Real Estate Short Sale Guide

There has been a debate over whether short sales will not hurt your credit score as much as a foreclosure. Finally there is an agreement that they will both hurt the homeowner by decreasing your credit score 200-300 points, however there is a pro to choosing a short sale vs a foreclosure route.

The biggest reason is that a distressed short sale homeowner will have the ability to make a large home purchase in the near future, rather than 7 years from the date of foreclosure. A short sale will not protect their credit rating but instead protect their ability to obtain financing in the future. Fannie Mae and Freddie Mac have already specified that a borrower will be able to qualify for a mortgage loan in less time, even if a pre-foreclosure (short sale) or bankruptcy exists on the credit report. A foreclosure on the other hand will disqualify the borrower for the longest period of time.

Once a short sale is completed successfully, the credit reporting agencies are updated. Many short sale sellers can see an improvement in their credit score in as little as 2 to 3 years. It’s important to seek ways to repair credit after a short sale.

Short sales can be a long ride for not only the buyers but the sellers. The distressed homeowner seems to get the short end of the stick, as far as getting their needs meet during this difficult process. Homeowners selling a short sale can be anxious and also need some hand holding to make this unique transaction a successful one. It’s quite important for sellers to be aware of the short sale process and how it works.

-Know who your best buyer is – The best buyer is not a speculative investor who is trying to get the house by making lowball offers. It is in the interest of the homeowner to get an offer close to the market value and find a buyer who will be living in the home.
-The lender may take time – The bank or lender has quite a few short sales to process and may accept, reject or ignore a short sale proposal for an extended period of time, sometimes as short as a couple weeks to as long as 90 days.
-Check the fine print – The lender may release the mortgage, but require the seller to pay what is owed via a promissory note.
-The escrow short sale timeline – Once the lender approves the short sale, they may require the buyer to close very quickly.
-And the bad – The lender can approve the short sale but many things could go wrong with the home and the property may still end up being sold at a foreclosure auction.

Homeowners going through a difficult short sale situation, may feel quite distressed due to the lack of control of the selling process and will need their Realtor to guide them through it. A successful transaction is a great thing, but it does require patience and a lot of hand holding for not only the buyer but the seller.

A good short sale candidate is a homeowner who is unable to keep up with their monthly financial obligations due to unforeseen hardships such as: divorce, job loss, sudden decrease in income, medical expenses, adjusted mortgage payment due to ARMs, job relocation and more.

What if I have 2 mortgage loans, will I still be able to short sell my house?

It can be possible to get an approval from both owners of the loan to short sale the house. The two lenders can cooperate and negotiate on the amounts, but it does make things more difficult. Many times the 2nd mortgage holder will lose all or close to all of the amount owed vs the 1st lender. If the 2nd mortgage holder holds out for more money, it can prolong things and possibly put in a wrench in the works.

Why do banks agree to do short sales?

Banks do not want to own your home and they would prefer to not foreclose on the property due to high costs of foreclosing the property. It can be more cost effective for a bank or lender to choose to do a short sale rather than go through an expensive foreclosure process. To minimize their losses, many lenders choose to short sale the property, if they can.

A real estate short sale is when a lender or bank agree to sell the home for less than what is owed on the mortgage(s). The short sale can result in the buyer getting a good deal, but you’ve got to watch closely. Sometimes the buyer can be shelling out more money than thought. Here are some items that will help minimize risk to the buyer during a short sale.

1. Choose your house carefully and with the right professional – You want to work with a real estate agent that is licensed and has real estate short sale experience. Having an agent with experience helps greatly when guiding a newbie to the short sale buying process.

2. Take a look at the situation – Many states don’t require sellers of short sales to market it as a “short sale”. It’s important to make sure you know what type of transaction the home would require if you are interested.

3. Be prepared to buy – There is not point for a buyer to look at short sale properties and make offers if they are not qualified to purchase. Learn the difference between a pre-qualification and a pre-approval letter. Typically in a traditional sale, the seller may proceed with negotiations with a pre-qualification letter but nowadays, lenders are the sellers in short sales and will require a copy of a pre-approval letter with a proof of funds with down payment to look at the offer.

4. Complete your homework – Find out who owns the title and whether the lender has already started foreclosure proceedings. Check to see how much is owed to the lender(s) and what are the price comparables in the neighborhood. This will help you determine how much to offer on the short sale property.

5. Grill the listing agent – Don’t balk at the idea of pushing the listing agent for information. Ask the following:

*Find out if the seller has been approved for a hardship sell, in which the lender sees that the seller truly cannot afford to keep the property. If the seller hasn’t been approved for the hardship sale, then it will prolong the deal much longer.
*See if the bank has approved the asking/listing price. It’s ultimately up to the lender to give final approval on the selling price.
*Find out if the loan has PMI (private mortgage insurance) which protects the lender in the event of default. It can be instead more financially advantageous for the lender to foreclose and collect the insurance than accept the real estate short sale.
*Check to see if the seller has stopped making payments on the property. Even though the seller is supposed to provide a clear title, the buyer may be asked to come up with any amounts owed: missing mortgage payments, liens, back taxes, etc.
*Check to see if there are multiple offers coming in for this property. You may need to strengthen your offer or choose to back away.

6) Beware of the 2nd mortgage – If there is a 2nd or 3rd mortgage on the property, it may make things more difficult to close as all the lenders have to agree on the approved short sale price for the transaction to be completed.

7) Inspections – Short sale properties are typically sold “as is” as the lenders do not want to pay for more things. Make sure your contract reserves your right to conduct inspections. You should know exactly what are the issues of the house, if any, before buying.

Get a leg up – You could consider taking a mortgage with the lender that holds the first mortgage and may end up being an attractive incentive for the lender to move forward with their choice buyer.

9) Watch out – Lenders reserve the right to change the terms of the short sale contract at any time. Read every word of the addendum or bank’s contract (you may even want a real estate attorney to review it). You can also ask your real estate agent to add a clause to the contract that gives you the right to terminate the contract is the short sale is not approved by a certain date.

10) Be Patient – Patience is needed to close a short sale. A short sale moves at the lenders place and it can take quite a bit of time.

Short sales have become quite common in the past year, helping many people get out from under a difficult situation. At the same time, quite a few attorneys have nestled themselves into a nice niche to do loan modifications for troubled borrowers.

The last time short sales were such a huge part of the real estate market was back in the mid 1990′s when the market also fell due to investor inflation in the real estate market.

Many homeowners are trying to decide, what workable options are available to me NOW and which one work. Loan modifications would enable you to keep your home, but of course, you would need to be able to qualify for a loan modification in the same criteria mortgage lenders use to qualify a buyer looking for a loan. During a loan modification, the attorney will try to renegotiate the loan to allow the homeowner to afford the home. Prior to missing any payments, it’s good to speak with the lender to get an idea of what could be affordable for each party.

In many cases, loss mitigators will want to speak with the attorney and the homeowner at the same time on the phone. Usually the loss mitigator may say that it wasn’t necessary to include the attorney to do a loan modification.

There are some law firms which specialize in loan modifications and have working relationships with investors who can purchase your home if the loan modification does not work out. They will structure a short sale with the law firm.

If you are going through a situation in which you are considering a short sale, then first speak with a Realtor who is familiar with loan and short sales. They may be able to guide you to the right choice, although always make sure to keep an eye out for fraud.

Are you trying to understand short sales? Are you facing the possibility of foreclosure due to financial difficulties? Then it is time to understand the short sale process just a bit more.

It may not feel like it, but you as the homeowner you still have options to help save your credit and losing your home to foreclosure. Many in this situation, tend to think they have no choices and their credit is beyond repair, but there are some things left to try to understand about short sales to save your credit.

1) Avoid Foreclosure – See how a short sale can benefit you. There are people who may want to purchase your defaulted mortgage and may be able to save you from carrying the full financial burden.

2) Debt Consolidation – You don’t want to be late on your mortgage as the lenders will report you to the credit bureaus once you are 30 days late. You can try to consolidate your debt if you qualify to make ends meet.

3) Lenders – The banking industry does not want to foreclose on your property as that is not what they are in the business of doing.

Become familiar with the short sale process as it may be a good choice to save your home and avoid further struggles financially. Before you begin the process, speak with some professionals who understand the foreclosure process and see if there is a way to save your home.

Banks are being flooded with short sale requests since many homeowners have fallen victim to the downward spiral of the real estate market.  If a homeowner is facing foreclosure they must call the bank to get assistance on a loan modification.  If a loan modification is unavailable or doesn’t work, then the next step is to request a real estate short sale.  In a short sale, the property is to be sold for less than what is owed on the loan.  It is usually their best option so avoid entering a foreclosure with the homeowner, which can be quite a costly process for them.

Here are a few suggestions:

• Make sure to get a knowledgable real estate agent that is educated about the short sale process.
• Price the home to sell in today’s market
• Talk to your lender early.  It is important since in the future it will prove that you attempted to work with the bank on avoiding foreclosure.
• Complete all the required documents properly and orderly.  Meet all the deadlines and keep copies.
• Your real estate agent is to contact the bank once the short sale request has been delivered to the bank with any offers.  The agent will try to get a time line from the bank on the steps left.
• The banks are known for throwing last minute requests into a deal.  You and your real estate agent will need to gather your negotiation skills so that the bank doesn’t try to strong arm you into accepting something not in your best interest.
• Make sure to get legal or CPA assistance, since there will be tax implications with short sales.  A real estate agent may be familiar with it, but it is best to speak with a professional in that field.
• It is a long process, but try to keep your head up and sanity together.  Your agent should be able to guide you through the long and tedious process and make it worthwhile to you and your family.