Why is a Short Sale a better option than Foreclosure?
Whether you opt for a short sale or let the home go to foreclosure depends on several factors. While for some homeowners, it is easier to throw up your hands and let the bank take your home, that might not be the wisest thing to do.
Why would a lender accept less than their payoff in order to facilitate a sale of the home? Why would a short sale be preferable to a lender than foreclosing on the subject property?
Foreclosure is an expensive process for a lender. Banks are in the business of making loans, in general they don’t want to possess the property. You also must remember that not only is foreclosure a long and arduous process for the bank but it also costs money. If the lender goes through the entire foreclosure process significant costs will accrue including posting the notice of foreclosure and advertising the foreclosure sale.
What is a Short Sale?
A short sale occurs when a lender accepts less than what is owed on the mortgage to end the foreclosure process.
Will The Bank Come After Us For The difference?
Unless you have great credit, are not delinquent, or have significant assets, most banks will not. A lender usually releases liability of the mortgagee in writing. You can also avoid any liability through speaking with your CPA to prove that you are insolvent (total worth equals less than you owe).
Can you do a Short Sale if I have multiple mortgages and liens on the property?
Regardless of how many mortgages or liens are on title, we can still do a short sale. Of course the process is more difficult and may take longer, but it can still be done. Essentially it will just require negotiations with each lienholder to determine how much each lienholder will settle for. They are generally amenable to taking less than owed since they would get nothing if the property went to foreclosure.
Why Do I Have To Provide Personal Information?
All lenders require a complete short sale package, including tax returns, bank statements, pay stubs, etc, to show that there is a genuine hardship or the need to sell.
Will A Short Sale Destroy My Credit?
Yes and no. The short sale may not show up on your credit. In fact, most mortgage trade lines report “Mortgage Paid” after a short sale. Any late payment history will still appear, as will any Notice of Default filings. What won’t report is an actual foreclosure. A promissory note may prevent the lender from reporting the mortgage as a loss. In today’s credit market, a foreclosure may prevent you from obtaining a mortgage for at least 5 – 7 years.
How Long Will This Take?
This is totally up to the lender. Some lenders take as little as two weeks, some over six months. The only way to know is to start the process. The key is making sure that your working with an experienced agent that knows how to properly put together a short sale package and has the established relationships with key decision makers within the loss mitigation department of your bank. It also requires on average 90-120 phone calls into the lender for follow up and persistence to make sure that they are pushing the file along smoothly.
Why Should I accept Such a Low Offer On My Property?
What difference does it make? To sell quickly, you must list the property at or below current market value, not what you wish you could sell for, or what you think the property should be worth.
Do I have To Pay An Agent?
The Lender pays the real estate agent as part of the fees listed on the HUD. We always start with a higher commission and then negotiate down with the bank as a tool of leverage to reach a deal There are no costs to you for listing your property as a short sale with us.
Will This Cost Me Anything?
Yes and No. Generally speaking, a short sale will not cost you anything. Some lenders however do require a seller contribution to execute the sale. When they do, its generally for a nominal amount just to keep within their short sale guidelines. This seller contribution is pretty rare and something that we are able to negotiate around 95% of the time.
Will I Get Any Money From The Sale?
Not usually. Most lenders will not allow a borrower to receive any money. If the lender thinks you are getting paid from the sale, they will immediately kill the deal.
What happens to the property if the lender goes through the entire foreclosure process and no one bids on the property?
If no sale occurs the lender will have to pay not only the advertising and notice fees but they will also be responsible for attorneys fees, trustee’s fees, and title insurance. The lender will then be forced to possess the property which will require them to pay for repairs, maintenance, hazard insurance, and property taxes. Furthermore the lender will have to sell the property which will require them to pay not only real estate commissions but also closing costs.
What’s the difference between Judicial Foreclosure and Non-Judicial Foreclosure?
Judicial Foreclosure means that the lender has to go to court to foreclose. Non-Judicial Foreclosure does not require the lender to go to court. This is because the loan instrument the borrower signed contained a power of sale clause, or the instrument is a Deed of Trust. A power of sale clause means that the borrower authorized the lender to sell the property to pay the loan if the borrower defaulted.
What does a notice of default mean?
A Notice of Default (NOD) means that the bank has contacted an attorney and the foreclosure process has begun. They have set a date at which your home will be auctioned off at a public auction to the highest bidder.
What does a notice of trustee sale mean?
A Notice of Trustee Sale (NOTS) means that the bank has posted public constructive notice that there will be a sale in 30 days. The sale can often be postponed if you are actively working a short sale with the bank. As a matter of course, they generally still go through the NOTS process.
What does “Acceleration Clause.” Mean?
It means that once a borrower is in default, the lender can choose to demand payment of the entire balance of the mortgage in one lump sum.
What does “Lis Pendens” mean?
It is a Notice of a Pending Lawsuit and one of the initial a step the lender takes on the path to foreclosure.
Here are a few benefits for doing a short sale that may not have occurred to you:
* You are in control of the sale, not the bank.
* You may sleep better at night knowing who is buying your home.
* You will spare yourself the social stigma of the “F” word, foreclosure.
* Contrary to popular belief, you can be current on your payments and still execute a short sale.
* Your home sale will be handled like any other home sale.
Buying Again After a Short Sale
If your payments have never fallen behind 30 days late and the lender does not require that you pay back the loan, Fannie Mae guidelines may allow you to buy another home immediately. The wait for an FHA loan is 3 years.
If your payments are in arrears yet a short sale is granted by your lender, you may qualify to buy another home with a Fannie-Mae backed mortgage within two years, regardless of whether the home is your primary residence.
Buying Again After a Foreclosure
With certain restrictions, you may be eligible to buy another home in 5 years if the home was your primary residence. Without restrictions, the wait is 7 years.
If you are an investor and do not occupy the home, the wait to buy with a Fannie Mae insured loan is 7 years.
Affects on Credit After a Short Sale
A short sale is not a derogatory mark on your credit because credit bureaus do not show the word “short sale” on your credit report. It may say “pay as agreed” or “paid as less than agreed,” among other categories. Some clients have reported negative FICO score drops from 50 points to 130 points.
The point drop is typically due to being in default (getting behind on your payments).
Affects on Credit After a Foreclosure
A number of sources have reported FICO score drops from 200 to 400 points after a foreclosure. Generally this credit score will remain on your credit report as a public record for 10 years.
Credit Reports After a Short Sale
All lenders report short sales differently and some do not report them to the credit bureaus at all.
Credit Reports After a Foreclosure
If a prospective employer runs a credit check on you, your job application may be denied if you have a foreclosure on your record.
Deficiency Judgments After a Short Sale
Judgments are often negotiated between the seller and the short sale bank. In some cases, such as California, if the home is your personal residence and was financed through purchase money, there is no deficiency judgment.
Deficiency Judgments After a Foreclosure
Banks are unwilling to negotiate deficiency judgments with the homeowner after a foreclosure. In California, for example, according to the California Association of REALTORS, a deficiency judgment may be filed if the lender forecloses under a judicial foreclosure versus a trustee sale or if the second loan is a hard money loan and the sale takes place as a trustee’s sale.
Loan Application Questions After a Short Sale
Loan applications do not ask questions about a short sale. You may report that you sold your home.
Loan Application Questions After a Foreclosure
You are required to answer the question: “Have you ever had a property foreclosed upon or given a deed-in-lieu thereof in the past 7 years.” If the bank sees you have had a foreclosure, your loan most likely will be denied. If you lie, you may be subject to investigation by the FBI for mortgage fraud.
Length of Time to Move After a Short Sale
If you’ve had a foreclosure notice filed, you may be able to postpone that action while the bank considers your short sale. The wait for short sale approval can be from 2 to 3 months, or longer.
Length of Time to Move After a Foreclosure
Unless prior arrangements have been made, the bank may want you to immediately vacate the property and can commence eviction proceedings.
Taxation After a Short Sale
A personal residence is exempt from mortgage debt relief until the end of 2012 on a federal level. Some states will still tax you unless you qualify for an exemption. An investor is not exempt from mortgage debt relief, subject to certain conditions.
Taxation After a Foreclosure
Same as with a short sale. Except some lenders immediately send out 1099s, even if the owner is exempt.
***Always obtain legal and tax advice before making a decision between a short sale or a foreclosure.
If you are interested in discussing your options to avoid foreclosure, please call or text 858-736-7000 or you can contact me via email.