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Woodbridge Homes For Sale What is a Short Sale?

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Real Estate Agent with Cell: 703-677-1120

Woodbridge Virginia Real Estate By Short Sale

What Is A Short Sale?

You've seen in the media about the housing "meltdown."  

Northern Virginia has not been hit as much as the rest of the country.

However, that does not mean that there are not some good buys for astute buyers.

Yes, you will find more foreclosures for sale than we've seen in a while.

You will also notice that a "new" type of sale is happening in Woodbridge Virginia homes for sale during this market correction... the short sale.

I put the word "new" in quotes because short sales have been around as long as the standard 30-year mortgage has existed.  However, during our current market correction, thousands of short sales are being listed for sale.

So, what exactly is a "short sale?"

A short sale means the homeowner owes more on their existing home loan than the property is worth in today's market.

The bank that holds the note has agreed to "settle" with the homeowner for less than is owed on the property.

For example, a home that sold at the peak of the boom in 2005 for $825,000 was purchased by Harry Homeowner with a five percent down payment, and the remaining $783,750 financed by a home loan.

Truth be told, Harry Homeowner actually qualified for a $500,000 fixed rate loan, but Larry the loan rep convinced Harry to use a "Cash-Flow Adjustable Rate Mortgage (ARM)", tied to the British LIBOR index, with a start rate of just 2%.

The cash-flow ARM was scheduled to "reset" (adjust) in three years, to the LIBOR index in 2008.

Harry was concerned that his loan rate, and house payment, could double or triple in 2008 if the LIBOR index was significantly higher, and he said so to Larry the loan rep.

Larry said, "No problem Harry... if the LIBOR rate goes that high, just refinance to a different loan you can afford.  Besides, you said you were up for a promotion at work, with a substantial pay raise, and I showed you that you could qualify for a loan of $750,000 at your new pay plan".

Just refinance if your rate and payment doubles or triples...

Fast forward to 2008...

Harry's home loan company notifies Harry that his rate and payment have doubled because the LIBOR index in 2008 was substantially higher than the 2005 rate.

Moreover, Harry's promotion with the big pay raise was put on hold because his company lost a big contract to a competitor.

So Harry dashes to the phone, calls Larry the loan rep to refinance to a more affordable loan program, but Larry's loan company went out of business in 2007, and Larry is back at the Ford dealer, selling cars again.

Harry calls one of the big-name mortgage companies for help. 

Thankfully, Harry gets an experienced loan rep on the phone, a nice lady with 20+ years in the business, Lucy the loan rep.

Lucy listens to Harry explain his situation.

Then she patiently, carefully explains to Harry that he has three GIGANTIC obstacles, road blocks, that destroy any chance for Harry to refinance to a more affordable home loan.

First, Harry's $783,000 loan is a "Jumbo" loan that exceeds the $730,000 conforming loan limit.  The cold, cruel fact is that there are NO jumbo loans offered by any bank, anywhere. 

So he needs to pay down his loan balance to $730,000 with $53,000 CASH right now to get a conforming loan.  Plus, Harry will need $12,775 to pay closing costs for the refinance.  Altogether, Harry needs to plop down $62,775 to refinance, and he doesn't have it.

Second, the house must appraise for $803,000 because the bank will lend up to 90% of appraised value; Harry needs to have a 10% equity position to qualify for the loan.

That's a problem right now...

Harry's appraisal will be based on the sale prices of homes in his neighborhood that have sold in the past 90 days.

Five homes have sold and closed around Harry's house in the past 90 days, but the average price for the homes sold is $625,000.

That's good news, and bad news.

The good news is that home prices in Harry's neighborhood show that the market has turned back up, and home values are slowly inching up again from the market "bottom" in 2007 when homes in his neighborhood sold in the $570,000 - $595,000 range.

(All you folks who plan to sit on the fence, waiting to buy a house when you think the market has hit "bottom", and you proclaim that the "bottom" has not yet been reached, well, the numbers and statistics say "you missed it"... that ship has already sailed.)

 

 

 

 

So Lucy the loan rep calculates 90% of $625,000 and tells Harry that he can only refinance $562,500, far below Harry's $783,000 loan.  Harry would need to pay down his loan balance with $202,500 cash from his own pocket, and have an extra $9,844 to pay closing costs to refinance the remaining loan balance.

Harry has $300,000 cash invested in his 401K retirement plan, but were he to cash in his 401K, he would owe the IRS a $30,000 penalty, AND pay income tax now on the money he would withdraw.

Third, Harry will not qualify for a $562,500 fixed-rate loan.... remember, his income in 2005 only qualified Harry for a $500,000 loan.  Harry didn't get the big pay raise, and rates on loans are higher.

So Harry's only remaining options would be to walk away from his house and loan, let it go to foreclosure, or ask his lender to let him sell the house with a short sale.

Remember, Harry cannot afford his new house payment now that his LIBOR loan has reset and doubled his payment.

 In my next post, you will find out why the experienced Realtors call short sales "Fake Listings".

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Erick Blackwelder or Peggy James of Erick and Company - Exit 1st Choice Realty, Woodbridge VA. Realtors®, call 703-590-2252  list your property for sale or to  purchase a property in Lake Ridge, Westridge, Old Bridge Estates, River Falls, Middle County, Cannon Bluff, Meadowbrook Woods, Blooms Crossing, Manassas Park, Beaver Creek, Hunter's Ridge, Brittany,  Manassas, Montclair, Dumfries, Occoquan, Dale City, Nokesville, or anywhere in Prince William County.

 

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8998C Lorton Station Blvd
Lorton, VA  22079
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