FAQ

Short Sales

Many sellers are finding that their homes cannot be sold for enough to cover the mortgage lien on their properties. So they sell “short” by getting the mortgage lender to accept less than what they owe to clear the mortgage debt. Distressed home sales recently accounted for more than one-third of home sales, according to the National Association of REALTORS®. Lenders are already inundated with inventory that is expensive for them to maintain. They want to sell loans, not manage property.

Why would lenders allow a short sale?

Lenders will allow you to sell short if you meet the following criteria:

• Has the home’s market value dropped below what you currently owe on your mortgage, according to recent comparable homes sold in your area?
• Are your payments current? Current payments may not rule out a short sale if other factors are leading to foreclosure.
• Can you show distress? Unemployment, bankruptcy, death or divorce are all hardships the lender will consider.
• Do you have a buyer? Prepare a Net Sheet that shows the sale price you will receive, costs of the sale, unpaid loan balances, outstanding payments and late fees.
• Do you qualify for the Making Home Affordable government refinancing or loan modification program? If you purchased your home before January 1, 2009, and are having trouble making your payments, you could be eligible for modification of your loan’s terms.
• Contact your lender and ask to speak to a decision maker who is authorized to approve your short sale. Provide a statement letter detailing your circumstances such as loss of job, medical problems, or whatever has caused your financial distress. Be willing to supply proof of assets, including recent bank statements, savings accounts, money market accounts, and anything else of tangible value. The lender may want to go back six months or a year to see your credit history. Show the lender your buyer’s purchase offer along with a comparative market analysis from your listing agent.

The key to a successful short sale is to get started on a solution early. Contact your lender for help, before you get behind on your mortgage payments.

Distressed Property

Short sales and foreclosures are the result of homeowners in distress. A “short sale” simply means the homeowner’s lender has given permission to the homeowner to sell the home for less than the remaining balance of the loan.

To accomplish this, the seller must show the lender why they are in distress, such as job loss or illness, or that home values have fallen to the point that the seller doesn’t have enough equity in the home to break even or sell at a profit. If the seller can show means to continue paying the note, it’s unlikely the bank will grant a short sale, but if it appears the seller is about to default, the bank may agree to a short sale in order to minimize its losses.

The terms of the short sale allow the seller to walk away from the mortgage while avoiding foreclosure, but the loss to the lender will be reflected in the seller’s credit report, possibly delaying their ability to repurchase a home in the near future. At the least, the next lender will require more down or demand a higher interest rate.

Foreclosure Proceedings

Once a homeowner defaults on mortgage payments, the bank begins foreclosure proceedings. The homeowner has many chances to stop the sale by paying the amount owed, until the home is put into a public auction. At that point, the homeowners loses all ability to retrieve the home. If the home does not sell at auction, it’s taken back by the bank as an “REO” which stands for real estate owned. The home then becomes an asset holding of the bank. REOs are managed by asset managers who are employed or contracted by the bank. REOs are put on the open market, often with a real estate professional who specializes in distressed sales. Foreclosures that are purchased this way typically are sold “as-is,” which means the bank has no intention to make environmental or structural repairs. So, buyer beware. When a buyer makes an offer on an REO, the asset manager decides whether or not to counter or accept, and strives to get as close to or above the original loan amount as possible.

The Price of a Bargain

While short sales and foreclosures can be bargains to buyers, they don’t come without a price. Because the lender is losing money on both short sales and foreclosures, the process to buy these homes takes longer and offers no guarantees to buyers. The length of time they are on the market, deferred maintenance, and stigma hurts surrounding home values, as much as 20 percent, according to the National Association of REALTORS®. Buyers should know that building equity takes time, and that the best home to own is the one you can comfortably afford.