A short sale can be an excellent solution for homeowners who must sell and owe more on their homes than they are worth. Unfortunately, a number of myths about short sales have developed, and it is important to understand the reality of this process should you find it meets your current needs.
Myth #1 - The Bank Would Rather Foreclose than Bother with a Short Sale
This is one of the most common misconceptions. The reality is that banks do not want to foreclose on your property because the foreclosure process is timely and incredibly costly. Banks, investors, and even the federal government have all publicly stated that if a person is qualified for a short sale, the deal needs to be considered. Overwhelmingly, banks receive more on their investment through a short sale than a foreclosure.
The qualifications for a short sale include:
•1. Financial Hardship - There is a situation causing you to have trouble affording your mortgage. Examples of qualifing financial hardships include: a job loss or salary reduction, divorce or seperation, debiliating illness, medical bills, business failure, excessive debt, mortgage payment increase, or the loss of a close family members such as a child or spouse.
•2. Monthly Income Shortfall - "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.
•3. Insolvency - The lender will want to see that you do not have significant liquid assets that would allow you to pay down your mortgage. Retirement Accounts are not usually included.
Myth #2 - You Must Be Significantly Behind on Your Mortgage to Negotiate a Short Sale
While this may have previously been the case, today lenders are looking for verifiable hardship, monthly cash flow shortfall, or pending shortfall and insolvency.
If you meet these three requirements and believe that you soon may be unable to afford your mortgage, act immediately. Any delay could limit your options. Do not wait until the countdown clock to foreclosure has started and you have even less time left.
Myth #3 - There is Not Enough Time to Negotiate a Short Sale Before My Foreclosure
This is a myth that probably hurts homeowners the most. Many do not realize that foreclosure is a process, and that there is time to make decisions that may result in better outcomes.
The foreclosing party-in most cases a lender-can stall a foreclosure up to the final day of the process. Today, many lenders will stall a foreclosure with as little as a phone call from you explaining that you are trying to sell, and almost all lenders will stall a foreclosure with a legitimate contract. For real estate professionals who understand and specialize in foreclosures and short sales, there is time available until the foreclosure process is complete.
Myth #4 - Listing My Home as a Short Sale is an Embarrassment
It is understandable to have reservations about letting the world know that you owe more on your home than it is worth. However, according to recent estimates, more than one out of eight homeowners in the U.S. is in the same situation. You are to be congratulated for being responsible and taking action and finding a professional who can work with you toward a solution to help limit the bank's loses and to avoid a foreclosure and the damaging affects to your credit.
Recent estimates show 40-60% of U.S. sales will be short sales or foreclosures, understand you are not alone! Furthermore, your home does not need to be marketed to the public as a short sale and rather this information can be provided in a section of the listing only available to the agents showing the home. As such your neighbors need not know!
Myth #5 - Short Sales are Impossible and Never Get Approved
This is a complete falsehood. Are short sales more difficult to execute? Yes. Do you, as a homeowner, need to learn about a new process? Yes. Are they impossible? Absolutely not.
For example, agents who specialize in short sales receive thousands of short sale approvals on a monthly basis. These professionals have undergone extensive training in methods to help homeowners in distress and process short sales. While there are no guarantees in any transaction, however, a short sale specialist will pocess the knowledge and experience to help bring your transaction to a successful close, and for individules such as ourselves, this is far from an impossible process.
Myth #6 - Banks are Waiting on a Bailout and Not Accepting Short Sales
You may have heard this, but the reality is that banks (and the U.S. government) are trying to do anything they can, within reason, to avoid foreclosing on properties. It is preposterous to believe they would deny a short sale in hopes that some future legislation would pass and pay them for losses.
Today, more banks are aggressively pursuing short sales and working with agents who understand how to process them. Freddie Mac recently hosted a national training Webinar for real estate agents where they expressly stated the organizational goal of "eliminating distressed assets through modification or short sale." and President Obama recently came out in support of them.
Myth #7 - Buyers are Not Interested in Short Sale Properties
This simply is not true and in fact, many agents are getting calls from buyers who say they only want to look at foreclosure and short sales.
For buyers, short sales and foreclosures have become synonymous with "good deals." More specifically, international buyers are targeting these properties. Listing with an experienced short sale specialist who is educated in the short sale process will provide you with a great chance of quickly seeing a contract on your property
Myth #8 - Short Sales Have Negetive Tax Consequences
The Mortgage Forgiveness Debt Relief Act of 2007 states that homeowners will not be subject to income tax from release from mortgage liability if and to the extent the mortgage proceeds were used to buy or improve their primary residence. The act does not provide income tax shelter from foregiveness of mortgage debts for investment property, vacation homes, or mortgages used for businesses or to pay off credit card balances.
If you're a homeowner looking to short sale your primary residence and any mortgages against the home were used to buy or improve the home you are protected.
* The act also protects owners who can prove they are insolvent at the time of the sale, meaning their total debts outweighted the total fair market value of all of their assets.
Myth #9 - Homeowners who Short Sale Their Homes are Liable for Deficiency Judgments
A short sale is an effort on the homeowners behalf to work with their lender and to help the bank reduce its losses. Banks understand this and only in rare occasions will they pursue a homeowner for a deficiency judgment. You may have heard of lenders pursuing homeowners in states like Arizona for Deficiency Judgments but what you probably didn't hear was that the parties they are pursuing are primarily investors who made risky speculative investments, and now that those investments have gone bad these individuals have attempted to stick the bank with their losses! That said, a short sale specialist will discuss with you the steps they will take to protect from a deficiency judgment.
If you're facing foreclosure you're facing some very important decisions. We want you know you're not alone and we are here to help with any questions you may have to assist you in making the best decisions for your situation. There is no charge for this service and we are happy to help! We offer confidential and professional real estate advice.
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