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Short Sale your homeA lot has changed in the world of foreclosures in the past five years. It just isn’t necessary for a homeowner to “walk away” and suffer the consequences of the word FORECLOSURE appearing on their credit report anymore. If you are a distressed homeowner, this article will show you why a short sale could very well be the answer to your mortgage nightmare. A short sale is when a homeowner’s mortgage lender accepts less than what is owed on the mortgage when the home is sold. A short sale requires expertise and negotiation skills to get the mortgage lender to accept less than what is owed on the house. In areas where home values have remained somewhat steady, a distressed homeowner can simply list their home for sale with a real estate agent and stop any foreclosure proceedings. In most regions however, home values have plummeted to the point where the majority of homeowners owe more on their homes than they are worth in today’s market. Distressed homeowners in this situation can still market their home for sale, but they will need to hire a Realtor who has expertise in short sales. If you are a distressed homeowner, there are some very important questions you need to have concrete answers to before proceeding with a short sale. Who qualifies for a short sale and how long does the process take? Homeowners who owe more on their home than it is actually worth and can prove some sort of a financial hardship. In a basic sense, a homeowner must prove to their lender that they are struggling to afford their home due to loss of job, divorce, illness, excessive credit card debt, looming bankruptcy etc. Generally speaking, the short sale process takes roughly 60-120 days but varies by lender. The length of time to close a short sale depends on the competency of the short sale negotiator; either the Realtor or a member of their staff, or an outside firm hired to handle the negotiation with the homeowner’s lender. Some lenders will require that the property being sold is a primary residence, and that has to appear at their income tax returns, some other lenders will oversee this requirement. Will the distressed homeowner owe any additional money to the bank after the short sale? Most of the time the bank will forgive the remaining mortgage balance after a short sale takes place. A lender can seek what is known as a deficiency judgment, which is passed on to the homeowner by the court system for banks who elect to sue the homeowner for the remaining balance after the home is sold short. Most short sales will not be required to pay anything other than the offer price from the eventual buyer, but there are times depending on the homeowner’s financial situation that the bank may request 5% – 30% of the remaining mortgage balance to be paid at closing. It is imperative that a distressed homeowner’s negotiator works to guarantee that nothing will be owed to the lender by the homeowner for exercising a short sale. With the new HAFA program, the Obama Administration is offering incentives to lenders to accept short sales and if the lender participates in the program, they MUST forgive the balance. How does a short sale affect a homeowner’s credit? Will the homeowner be able to purchase another home after the short sale? This will depend on whether or not the home is sold in a “pre-foreclosure sale” or a “short sale”. Please note that these two terms are often used interchangeably. A pre-foreclosure assumes that the borrower has been delinquent in paying his or her mortgage and the servicer/lender agrees to accept a lesser amount to avoid the time and expense of a foreclosure action. In this situation, the homeowner’s credit rating will be severely damaged until the property sale closes. It usually takes a year before the homeowner’s credit scores rebound, though the delinquencies will still be apparent for up to seven years. A short sale refers to situations in which the servicer/investor of the mortgage agrees to a payoff of a lesser amount than is actually owed, even on a current mortgage, to facilitate the sale of the property to a third party. This can be reported to a homeowner’s credit report as “PAID IN FULL” or “SETTLED FOR LESS THAN FULL BALANCE”. The term “Paid In Full” as it appears on a former homeowner’s credit report has no impact on their credit rating. “Settled For Less Than Full Balance” does have an impact on the former homeowner’s credit rating but the impact is not severe and does not prevent them from buying a home. It is impossible to predict the exact impact to an individual’s credit rating because a credit scoring model considers a consumer’s entire credit history. How it is reported can be negotiated with the lender but the outcome cannot be guaranteed. If the sale of any given homeowner’s home is not a short sale and they go 30+ days late on any of their mortgage payments during the twelve month cycle before the completion of the sale of their home, current mortgage underwriting guidelines will not allow that homeowner to buy another home until they have had a twelve month period without any late payments. If a short selling homeowner goes 30+ days late on any of their mortgage payments during the twelve month period before the completion of the sale of their home, current mortgage underwriting guidelines as specified by Fannie Mae, will not allow that particular homeowner to buy another home for two years. Current Federal Housing Administration (FHA) guidelines as outlined by the Department of Housing and Urban Development (HUD), will not allow that homeowner to buy a home for three years. These guidelines are subject to change at any time. If the sale of an individual’s home is a short sale and that homeowner is not delinquent on any mortgage payments and has not been delinquent at any time within the twelve months prior to the credit report date or was guilty of prior mortgage delinquencies, then Fannie Mae will accept delivery of a new mortgage provided the lender or servicer who completed the short sale has not entered into any agreement that obligates the borrower to repay any amounts associated with the short sale, including a deficiency judgment. This information was obtained from Fannie Mae via Announcement 08-16 released on August 13, 2008. This guideline is subject to change at any time. See: Announcement 08-16 released on August 13, 2008 HUD will allow homeowners to obtain an FHA mortgage provided they are current on all of their mortgage and installment loan payments at the time of the short sale and have not been 30+ days late on any mortgage or installment loan payment in the twelve month period preceding the short sale. HUD also states the following: 1. Borrowers are not eligible for a new FHA insured mortgage if they pursued a short sale agreement on his or her principal residence simply to take advantage of declining market conditions and purchase at a reduced price a similar or superior property within a reasonable commuting distance. 2. This information was obtained directly from HUD via mortgagee letter 09-52 released on December 16, 2009. These guidelines could change at any time. A link to this information is here: mortgagee letter 09-52 released on December 16, 2009 3. The mortgage applicant must still have the proper income, debt to income ratios, assets, and credit to qualify for a new mortgage. In addition, specific lenders may have their own policies regarding short sales. It is impossible to predict all of the lender mandated changes in mortgage guidelines that may interfere with any homeowner’s ability to purchase a new home after a short sale. It is advised and encouraged to verify all of this information and seek the advice of an attorney regarding this issue. Will a homeowner who completes a short sale get 1099’d and have to report the mortgage balance owed as income? If the subject property is that homeowner’s primary residence, then the answer is no. The Mortgage Debt Relief Act of 2007 allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring (including short sales), as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief. This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition. A link to the Mortgage Debt Relief Act of 2007 has been provided here: Mortgage Debt Relief Act of 2007 What documents will my Realtor and/or short sale negotiator need? They will need the very same documents that the homeowner’s mortgage professional needed when that homeowner originally applied for their home loan. In the case of a short sale, a homeowner’s negotiator will be looking to show the lender that the homeowner cannot afford the home. This is the exact opposite scenario as compared to when the homeowner was looking to originally qualify for their home loan and their mortgage professional was looking to prove to the banks that they could afford the home. Either way, the same documents that qualify a homeowner to obtain a loan are the same documents that get that homeowner out of that loan. They are as follows: 1. Last 2 Years Tax Returns 2. Last 2 Years W2’s 3. Two month’s most recent bank statements 4. Sixty day’s paystubs 5. Mortgage statement 6. Hardship letter 7. Authorization to represent (provided by short sale expert) 8. Financial statement (provided by short sale expert) 9. Bank specific documents (provided by short sale expert) 10. Listing documents (provided by short sale expert) Self employed borrowers will need to provide: 1. Last 2 Year’s Business Tax Returns 2. Profit & loss statement – income & expenses 3. Six month’s most recent business bank statements 4. Letter stating that seller does not receive paystubs Will the new HAFA program created by the Obama Administration affect short sales? The Obama Administration’s new short sale plan, which begins April 5, 2010, calls for banks to agree to not pursue borrowers for any deficiency judgments after a short sale. It also requires second lien holders to accept a maximum of $3000 to settle their debt, allots $1000 to mortgage servicers for a successful short sale, and allows for up to $3,000 in “relocation” assistance to borrowers. The plan, known as Home Affordable Foreclosure Alternatives (HAFA), is for borrowers who qualify for or have participated in the Home Affordable Modification Program, or HAMP, but have not been able to make their new reduced mortgage payments through the trial period. It is also for any borrower who has tried to modify their loan through HAMP and now requests a short sale in order to avoid foreclosure. The program calls for banks to decide what they are willing to take monetarily in the short sale before the property goes on the market, so that the buyer, real estate broker and seller know what price the property needs to sell for in order for the bank to approve the short sale. It also requires lenders and servicers to use uniform documentation and short sale terms; preventing them from reducing the real estate agent’s commissions in a short sale and greatly expedites the lender’s short sale approval process to ten business days after receipt of an offer. HAFA also allows lenders to offer a deed in lieu of foreclosure to borrowers with government insured loans without requiring borrowers to first put the property on the market for 90 days, which is the typical protocol for a deed in lieu of foreclosure. You can understand the program in its entirety here: https://www.hmpadmin.com/portal/docs/hafa/sd0909r.pdf Unfortunately, there are some restrictions as banks can never be fully regulated by government: 1. A lender’s participation in this plan is strictly voluntary. The lender is not required to participate in this plan but if they do participate, they must abide by the rules for every short sale request. 2. The short sale must take place on the person’s primary residence. 3. The loan must have originated before January 1, 2009. 4. The maximum owed is capped at just over $700,000. 5. The total monthly mortgage payment must also exceed 31% of the borrower’s income. How will I know what the terms of the short sale are? Everything will be in writing as negotiated by a homeowner’s selected Realtor and/or their affiliated short sale negotiator. A homeowner’s lender will issue an approval letter defining the terms of the short sale, including whether or not the homeowner will owe any money, how it will be reported on their credit, and if that homeowner will be issued a 1099C.
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