Kenneth McMillan, CMP Mortgage Banker Clarion Mortgage Residential / Commercial Phone: (949) 481-6300 Fax: (949) 861-9370 ken@pvtmortgagelending.com www.pvtmortgagelending.com
The Short Sale Guide Will a lender allow a real estate short sale when the property has equity?
What is a Short Sale? A real estate short sale is a form of agreement between the seller of a home and their lender, whereby the lender allows the home to be sold for less than the existing loan balance outstanding. (also known as being “up-side down, or underwater) The mortgagee
(lender) would accept less than the loan amount in order to avoid a foreclosure proceeding. This short sale would result in a substantially discounted purchase price for the buyer of the home. The buyer would then precede with the purchase of the home much the same as in any conventional realty transaction.
Is it necessary to be in the foreclosure process to start a short sale? The good news is… “NO!” Recent revisions to laws pertaining to a short sale, have waived the late payment rule. Lenders are now free to use their own time initiatives when determining when they decide to work out a potential problem. Some lenders are still reluctant to negotiate unless you are late so it is absolutely critical that you partner with a Real Estate Agent “Short Sale Specialist” who can achieve positive results regardless. Depending on individual state law and regulations, a foreclosure can proceed as quickly as 35 days from the date the notice to the borrower is filed. For that reason, time is of the essence and you should allow a window of no more than 60 days to effectuate a lender approved short sale. Keep in mind that each lender is different and experience has shown that Lenders can take as long as 90 days to work through the Short Sale offer and acceptance.
If your home has considerable amount of equity, the lender may choose to continue with a traditional foreclosure proceeding to regain title to the property and dispose of it at a market price. Given the current state of affairs with the real estate market, the home will most likely be over encumbered, hence the reason for the short sale in the first place. A glut of homes for sale in the market area of the home may make the lender think twice about taking title to the property. In this case the Lender may be more interested in perfecting what is known as a “LOAN MODIFICATION.” A loan modification is an adjustment of the original terms of the note. The benefit is that you retain ownership of your home with payments you can afford to make. This is a negotiated transaction and just as in the Short Sale you should seek a competent modification specialist. (See our Loan Modification Booklet for more information or contact Ken McMillan, CMP, LMS - Loan Modification Specialist at 866-420-5511)
Why would a Lender or Seller find a Short Sale appealing? Homeowners benefit by avoiding the long-term negative consequences to their credit which are associated with a foreclosure. Lenders benefit because they can avoid the substantial expense of a foreclosure proceeding. Most lenders do not want to own the properties used as collateral for their loans, because the maintenance costs and taxes add to their cost and decrease profitability. Recent studies show that a foreclosing Lender experiences approximately $40,000 in hard cost in addition to a 40% reduction in equity or Fair Market Value (FMV). Keep in mind that although this process is one of the most emotional times for you, to your Lender it is just another financial transaction and will make their decision based on a fiduciary responsibility to the shareholders. Simply stated… if it cost less to short sale than to foreclose, then this is what the Lender will do.
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Why should I consider a Short Sale? Selling a property has advantages over foreclosure proceedings and helps restore credit ratings quicker. Foreclosure means the bank has taken legal action to take the property back and try to sell the property in some fashion most commonly through a Sheriff or Trustee Sale. If there is a loss or deficiency, the mortgagor (seller) could still be liable for that amount. With a short sale, in most cases all terms are agreed upon prior to closing.
How do I qualify for a Short Sale? Each case is different and there are no hard set rules. But some guidelines are in place to help people. First, there basically has to be a financial hardship with the property needing to be sold. Secondly, the net value of the property needs to be less than a realistic fair market value (sales price) after all selling expenses. Finally, the homeowner does not have any other assets or possibility in the foreseeable future of repaying the late payments and fees.
Will my credit rating be affected if they allow a short sale on their property to occur? While it is up to the individual lender to decide what to report, what often happens is the loan will report as "paid" on their credit report? While that good news the bad news is that there will likely be a reference that says "settled for less than originally owed" or something similar. It is certainly more advantageous to have the short sale referenced than to have a foreclosure on their credit report.
Will the bank or lender require an appraisal on my home in a short sale? Most lenders will require that a full appraisal be submitted in the short sale package. Some may only require a BPO or brokers price opinion. The lender will need some formal assessment of the value of the home in order to make a decision as to accept or reject the short sale offer. Again a Short Sale Specialist would actually prefer a liquidation appraisal as it shows the lender a more realistic depiction of what they could expect if they were to deny a short sale and attempt to sell the home through foreclosure. The goal is to demonstrate to the lender that it is in their “financial” best interest to approve the short sale.
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Will a lender allow the seller to make a profit on a short sale? By the nature of the transaction, the seller is not going to make a profit on the short sale. They may have extracted equity from a previous refinance of the home, but their current loan balance will be higher than the selling price of the home.
If a seller is in bankruptcy, will that affect the short sale of the property? Absolutely, as most lender would not consider a short sale if the homeowner is in the middle of a bankruptcy proceeding. Negotiating a short sale between the parties is considered a collection activity and such a negotiation is prohibited in bankruptcy.
Are there tax implications with a Short Sale? Much like the issue of credit reporting, the circumstances are individual to the lender. As a short sale represents a loss for the lender, they can report the amount lost a debt forgiveness to the seller. If a formal tax form 1099c is filed, the seller may be responsible for paying taxes on the amount of debt forgiveness. However… there is good news. In December 20, 2007, Congress passed the “Mortgage Forgiveness Debt Relief Act.” In General the Act allows exclusion of income realized as a result of a loan modification or foreclosure on your principal residence. There are certain qualifications and I recommend you seek competent tax advice to know your rights. If you need assistance locating a tax expert we would be more than happy to refer you to tax professional. (I provided a bit more info regarding this law at the back of this booklet)
Do I have to talk with the lender(s)? At some point during the process, you will have had some contact with the lender(s) because of being late on mortgage payments. Once the short sale process starts, almost all of the conversations with the lender(s) will be handled by your short sale specialist. Unless it is absolutely necessary for you to make a call, they’ll handle the dozens of calls that will be needed.
How much time do I have? It depends solely on how many months you are behind in mortgage payments. If you have not been served foreclosure notices, you should have enough time to try and sell the property. When foreclosure proceedings have started, we will need to move the process along quickly.
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When do I need to vacate the property? Generally a few days before closing, but you can leave anytime you want. However, you are still responsible for the utilities and condition of the property.
The Good and Bad issues with a Short Sale. It really surprises me how many homes go through foreclosure that were not for sale at some point. It appears people just gave up knowing they could not sell their house for enough to pay off the mortgage(s). Foreclosure is the last thing anyone wants including the lender(s). So why do people just let their houses go back to the bank?
The Good 1. It shows creditors you tried to help make things right and avoid foreclosure. 2. A Short Sale negatively effects your credit for a shorter period than a foreclosure. 3. It keeps the lender(s) notified of your situation keeping them from wondering what is the problem. 4. In a foreclosure there is the possibility of a deficiency judgment after the public sale, but in a Short Sale it generally is discussed prior to closing so you know what is going to happen. 5. It is a private matter rather than having the foreclosure filings in the newspapers and no foreclosure signs on the front lawn. 6. Tax liability may be eliminated or reduced.
The Bad 1. It will affect your credit for roughly 2 years (a foreclosure could be 7 years) 2. Sometimes it prohibits obtaining government loans (Student, FHA, VA, etc) for 2 years. There are circumstances involved. 3. You will be given a 1099c tax for the deficiency (that might be able to be negotiated with the IRS depending on circumstances) 4. You will walk away from the closing with ZERO dollars 5. The process takes awhile (approximately 90 days)
What documentation is needed? Every lender requires different proof that a hardship exists. In general you’ll be asked for 2 months of the following: o o o o
bank statements, checking accounts savings accounts pay stubs
A signed, valid purchase and sales contract, preliminary HUD-1 settlement statement and a preliminary estimate of proceeds to the lender. There may be additional requests for more detailed information on the financial condition of the seller. You may be asked to write out a letter in your own words what happened to cause you to be late in your mortgage payments and why you want to be considered for a Short Sale. Finally, you’ll sign a letter of authorization allowing your Short Sale Specialist to contact the lender(s) and discuss the possibility of a Short Sale.
What happens next? The very first thing your Short Sale Specialist will do is submit the letter of authorization to the lenders giving them permission to talk with them on your behalf. They’ll contact the lender(s) and ask them what their policies and procedures are. Usually they will provide the necessary paperwork they want filled out and signed. After completing the lender's paperwork, your Specialist will fax it back to the loss mitigation department along with all the documentation required. A typical file professionally prepared will easily reach 250 – 275 pages in total.
What types of property go through a Short Sale? All kinds, sizes, price range and locations. A Short Sale can occur on any property at any time. Circumstances change every day and sometimes it can not be helped. When the finances of the owner get to a point where they can not fully recover, then it is time to at least consider a Short Sale.
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General Timeline for a Short Sale
Mortgage Forgiveness Debt Relief Act
Start to Finish – The First 30 days
What is the Mortgage Forgiveness Debt Relief Act of 2007?
Day 1 – 10
The Mortgage Forgiveness Debt Relief Act of 2007 (MFDRA) was enacted on December 20, 2007 and allows an exclusion of income realized as a result of a loan modification, foreclosure or short sale on your principal residence.
1. View property and establish list of repairs if any 2. Take pictures 3. Establish need for Short Sale 4. Write and deliver letter of authorization to lender(s) to discuss Short Sale possibility 5. Prepare CMA with Seller net sheet on paying lender(s) in full and another based on a liquidation appraisal 6. Establish list price to pay Lender(s) in full 7. List property for sale 8. Obtain a hand written hardship letter from seller(s) detailing why they need a Short Sale
Day 11 - 30 1. Obtain the following from seller(s) a. 2 months of bank statements b. 2 months of pay stubs / receipts c. Most recent tax returns
What does that mean? Usually, debt that is forgiven by a lender must be included as income on your tax returns and is taxable. The MFDRA allows you to exclude certain cancelled debt on your principle residence from taxation.
Does the MFDRA of 2007 apply to all forgiven or cancelled debts? No, the Act only applies to debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes. Any mortgage debt that was not used for these exact purposes would be taxable.
2. Contact loss mitigation department of lender(s) a. b. c. d.
fax hardship letter fax all bank statements and tax return fax all copies of listing agreement and net sheet fax CMA with opinion letter of realistic value and net sheet
Does this provision apply to only the year 2007? It applies to qualified debt forgiven in 2007, 2008 and 2009.
Can I exclude debt forgiven on my second home, credit card or car loans?
Day 31 and forward
Not under this provision. Only cancelled debt used to buy, build or improve your principal residence or refinance debt incurred for those purposes
1. Fax 2nd copy package as lender always loses 1st copy. 2. Be patient…. Wait 30 days for response. 3. Adjust price to market value 4. Make minor repairs if needed 5. Request formal appraisal
What If forgiven debt doesn’t qualify for exclusion is there help? Yes, you may qualify under the “insolvency” exclusion or under Title 11 bankruptcy. Normally, a taxpayer is not required to include forgiven debt if determined to be insolvent. Speak with a tax professional or a Bankruptcy Attorney for more information. (To learn more about your bankruptcy options ask for a free copy of our booklet titled “Is Bankruptcy for me”
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Benefits from a Loan Modification What If forgiven debt doesn’t’ qualify for exclusion is there help? Yes, you may qualify under the “insolvency” exclusion or under Title 11 bankruptcy. Normally, a taxpayer is not required to include forgiven debt if determined to be insolvent. Speak with a tax professional or a Bankruptcy Attorney for more information.
What are your options to avoid a foreclosure? 1) Keep the property and continue to pay the payments 2) Restructure the debt. (LOAN MODIFICATION) 3) Sell and pay off the mortgage 4) Deed in Lieu of foreclosure 5) Foreclosure 6) Bankruptcy 7) Compromise sale 8) Short Sale 9) Short Refinance 10) Move and rent home 11) Take on additional employment to pay payments 12) Denial… Not really a good option ! 13) Sell home to investors and rent back w/ option to buy
All of the above are viable options but in reality the 2 most common and most likely to produce any real results are the Loan Modification or the Short Sale. To learn more about a Loan Modification and what how it works, call my office and request a copy of our booklet, “STOP foreclosure through modification”
Some of the greatest benefits realized through a Loan Modification are that you get to stay in your home. A foreclosure is avoided, you retain title, reduce your payment, interest rate, balance or a combination of all three. Your credit report immediately reflects any past due payments are now current and you begin to rebuild your credit using your new mortgage history. You avoid the emotional stress of moving your family, seeing foreclosure signs in the front yard, uprooting your family and explaining to neighbors your dilemma. There are no legal notices in the paper as there are in foreclosure. In a foreclosure you have to vacate your home which means raising enough money to pay your first month, last month and damage deposit to your new landlord. You avoid the embarrassment of rental agents pulling your credit and landlords rejecting your rent request.
Call 866-420-5511 to request your FREE copy of any of our other books. * The Loan Modification Guide
* Reverse Mortgage
* Is Bankruptcy for Me?
* Your Credit Score
* The Homebuyers Handbook
* Identity Theft
* 33 Way to Sell Your Home Fast
The material contained in this booklet has been prepared by an independent third-party provider. The content is provided for use by real estate, financial services and other professionals only and is not intended for consumer distribution. The material provided is for informational and educational purposes only and should not be construed as investment and/or mortgage advice. Although the material is deemed to be accurate and reliable, there is no guarantee it is not without errors.
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NOTES
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