So something happened in your life and you have fallen behind on your mortgage payment. Surely this is not a situation to take lightly! You don't have the extra cash to bring the mortgage up to date and you have already been served foreclosure notices indicating that your home will be repossessed unless you do something about it.... So what do you do?
At this point you have a number of options, none which sound all that appealing at first! You can (1) Put the home on the market in hopes of selling it prior to the final foreclosure/auction date for profit (2) Organize a short sale with bank approval (3) Stay in the house without attempting to sell it or make the payments and wait until the day you are evicted because you don't own the house anymore, the bank does (4) Give up, give it back to the bank and suffer the devastating impact on your credit score.
Before making that decision, ask yourself these important questions; how and why did I end up in this financial situation? Did a negative change in my income affect my ability to pay my bills? Have I been spending the money that would otherwise go towards paying my mortgage on unnecessary luxuries? Can I get my act together again, negotiate a repayment plan with the bank and actually be able to make those payments on time?
If the answer to those questions indicate that you don't and will not have the money to get your mortgage back in good standing, then its time to take ACTION! What can you do? My advice is to sell the property before the auction date. Nowadays, this may be easier said than done. Let's say that you purchased the property last year and because your local real estate market has changed you find that the home has appreciated very little or none at all - maybe you found that the home has actually depreciated! What do you do then? Ever heard of a short sale?
Short sales happen when a lender agrees to accept less than the amount owed against the property because there is not enough equity to sell and pay all the costs related to the sale. Not all lenders will be open to negotiate a short sale and that is why using a real estate professional can be a tremendous value when attempting to put one of these transactions together. A short sale is a great option to alleviate your foreclosure status but bear in mind that even if your short sale is successful, it will still have an impact on your credit.
According to David Steep, division manager at Vitek Mortgage, the affect of a short sale on a seller's credit is much less damaging when compared to an executed foreclosure. The ding on your credit will show up as a pre foreclosure in redemption status which results in a loss of 80 to 100 points on your credit score. This means that if you had a credit score of 680 prior to the executed short sale, you will end up with a score between 580 and 600. The bad news is that you could be subject to a deficiency judgment for the difference between the original defaulted loan amount and the actual amount paid from the sale.
So how exactly does a short sale work? Negotiating a short sale is a grueling and complicated task so it is very important that you hire a real estate professional who is willing to dedicate the time to truly help you successfully complete the transaction.
From the lender's perspective, a short sale will save them many of the costs associated with the foreclosure process - attorney's fee, the eviction process, damage to the property, costs associated with resale, etc. In a short sale scenario the bank is able to cut those losses.
In order to approve the short sale, the lender will want information about the property and your financial status. For property information, the lender will generally hire a local real estate broker or appraiser to evaluate the property and give their opinion of value called a BPO, based on comparable sales data and property condition. The bank will then ask for your financial information - sort of like a backwards loan application. You must prove that you are unable to afford the payments by showing that you do not have the source of income or assets to repay the loan. You must also submit a "Hardship" letter explaining your financial troubles and how you got there. This may require some creativity - Don't Lie! - Just paint the picture that you need them to see!
Finally, the lender will want to see a written contract between you and the qualified prospective buyer. The property will usually be delivered in its present "As Is' condition, with the buyer paying all of their own closing costs. Your closing costs are usually all paid by the lender including the brokerage fee (commission to the real estate professional that structured the transaction on your behalf), state doc stamps, delinquent taxes, and fees associated with title work on the seller's side, if any.
At the conclusion of the short sale you can take a deep breath and move on with your life with one less problem to worry about. Remember, hiring a real estate professional is vital to a successful short sale. A short sale is a fantastic option and a great way of solving your problem! At Century 21 First Realty, we have been instructed on how to successfully complete these complex transactions. Should you find yourself in the unfortunate situation of a foreclosure, do not hesitate to contact me for a Free Consultation. I will evaluate your standing and together we will decide if a Short Sale is the right option for You!
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