What is a Short Sale?
A short sale is nothing more than when a lender is willing to accept less than what is owed on outstanding debts against real property. A short sale is a way for a homeowner to avoid foreclosure and still be able to pay off the bank from acceptance or a settlement agreement.
In light of what is going on in our economy and in the local housing market and with so many people facing foreclosure or finding themselves upside down in their mortgages I have taken special training on helping homeowners in distress. A foreclosed property in a neighborhood can have an extremely negative effect on the entire marketplace and one of my goals is to help homeowners avoid foreclosure completely. One of the biggest problems according to all the statistics is that most people do not know of their options if they are facing a financial difficulty. One of the issues we’ve been trained in is explaining those strategies to the homeowner so they can make the best decision for their future.
Whether the homeowner intends to keep the property or needs to sell as a Real Estate Professional we have an obligation to inform you of all the available solutions so we can determine the best solution.
1. Refinance. If the homeowner meets the required eligibility criteria, one of the best options is the Home Affordable Refinance. The Home Affordable Initiative was launched in early 2009, follow this link for greater detail. HOME AFFORDABLE REFINANCE.
2. Do A Lender Workout
- In a forbearance, the lender spreads the back payments, fees, penalties, et., over a fixed number of upcoming payments to allow the homeowner to catch up.
- With a loan modification, lenders will often work with the homeowners to help them keep the home by reducing or rolling back interest rates, forgiving back payments or adding them to the loan amount or possibly re-casting the entire loan into a fixed rate that wraps all the fees into the new loan.
3. Sell and Bring Cash to Closing, It is imperative here that real estate professionals assure themselves to the best of their ability that the seller has the necessary funds to do so. It is equally critical that the sellers speak with their finance and tax professionals about possible tax consequences, eg., liquidating ones 401(k) account, before bringing cash to closing.
4. Offer the Lender a Deed in Lieu of Foreclosure, This is a situation where the borrower offers to trade the property to the lender in exchange for the cancellation of the note. This is more likely to work in the states where there is a long foreclosure timeline. The lender will be able to get the property much sooner, which lessens the lenders expenses. Like the workout, a deed in lieu of foreclosure should be done by sellers and/or their attorneys.
5. Request a Short Sale, The lender has not yet foreclosed on the property, and there may be a window of opportunity for the seller to put the property on the market and try and sell it in order to at least partially pay the lender what is owed.
6. Go to Foreclosure, If you are contacted by someone in the late stages of pre-foreclosure, the homeowner should immediately contact an attorney with distressed property expertise to determine if there is any way to take advantage of the other options.
There are numerous resources to help distressed homeowners understand their options. Those resources include, but are not limited to:
- To find a HUD approved housing counselor: (800) 569-4287
- To contact the Homeowners Hope hotline: (888) 995-HOPE
- Fannie Mae
- Freddie Mac
- Making Home Affordable
WHY SHORT SALES ARE PREFERABLE TO FORECLOSURE ?
Short sales are considered preferable to foreclosures because short sales (1) may not damage the distressed owner’s credit report and/or ability to obtain financing in the future as much as a foreclosure and (2) lessen the impact a foreclosure can have on the surrounding community.
There are varying opinions on the number of points by which a short sale or foreclosure will lower a distressed homeowners credit score. Some consumers report that a short sale lowered their credit score by only 50 points. Others attest that a foreclosure decreased their score 200 points or more. The reality is that credit scoring algorithms are complex and take into consideration a number of factors, including, but not limited to, the following:
- Payment history
- Amount of debt compared to credit limits
- Length of credit history
- Number of credit inquiries
- Number of credit accounts
- Type of credit accounts
In addition, when calculating an individual’s credit score, agencies compare the above information to the loan repayment history of consumers with similar profiles. Therefore, it is impossible to specify the exact number of points by which a short sale or foreclosure will lower a consumers credit score.
Where short sales and foreclosures proceeding are concerned, what is certain is that a distressed homeowner who completes a short sale will be able to qualify for a loan owned by Fannie Mae sooner than if the homeowner allowed the property to go into foreclosure.
DO YOU QUALIFY ?
If a short sale is judged to be a distressed homeowner’s best option, the real estate professional must be exacting and thorough in qualifying the homeowner for a short sale. Not every owner is a short sale candidate and, unfortunately, not every owner can be saved from foreclosure.
Many panicked homeowners seeking a short sale solution may be unclear on what constitutes a valid hardship---an event or events that change a homeowner’s ability to keep current in mortgage payments. Loss or equity or choosing to purchase another property simply to upsize or downsize for example, is NOT considered a valid hardship. However, lending institutions may entertain short sales for homeowners who have experienced any of the following that would cause their payments to no longer be affordable.
- Employment changes
- Business failure
- Illness and medical costs
- Divorce or death of spouse
- Increase in monthly mortgage payment
- Natural disasters
UNDERSTANDING HAMP AND HAFA
- Home Affordable Modification Program (HAMP)-----HAMP was enacted in 2009 to attempt to help homeowners who wanted to modify the current loan to reduce the payment to an affordable level for the borrower.
- Home Affordable Foreclosure Alternative (HAFA)-----To help homeowners who are unable to keep their homes under the Home Affordable Modification Program, the HAFA program may make a short sale or a deed in lieu of foreclosure a viable option to help them avoid foreclosure. The HAFA Program, which took effect on April 5, 2010, provides servicer, seller, and junior lien holder incentives for these transactions and is designed to simplify and streamline the use of short sale and deeds-in-lieu of foreclosure. Check eligibility here, ELIGIBILITY.
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