February 28, 2011

Do You Qualify for a Short Sale?

Posted by martikilby under Selling your home, Short Sale | Tags: , , , , , , |
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A short sale is an attractive alternative to foreclosure, mainly because the impact on your credit is far less severe.  However, just because you owe more on your mortgage than your home is worth doesn’t necessarily mean that a short sale is a viable option.

In a short sale, the lender agrees to accept a pay-off on your mortgage for less than the amount owed.  Logically, the lender is not going to agree to receive less money if there is evidence that you can continue to pay your mortgage as promised.  Thus, a homeowner hoping to sell their home in a short sale must demonstrate that they can no longer afford the mortgage payments. 

The first question the lender will ask is “What happened?”  At the time of loan origination you were able to make your payments….why not now?  You will be asked to identify one or more recent hardship factors that have negatively impacted your ability to pay.  Examples of hardship factors include: 

  • Illness/Disability                                             
  • Death of a Spouse
  • Unemployment                                               
  • Reduced Income
  • Medical Bills                                                   
  • Too much Debt
  • Divorce/Separation                                        
  • Military Service
  • Incarceration                                                  
  • Business Failure

The lender will also request that you complete a financial worksheet that lists all of your monthly expenses and income.  You will need to provide bank statements and pay stubs to document the information on the financial worksheet.  Contrary to popular belief, it is OK to have a small amount of money in savings and lenders do not expect you to drain your 401K to pay your bills.

So the bottom line is that if you have experienced an event(s) that triggered a financial hardship and your monthly expenses are greater than your monthly income you probably qualify for a short sale.  Please feel free to contact me with specific questions about your situation.

 

February 22, 2011

Short Sale vs. Foreclosure: You Be the Judge

Posted by martikilby under Credit score, Credit Scores, foreclosure, Short Sale | Tags: , , , , , , , , , , |
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Short sales can be a real pain for everyone involved…sellers, Realtors, buyers…and because so many fail, people are often left with a negative view of the short sale process.  But, do you really know the benefits that might make it worth the effort?

As I’ve mentioned before, I work with an exceptional short sale negotiation company that has a 99% success rate in getting approvals.  The president of that company recently put together a nice chart outlining the benefits of a short sale vs. a foreclosure and I’ll share the highlights.

Future Ability to Purchase a Home:    When you apply for a home loan, there is a question on the application that asks, “Have you had a property foreclosed upon or given title or deed-in-lieu thereof in the last 7 years?”  A positive response may impact your ability to qualify and will certainly influence the interest rate you are charged.  Currently, there is no question on the loan application with regard to short sales.

Impact on Credit Score:    With a foreclosure, credit scores can drop 250 – 300 points.  Conversely, with a short sale only late payments will impact the credit score.  After a short sale, the mortgage that was paid-off short will be reported as ‘paid as agreed’, ‘negotiated’, or ‘settled for less than agreed’.  This can lower your score as little as 50 points and will usually have little to no effect in twelve to eighteen months.

Impact on Credit History:   Foreclosure remains on your credit history for seven years.  Since short sales are not specifically reported their impact is only as great as the number of missed payments, as noted above.

Deficiency Judgment:  Unless you’re in a state with anti-deficiency laws, the bank can pursue a deficiency judgment.  In a successful short sale, the bank will waive the right to pursue a deficiency judgment.

Current and Future Employment and Security Clearance:   Many employers require credit checks for all employees, and certainly for anyone hoping to attain a security clearance.  While individual companies and agencies have different requirements, a foreclosure can have a negative impact on your ability to get a job, keep your job, or get certain clearances.

Of course I’m not a lawyer or accountant, and each individual’s situation is different, and not everyone will qualify for a short sale.  You should always consult the appropriate professional for advice.  But as a real estate professional, I would definitely give the short sale serious consideration before deciding to just walk away.  For a confidential consultation just give me a call at 619-846-9249.

 

February 10, 2011

Ammunition for Short Sale Success

Posted by martikilby under Short Sale | Tags: , , , , , , , |
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Negotiating a short sale is one of the most challenging jobs in real estate today.  As an agent representing a short sale client you are responsible for helping them get out from under a huge financial burden and save their credit, and responsible to the new buyers for closing the deal in a reasonable length of time.  Not only is it often stressful, but it can be downright frustrating;  re-faxing documents to the bank that you’ve sent three times, waiting for responses to phone messages and emails, and trying to find someone at the bank who actually cares about getting the transaction completed.

One of the short sales that I’m currently working on is especially trying as there are two different lenders involved on a 1st and 2nd mortgage, and as in similar cases, the 2nd mortgage holder won’t really look at the file until we have approval from the 1st.  After weeks of sending documents the 1st lien holder comes back to the table with an offer of approving the short sale, if the borrowers paid them $9,000.  Impossible!  If my clients had an extra $9,000 they wouldn’t be selling their home!  We counter at $1,000.  The bank then comes back at $3,000, insisting that according to their financial statement the borrowers can afford to contribute $3,000.

Hmmm…..my clients are insisting that as much as they would like to sell their house short and avoid foreclosure, they can’t afford the $3,000, especially as they just did their 2010 taxes and learned that they owe close to $10,000!  Aha!  More ammunition to make their case!  We submit their tax return and two days later have a short sale approval from the 1st lien holder with a $1,000 contribution!  Exactly what we countered!  The approval has been submitted to the 2nd lien holder and we’re pushing for a speedy response.

The bottom line is that my clients are thrilled and half seriously asked if I could help them negotiate their tax liability!  Ha!  I think I’ll stick to short sales.  Banks are tough enough…..I can’t imagine negotiating with the IRS!

 

January 12, 2011

Struggling HAFA Gets Some Updates

Posted by martikilby under foreclosure, HAFA, Short Sale | Tags: , , , , , |
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It’s no secret that the government’s short sale program, HAFA, has had less than stellar results.  The Home Affordable Foreclosure Alternative program was started in April 2010 to provide alternatives to foreclosure when a loan modification wouldn’t work.  Through September, the program has processed only 342 short sales or deed-in-lieu transactions.  This number is ridiculously low considering that third-party technology provider Equator, who provides the platform for processing short sales for several banks, including B of A, reports that over 117,000 HAFA short sales were initiated in the period from April – October.   What happened to all of those transactions?

Mortgage servicers and Realtors have complained about the confusing rules and the stringent requirements for participation that have made it difficult to complete a transaction.  In December the California Association of Realtors sent a letter to government regulators complaining about the program and requesting specific changes to expedite approvals.  The government responded quickly and issed a directive on December 28 that made some significant changes to the program.  Here are a few of the highlights:

  • Servicers are no longer required to verify that an applicant’s mortgage payment exceeds 31% of their gross income, although a hardship must still be demonstrated.
  • Applicants do not need to be currently living in the home so long as it was their principal residence in the last 12 months.
  • Payments to subordinate lien holders are no longer capped at 6%, but have an aggregate cap of $6,000.
  • Servicers participating in the HAFA program will be required to either approve, disapprove or provide a counter to any complete short sale application and purchase offer within 30 days.
  • Servicers who pay contractors to assist in processing the short sale cannot charge those fees to the borrower or deduct it from the real estate commissions.

Will these changes improve the approval rate?  Probably, but the key will lie in how well the banks comply and the rules are enforced.

 

December 9, 2010

Your Credit After a Short Sale

Posted by martikilby under 2nd mortgage, Credit score, mortgage, Short Sale | Tags: , , , , , |
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The most frequently asked question about selling your home through a short sale is “What will this do to my credit?”  Like most questions in today’s real estate market, there is no single answer.  But the good news is that you may be able to buy another home much sooner than you think.

There are many factors that determine the all-mighty credit scores, but generally a short sale will cause your score to drop by 100 – 200 points.  This is true if your short sale is reported as “settled for less than agreed”, and no deficiency judgment is filed.  This is a critical point, and it is important that you and your Realtor carefully read the language used in any short sale approval.   In California, SB 931 goes into effect on January 1, 2011 which protects borrowers from lender recourse on a 1st  mortgage, but may still leave them vulnerable on 2nd mortgages.  If you are unclear about whether or not your lender can file a judgment or if they ask you to sign a promissory note, consult with an attorney before signing anything!  A deficiency judgment or other recourse will increase the long-term negative impact of the short sale on your credit.

Another important factor is the length of time of default before the sale and whether or not a Notice of Default (NOD) was ever filed.  For many lenders, the filing of a Notice of Default is nearly as derogatory as an actual foreclosure.  A foreclosure stays on your report for 7 years and with either a foreclosure or NOD, you will most likely not be able to buy another home for a full 3 -5 years.  However, with a short sale that did not include an NOD, you may be able to qualify in as little as 2 years, according to some lenders.  This is another reason why it is important to act quickly once you realize you can no longer make your mortgage payments.

The most important factor is improving your score after a short sale is how you manage the rest of your credit.  I have several clients who just 18 months after a short sale have brought their credit back up over 700!  A few of their tips include:

  • Don’t take on additional debt
  • Stay ruthlessly current on every payment
  • Gradually pay down balances to a level that is 1/3 of your total credit line, but don’t close accounts.  Better to pay them off, and use them occasionally.

As short sales become more and more common on credit reports their impact on your non-mortgage credit will likely lessen, and even if you once again choose to buy a home, you may be eligible in as little as 2 years.

 

December 6, 2010

2nd Lien Holders Standing in the Way of Recovery

Posted by martikilby under 2nd mortgage, foreclosure, Short Sale | Tags: , , , , , , |
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Over the past two years we’ve seen an increase in the number of short sales as underwater homeowners try to avoid foreclosure.  Realtors and Federal policy makers have applauded this movement as a means to encourage sales and spur the market recovery.  Too often however, 2nd lien holders are blocking the short sale and forcing homeowners into foreclosure.

In a short sale, the property is offered for sale for less than what is owed.  Provided the final sales price is reasonable, and the homeowners can prove that they are unable to continue to make mortgage payments, most lenders will accept the short sale as it costs them far less to take the loss than to foreclose.  However, if there is a 2nd mortgage on the property it becomes a much more complicated transaction.

When there are two or more liens on the property, the 1st mortgage is in the primary position and when reviewing a short sale, the lender will generally approve only a token payment of $2000 – $3000 to the junior lien holder.  So on a sale of a $320,000 property with a $400,000 1st mortgage and a $50,000 2nd mortgage the lender in the first position will recoup approximately 80% of the original loan amount (less fees and expenses), but the 2nd mortgage holder will recoup only about 5 – 6% of their investment.

As a result, 2nd lien holders are in no hurry to approve a short sale and what develops is a sort of “chicken game” between the negotiator for the first mortgage, the negotiator for the 2nd, and the Realtor or negotiator representing the homeowner.  The poor buyer who is trying to purchase the home is at the mercy of everyone involved.  Often the lender in the 2nd position will ask either the homeowner or the buyer to come up with additional funds to at least get them a 10% return.  Although this might only be a few thousand dollars, that might be enough to kill the deal.  For the 2nd lien holder, they might choose to just wait for a better offer where the buyer will agree to pay, or they will agree to the sale but file a deficiency judgment against the homeowners.

According to CoreLogic, a company that tracks foreclosure data, of the 1.33 million homes that are in some stage of foreclosure, over a third have a 2nd mortgage.  Many of these 2nd mortgages were underwritten to allow the homeowner or buyer to borrow 90 -100% of the home’s inflated value.  Sorry if I’m not sympathetic, but it was a risk the banks knowingly took.  The strategy back-fired as values plummeted, but now the banks holding these 2nd mortgages need to just write-off the loss and get out of the way. 

How to protect yourself in a short sale transaction with a 2nd mortgage?  Make sure your Realtor knows how to play the game.

 

October 31, 2010

Improve your Odds for Short Sale Approval

Posted by martikilby under foreclosure, lenders, Short Sale | Tags: , , , , |
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As I mentioned in my last post, there are several reasons why a lender might choose to foreclose versus approving a short sale.   But there are a few things you and your Realtor can do to improve your chance of having your sale approved. 

1.  Submit a quality offer.  Here are a few things your Realtor should look for in any offer you receive: 

  • The offered price shouldn’t be significantly less than market value.  The lender is less likely to approve the sale if he feels that his loss is greater than necessary.
  • The buyer can show more than sufficient funds to close the deal.  The larger the down payment the better.  Banks will consider a contribution to closing costs, but remember, they are looking for the highest possible net return on the sale.
  • The buyer agrees to put his/her earnest money deposit into escrow before short sale approval.  This shows the lender that the buyer is committed and less likely to walk away from the deal.  If the sale is not approved, the deposit is of course returned to the buyer.
  • The buyer should plan on paying for any needed repairs, including termite.  Don’t submit an offer that asks for repairs or a home warranty.
  • The offer must not be contingent on the sale of the buyer’s current home.  Buyer should be flexible about when they need to move out of their current residence.
  • The offer should be well written and easy to understand.  (More on that subject in a future post), 

2.  Submit all required documents. 

  • Make sure your Realtor has confirmed with your lender regarding every required document.  They should all be submitted at one time to help prevent certain items from getting lost in the lenders system.
  • If additional (or yes, duplicate) documents are requested, submit them as quickly as possible and have your Realtor or negotiator confirm receipt. 

3.  Remember the squeaky wheel…. 

  • Whether it is your Realtor or a professional negotiator who is representing your short sale to the bank, they need to be in regular communication with the lender, inquiring about progress on your file.  1 phone call a week is not sufficient.  The negotiator on the bank’s side needs to understand that you are very serious about gaining their approval and selling your home.
  • Ask for updates from your Realtor and make sure that there is follow-up with the lender 2-3 times per week.  You should know at all times where you are on the foreclosure timeline.  Make sure you immediately provide your Realtor with any letters you receive from your lender or any legal notices.

There are many important details in a short sale that are very different from a standard equity sale.  When listing your home, make sure you select a Realtor who is experienced with short sales.  Saving your home from foreclosure is way too important a task to trust to an inexperienced agent.

 

October 29, 2010

Why Banks May Choose Foreclosure over a Short Sale

Posted by martikilby under foreclosure, lenders, Short Sale | Tags: , , , , , |
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It has been estimated that the average cost to foreclose on a home is about $75,000 including costs to local government for lost tax revenue and services, costs to the homeowner, and the devaluation to neighbor’s properties. Of this amount, the actual cost to the bank averages about $50,000 – $60,000, including attorney’s fees, property maintenance and REO resale fees.  Considering that the hard costs of a short sale are considerably less, and the impact on local government, neighborhoods and individuals is far less destructive, it’s difficult to understand why banks seem to be dragging their feet when it comes to approving short sales.

According to a recent article in the NY Times, many lenders are concerned about fraud. It is known that some homeowners, who actually can afford their mortgage payments, falsely portray their financial picture in order to cut their losses on a property and move on.  Other homeowners may try to sell to a relative who would then sell the home back to them, a practice that is illegal.  A recent industry report estimates that short sale fraud occurs in a least 2 percent of sales and costs banks about $300 million annually.

But fear of fraud and the associated costs is a relatively minor consideration.  The more important reason shouldn’t be too surprising:  There are financial incentives in many cases to choose foreclosure over a short sale.  For instance, institutions that service loans can reap high fees from foreclosures and lenders can often collect on private mortgage insurance that protects against foreclosure losses.  Neither the same high fees nor insurance is collected when a home sells short.  Another little known fact:  A 2009 regulatory change to a federal accounting law allows banks to foreclose on a home, but not take the loss until the home sells.  By contrast, in the case of a short sale, the bank must take the loss immediately.

So obviously, the bank’s decision has nothing to do with what is best for the national or local economy, or the individual homeowner.  Check back for my next blog where I’ll discuss what you can do to improve your chances of having your short sale approved.

 

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