Short Sale Help
Been on the fence about doing a short sale? Now is the time to talk to your Attorney and CPA to determine if a Short Sale is in your best interest. For those underwater homeowners who sell their home (or lose it to foreclosure) come January 1, 2013, without another extension to the Act, they could face tax consequences on the "forgiven debt".
What is a Short Sale?
A short sale is when the current home owner/borrower is trying to sell the home for less than what they currently owe on the loan(s) and therefore are trying to get the lien holders to settle for a lesser amount than what they are owed.
In order to complete a short sale, a seller must be able to show a "hardship". Some examples are: not being able to afford your monthly payment, losing a job, illness, divorce, death or job transfer to another state.
What are acceptable hardships?
According to HUD - the Dept. of Housing and Urban Development - there are many valid reasons and hardships to be acceptable for default. Here are 5 of them.
1. Death of Principal Borrower
2. Serious Illness of Principle Borrower
3. Marital Problems (Divorce, Separation)
5. Lessened Income
Why would a mortgage lender accept a Short Sale rather than foreclose?
Real estate law and the foreclosure process differ from state to state and lenders do not want to tie up their financial and legal resources trying to keep up with all the state-specific laws.
The foreclosure process is too time intensive, too costly and too state-to-state specific. Banks would rather just “cut their losses” and move on to replacing “bad loans” with “good loans”. For the most part, mortgage companies do not want to be in the real estate business!
As we all know, mortgage lenders make money by lending money. If the amount they have to hold in reserves is related to the amount they have tied up in REO properties on their books, you can see that they would want to keep these properties at a minimum.
So, when might a seller have to pay some of the costs of a short sale?
The Following are Usually Allowed by the Short Sale Lender
- Real estate agents' commissions
- Seller's title insurance
- Seller's escrow fee - though they often limit the amount
- Termite inspection, though often not repairs
- Past due real estate taxes - as long as they are not too old
- A small amount to the second mortgage
Items Sometimes Paid by the Short Sale Lender
- Termite repairs
- Past due HOA - Homeowners' Association - Dues
- Home Warranty for the new buyer
- Buyers' closing costs
What kind of fees that you can expect to pay.
Secondary Liens: This type of lien can take many different forms, such as a Home Equity Line of Credit, (HELOC); mechanics or tradesman liens; and even subordinate mortgages, which were very common at one time.
Home Equity Lines of Credit Liens can present an issue with a short sale as they are given to take equity from a house with no restrictions on how they are used. If the HELOC has been drawn against the house using the same bank that maintains the mortgage, negotiations can be easier. These are negotiated for the seller and take the forms of an unsecured loan for the seller to maybe even total forgiveness.
HOA Fees: Banks do not like to be paying any outstanding association fees on a condo or Pud. These should be negotiated with the association before the property can go to the closing table, and again this is negotiated by the listing agent or the seller’s attorney.
- The short sale lender may not be willing to pay as much to the second lender as the second wants, and someone needs to pay it. Under current California laws, often the lender cannot ask for a contribution, but they can refuse to approve. If more is needed for the second, and it can't be negotiated down further, and the seller has no money, sometimes the buyer can make a contribution.
- Past due HOA dues - sometimes the amount can be negotiated with the HOA, and the buyer or seller can pay or share these if the short sale lender will not pay them.
- Repairs sometimes need to be done before the new buyer's lender will allow the loan to fund. These may include termite or other items. If the short sale lender will not allow them, either the buyer or seller will need to pay to have these done prior to close of escrow.
THE SHORT SALE APPROVAL PROCESS. Once the bank gets the file, the bank will assign a negotiator for themselves. This could take 1-2 weeks. They then will review the package, if complete will order an appraisal or bpo within the first 2 weeks. It could then take 2 more weeks to finish the appraisal. Once it comes in, the negotiator will review what the home is worth versus what they will receive from the short sale against what they would receive if they foreclosed. This could take 2-4 more weeks.
For more information on Short Sales and how they work please feel free to contact Becky Blair and Kim Carlson we are always happy to help!