doing a short sale? In a short sale, it is possible the bank could send you a 1099 for the difference in what you sell the property for and what you owed. This means the IRS could consider the difference as income and you could be taxed on that income.   The bank might also ask you to pay a portion of the difference back in the form of an unsecured note, which is similar to an I.O.U. It is a negotiation and we employ tactics to have the bank consider the debt settled.

    In a foreclosure, your house is sold at an auction, which typically causes the difference of the total amount you owe and the foreclosure sale price to be much greater. This means you have a higher potential of tax liability. Additionally, the bank has the right to pursue you for a Deficiency Judgment which can include the debt you owe, interest, late fees, attorney fees and foreclosure holding fees.

    Although there are no guarantees, a successful short sale should eliminate a deficiency judgment, minimize your tax liability and keep the foreclosure off your credit.

    Go to: http://www.irs.gov/individuals/article/0,,id=179414,00.html for information on whether or not you qualify for the Mortgage Forgiveness Debt Relief Act and Debt Cancellation (Expired 12/31/2013; check the web to see if Congress has extended yet). This Act may protect you from receiving a 10-99 and paying taxes. Please consult your tax attorney with further questions.

    What is a Deficiency Judgment? A Deficiency Judgment can arise when a bank sells the house at foreclosure auction. The bank can sell the house at auction for any amount less than the total debt amount plus fees. A deficiency judgment can arise if the bank sells the house for less than the mortgage debt. The lender then holds you responsible for the unpaid portion of the loan.

    For example: If you owe $100,000 to the mortgage servicer and net $55,000 after the auction, the remaining difference of $45,000 can be moved into a judgment against you. This will also appear on your credit report along with the foreclosure. The lender may be allowed to take further legal action such as garnishing your wages to pursue payment based on the laws of your state. Some states have restrictions and regulations on deficiency judgments, but unfortunately the majority of the states do not.

    Some lenders will choose the deficiency judgment while others may pursue a path to write off the loan.

    Do I need to give you a Power of Attorney? No. You will be able to sign the documents at closing. If you are out of state or unavailable, we can get a Power of Attorney to sign on your behalf for a recording fee payable to the title company.

    Does DeSelms Real Estate ever take title to my property? No.

    What is HAFA? (Home Affordable Foreclosure Alternative). It’s government program designed to help homeowners sell their home as a short sale or a deed-in-lieu. Only certain banks participate in this program and there are some eligibility requirements. If you are HAFA approved, they will completely waive the deficiency and potentially offer the homeowner up to $3000 at closing for relocation assistance. For more information, please visit: http://www.makinghomeaffordable.gov/programs/exit-gracefully/Pages/hafa.aspx

    What if my home is vacant? If your home is vacant, this could affect the process or outcome of the short sale with your lender. If you have an FHA loan, the home must be owner-occupied to qualify for the short sale, unless you were forced to relocate or vacate your home. HUD, the investor of FHA loans, is very particular about reasons that qualify as valid “forced relocations.” If you have further questions, please ask our team for literature on HUD guidelines. 

    Will I get any money at closing? Usually not. A seller in a short sale is not allowed to bring cash to aid the sell or net cash per all lender definitions of a short sale. However, there are some exceptions. If you have an FHA loan, and your home is owner-occupied up until closing, then you may qualify for the FHA Seller incentive, up to $3,000. If your loan is a conventional loan, and your lender participates in the HAFA program, and your home is owner-occupied up until closing, then you may qualify for the HAFA relocation assistance depending on your assets.

    Will I have to bring money to closing? Usually not. A seller in a short sale is not allowed to bring cash to aid the sell or net cash per all lender definitions of a short sale. However, a seller might have to bring money to closing if there are secondary/junior liens that we need to settle before we are allowed to sell your home.