What is a Short Sale

A short sale can be an excellent solution for homeowners who need to sell, and who owe more on their homes than they are worth. In the past, it was rare for a bank or lender to accept a short sale. Today, however, due to overwhelming market changes, banks and lenders have become much more negotiable when it comes to these transactions. Recent changes in corporate policy and the Obama administration have also improved the chances of getting a short sale approved. But to be technical, here’s a more official definition:

A homeowner is ‘short’ when the amount owed on his/her property is higher than current market value. Short sales occur when a lender accepts an amount less than the amount mortgaged as the total payment to settle the real estate debt obligation. Essentially the lender allows the homeowner to sell his or her property for less than what is owed on the mortgage.

A short sale occurs when a negotiation is entered into with the homeowner’s mortgage company (or companies) to accept less than the full balance of the loan at closing. A buyer closes on the property, and the property is then ‘sold short’ of the total value of the mortgage. For homeowners to qualify for a short sale, they must fall into all of the following circumstances:

Financial Hardship – There is a situation causing you to have trouble affording your mortgage. Monthly Income Shortfall – In other words: “You have more month than money.” A lender will want to see that you cannot afford, or soon will not be able to afford your mortgage. Insolvency – The lender will want to see that you do not have significant liquid assets that would allow you to pay down your mortgage. This seems simple enough, but it is a complicated process that takes the expertise of experienced professionals. Together, you can identify all possible options and, when possible, a CDPE can assist you in the quick execution of a short sale transaction.

The average foreclosure can cost a lender from 35-50% of the value of a property,

Questions and Answers on Short Sales

1. What happens to the seller’s credit rating when they allow an investor to short sell their property? What typically happens is the loan will show up as “paid” on their credit report; however there will be a notation that says “settled for less than originally owed” or something along these lines. It is more favorable for a homeowner to short sell than to have a foreclosure on their credit report.
2. How do bankruptcies affect the possibility of doing a short sale? Most mortgagees wont consider a short sale if the homeowner is in bankruptcy…why? Because negotiating a short sale payoff is considered a collection activity. Collection activities are prohibited in bankruptcy.
3. If I do a Short Sale, how much will I have to pay to sell my home? Nothing. It’s true, in most cases you will pay literally no sales costs if your lender approves the Short Sale. All commissions, title and escrow fees, and even most repair expenses are paid by the lender as part of the Short Sale approval. We will include the following clause in the contract.”Seller’s agreement to sell is subject to approval by existing lender of a Short Sale at no cost to Seller. Seller shall not be required to deposit funds to close escrow.”Remember, lenders approve Short Sales and accept the resulting loss in an effort to avoid bigger losses through foreclosure.
4. What sort of hardship would my lender consider legitimate? To some extent, that will depend upon the mortgage company considering the Short Sale request. Generally, so long as the hardship is real and the mortgage company believes the loan is likely to become delinquent as a result, the Short Sale request will be processed by the Loss Mitigation Department. A big key to getting Loss Mitigation to accept a hardship is to submit a strong hardship letter. The hardship letter sets the tone for the entire file.Below you will find a list of “hardships” that are common and frequently accepted by mortgage lenders.
   • Family illness or injury
   • Illness or injury in the extended family – particularly if it forces relocation
   • Job relocation when the property is equity deficient
   • Job loss or significant income loss
   • Divorce or split of domestic partners
   • Adjustment in mortgage payment or unforeseen increase in living expenses
5. I am current on my mortgage, will my lender consider a Short Sale? The answer is, maybe. Some lenders will accept a Short Sale file for approval on loans that are not delinquent. Other lenders will not accept the file until the loan is delinquent. We can put your Short Sale file together within a couple days and submit it for approval.(Remember, there is no charge for this). That is the best way to determine if your lender will accept a file for approval on a loan that is current.
6. Why would a mortgage company agree to accept a Short Sale? There are actually several reasons why a mortgage company would approve a Short Sale payoff, including the following;Legal Concerns – Mortgage lenders have come under legal pressure to work with borrowers to equitably resolve situations where borrowers are unable to meet their mortgage obligation, particularly when the borrower makes an effort to arrive at a compromise solution.Wall Street is watching – Mortgage lenders rely heavily on their ability to package and sell bundles of loans on the secondary mortgage market. They need to sell these bundles of loans in order to put the funds back to work by loaning the money again and collect loan fees along the way. If mortgages perform poorly after they are sold it could impact the lender’s ability to sell their loans on the secondary market. A successful Short Sale gets the loan payoff resolved quickly. Asset Management Expenses – If a lender acquires a property through foreclosure, the property will be managed until it is repaired and resold. It is expensive to manage real property assets - homes – spread throughout the region, the state and possibly even the nation. Keeping properties maintained, keeping utilities on, making repairs and the administrative costs attached to these activities are all costs the lender would prefer to avoid. A successful Short Sale eliminates most of these costs. Reserve Requirement – Delinquent and non-performing loans place another burden on mortgage lenders. For all delinquent and non-performing loans lenders must set aside funds in reserve to deal with potential losses. These funds cannot be put to work generating new loan fees until the bad loans are resolved. A successful Short Sale lets the lender put more money to work.
7. Will A Short Sale Stop A Foreclosure? While the Short Sale itself does not stop the foreclosure, lenders normally work with a homeowner and delay the foreclosure if necessary, if they receive a legitimate Short Sale proposal. The key here is to submit a complete, well organized, Short Sale proposal. The lender does not want your property, and would rather resolve the situation before the foreclosure is complete.
8. How to deal with the Deficiency Judgment? A bank can file for a deficiency judgment against the homeowners after completing the short sale deal. Both parties must show up in court and for the homeowners, it’s very much like being sued. If the judgment is awarded the court declares that the homeowners still officially owes the bank the remaining. The homeowner may also be able to file bankruptcy and have that deficiency judgment cleaned from their credit history.If you can prove financial hardship was the reason the homeowners couldn’t make their mortgage payment, the bank usually agrees not to file for a deficiency judgment. If you can prove financial hardship was the reason the homeowners couldn’t make their mortgage payment, the bank usually agrees not to file for a deficiency judgment. Many times the homeowners have been living in enough financial hardship that they won’t have to pay taxes on their 1099 Form.
9. What is the Florida Foreclosure Time Line? When you buy a house in Florida with borrowed money, your lender will place a lien against your property by using a Mortgage or a Deed of Trust. The Deed of Trust or the Mortgage is recorded at the courthouse telling the public that you owe them that amount of borrowed money.You will sign a Note, which you personally guarantee that you will pay the borrowed money back to the Lender.FIRST MONTH: Sellers get behind on their first payment. They receive a letter from the lender advising them that they did not receive their payment. SECOND MONTH: Sellers get behind on their second payment. They receive a letter from the lender advising them that they did not receive their payment and they need to remit a payment promptly. THIRD MONTH: Sellers get behind on their third payment. They receive a letter from the lender advising them that they did not receive the payment and that the lender has forwarded this file to the Attorney. The Attorney will start foreclosure proceedings if the seller does not pay. FOURTH THROUGH EIGHT MONTH: A Complaint for Foreclosure Summons and a Notice of Lis Pendens is filed with the Court advising the public that the Sellers are in foreclosure. Lis Pendens notice served followed by 20 days to file an answer. The serving could be immediately because they are easy to personally serve or it could take some time if they have moved and cannot be found. If the Plaintiff/Lender cannot find the Defendant/Sellers to serve, they will have to publish in the newspaper for a period of a month or more depending on the statute of law. Once service is made on each party, they have 20 days to answer the Complaint from the date they are served. Most Sellers do not answer the Complaint. Answering the Complaint may delay the time period for the foreclosure but with no guarantee. When ALL PARTIES (they serve husband, wife, tenants, all other occupants, other lien holders) are served, there is a hearing date scheduled. After the answer period ends (and sometimes even before) the lender’s attorney will file a motion with the court to declare summary judgment. There is an additional 20 day answer period before the hearing can be held. Defendants are allowed to attend the hearing and speak. It is recommended that an attorney speak for the borrower if they so desire. At the hearing the judgment is entered and a sale date is set (usually in 30 days). Then the property is sold at auction to the highest bidder. After the sale, there is a 10 day waiting period after the foreclosure sale before Clerk issues Certificate of Title. At that time the new owner can have the Sheriff show up and set the old owner’s possession out on the curb. The lock’s can be changed and old owner would be trespassing if they go back into the house.
10. What About My Credit? One of the primary benefits of a successful Short Sale is avoiding the credit damage of a foreclosure. The damage to your credit done by a foreclosure lives on for years – at least seven years. Your credit will recover much quicker from the credit dings of a few late mortgage payments, if you keep your other accounts current. So, consider allocating your funds to meet basic necessities (food, utilities, household needs, auto expenses and such) first. Beyond paying for necessities plan to pay other bill to keep as many accounts current as possible.

Seller’s Package to the Bank

Sellers must provide all this information to the bank. It is best to send it all together.

Lender Cover / Intro Letter This is basically an introduction and index of all items in a complete short sale package. A check list of all the important documents. Executed Contract w/addendum(s) This is the agreement between buyer and seller. This is the executed contract with all necessary addenda. This is the only contract to be submitted to the lender for short sale (unless otherwise requested from the lender). All other offers /contracts after this will be held as backups. Buyers Proof of Funds /or Qualification for financing This shows the seller’s lender that there is a qualified purchaser for this short sale property. Authorization to Release information This is submitted to the bank to allow the realtor and/or attornies to speak and negotiate direct with the bank on behalf of the borrower. Borrower Financial Statement This is where the seller will list all their assets and liabilities. It will give a clear idea to the bank of their financial hardship. Listing Contract This is the contract between Seller and Broker MLS Report and Property history This is the report off of the Multiple Listing System showing the short sale property for sale in as well as how long it has been on the market, price reductions, etc. Borrower last two pay stub /or explanation This shows all the seller’s income. If there is no income, explain otherwise - ie – unemployed, social security, etc. Borrower 2 months Bank Statement /or explanation This will show all the debits and credits of all of their bank accounts which should coincide with what is stated on the financial statement. Prior 2 year Tax Returns / or explanation This is the last 2 years of tax returns Hardship Letter There should be a reason for your short sale. This is where the seller wants to state everything that is working against them to keep this property. It can be as simple or as severe as death, loss of job, etc. Get detailed. Updated Appraisal This is an estimate of what the property is worth; valuation of the property. Estimated HUD from Title Company This is the settlement statement which will help indicate to the bank all costs associated with the short sale including any liens. This is prepared at no cost to the seller’s by a professional title company

Everyone Wins

It isn’t often in real estate transactions that virtually all parties with a financial interest can be winners in the same transaction. A successful Short Sale is one of those rare situations where everyone wins. The Buyer Wins by acquiring a property at below market price. While some Short Sales will be bigger bargains than others, nearly all Short Sales will represent a good deal for the buyer. The Seller Wins by avoiding foreclosure and all the credit damage that goes along with it. The property gets sold, all the loans get paid off and the existing lender pays all the sales costs. In most cases the Seller has no out-of-pocket expenses. The Mortgage Holder Wins by reducing the loss they absorb to get the delinquent loan off their books. Mortgage companies know that the costs associated with acquiring a property through foreclosure hit their bottom line – hard. To resell the property the mortgage company frequently needs to invest money in clean up and repairs, and they need to pay staff to manage and maintain the property as well. This is precisely why they have set up Loss Mitigation Departments to resolve delinquent mortgages before the foreclosure is complete. Articles: http://www.floridarealtors.org/NewsAndEvents/article.cfm?id=244043

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