With home foreclosures at an all-time high, the government bailing out subprime mortgages and many homeowners falling further behind on mortgage payments each month, it's no doubt that there are many housing bargains in this market.
The most misunderstood aspect of housing deals is the "short sale". This occurs when a home is sold for less than what is owed to the mortgage holder, thus coming up "short". The lender signs off on the note as a complete payoff. Then everyone ends up happy, right? Well, if it's done right then that's the outcome. Unfortunately, many short sale transactions are frustrating and never get processed.
Short sales are more popular than ever, largely in part of the recent subprime market. Homes were over-valued in anticipation of high appreciation. Home buyers were sold on the theory that they could refinance a high-interest-rate loan in a short period of time and lock a better rate when their home was worth more than they paid. What happened, unfortunately, is that home values peaked and even started to decline leaving these people with bad loans they couldn't afford.
Lenders will likely consider a short sale if the home is several months behind in payments or if the sheriff's auction has already occurred and it's in the redemption period. Redemption periods vary by state and are usually around six months.
The department of the lender that handles short sales is called the "loss mitigation department." In other words, these people are hired to prevent the lender from incurring any further loss. If the home goes to foreclosure, lenders' losses can be anywhere from 10% to 50% of the home's value, depending on amount of neglect, weather damage and/or disrepair. By accepting a short sale, they are minimizing their loss by cutting a deal with the borrower. Lenders may have the right to sue the borrower for the difference between what they have against it and what they receive, so the most important feature of the agreement should be a "non-recourse release," which simply means that the bank will accept the terms of the sale and write-off the difference.
Having a successful short sale depends on key items, starting with a complete short sale package, prepared by a realtor or other professional experienced in processing short sales. The package will include a hardship letter by the borrower explaining why they can no longer afford the home, recent pay stubs, bank statements, tax returns, market analysis of the home, list of repairs needed and financial statements. FHA-guaranteed loans have several more necessary requirements that must be included in the package. Bank staff in loss mitigation departments can each have up to 250 files on their desk at any given time. They will process the most complete packages and the sales packages that come closest in price to their value first.
To have an acceptable short sale, the bank must be convinced that the home has been properly marketed and it is the highest they can expect to receive from the proceeds. They will often hire an appraisal or Broker's Price Opinion (BPO) to confirm this.
A short sale approval can take anywhere from 2 weeks to several months from the time they receive the short sale package. The more complete the package is, the better the chances are that it will be processed quickly.
Despite reports to the contrary, a short sale will still damage a credit score, but not to the extent of what a foreclosure could do. Usually, the credit score is affected by about 50 points, which for most people, can take about 2 years to recover. A foreclosure will be reported on a credit report for 7 years, which can take several more years to re-establish credit.
This is a brief overview of the short sale process. If you need more information on short sales, please contact me at LarryKaduce@Remax.net or visit my website at www.LarryKaduce.com.
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