Short Sales

Never the first alternative
The current state of our economy has most of us concerned; many people face an uncertain future and far too many are struggling with financial difficulties. For those experiencing problems, falling behind on their mortgage payment is almost always the most challenging to solve. Over the last few years “short sales” have become an increasingly popular way for homeowners to get out from under a debt they can no longer afford. Short sales can be an effective way to avoid foreclosure but they can have serious consequences for the borrowers both at the time of sale and in the future. A short sale should never be your first choice to solve your problems.

The Short Sale
A “short sale” or “pre-foreclosure sale” is a negotiated settlement between a lender and the borrower. Today many homes will not sell at a price high enough to cover the existing balance and the costs associated with the sale. If the borrowers find themselves facing a financial hardship the lender may accept an amount less the outstanding balance on the loan as full payment, a short sale.

Consequences
It sounds simple but there are a number of complications that the borrowers might not be aware of. First of all, you must be able to demonstrate an actual hardship, a loss of income, unexpected medical expenses, death, divorce, etc. before a lender will consider negotiating a short sale. Many lenders are reluctant to do any negotiation regardless of the circumstances. The lender, (or lenders if there is another loan on the home), will have to approve any offer. If there are other liens on the property, property tax, HOA fees, assessments, or judgments, the holders may also become a part of any negotiation. In some cases the company providing mortgage insurance and the investor funding the loan will also need to approve a settlement. The process is complicated and will take time. Often, buyers become frustrated and find another home. The lender will usually ask the borrowers to contribute some of the expense of the sale, usually the closing costs as a minimum. The borrowers’ contribution is largely based on their ability to pay. The lender may also require the borrowers to repay the outstanding balance and ask that they sign a promissory note. The note will stipulate the repayment terms. In some states the lender can pursue a “Deficiency Judgment”, (they sue the borrowers for the balance), if the proceeds from either a short sale or foreclosure sale fail to pay off the loan balance. If the debt is forgiven, a Form-1099 is issued to the borrower. IRS rules typically consider debt forgiveness taxable income.

A short sale’s effect on the borrowers’ credit is largely a matter of opinion. The calculations involved in the FICO score are confidential and the true effect will vary according to an individual's overall credit history. Homeowners’ facing foreclosure will usually have a history of late payments on the mortgage and other debts as well. Each late payment reported to the credit agencies will have its own consequences and the overall score will suffer. Add to that any type of foreclosure or pre-foreclosure agreement and the FICO score can drop significantly. Again, opinions vary but most estimates I’ve seen range from a 150 to 300 point drop in the score.

Advantages
There are advantages for both the homeowner and the lender when a short sale is the only alternative to foreclosure. When facing either case it's obvious the homeowners' credit has been damaged. A negotiated settlement may lessen the impact. Credit scores might not suffer as much if an agreement can be reached. A short sale does seem to have less of an effect on a person’s ability to finance a future purchase than a foreclosure. Much will depend on how the lender chooses to report the settlement. Short sales will save the lender from the expense of pursuing a foreclosure. Homeowners negotiating a short sale are less likely to damage the house. The owners will move voluntarily avoiding any possible problems with eviction. Foreclosed homes can remain unsold and vacant. These homes add to the lenders' inventory making less cash available for new loans. Vacant homes can be vandalized, attract squatters, and may wind up selling for even less than a negotiated short sale. Foreclosed homes sitting unsold further deteriorate the value of all homes in a neighborhood. A successful short sale does result in an occupied home and can help preserve those values. Done properly a short sale can be a useful option for homeowners and lenders wanting to avoid foreclosure.

Alternatives
If you are having trouble with debts don’t wait for your creditors to contact you. Call them first! Many of those calling to collect a past due account won’t have the authority to discuss working out a solution. If you are dealing with a mortgage company ask for their Loss Mitigation Department. The Obama Administration’s Financial Stability Plan provides incentives for both homeowners and lenders to seek out loan modifications. For an overview and qualifying questions go to http://www.financialstability.gov/ Many state agencies will also have work-out programs available for homeowners in need. Contact your local state housing authority or university extension service. Lenders may be able to provide Short or Long-Term Forbearance agreements, (a suspension of collections), if a problem is temporary. A refinance or interest rate reduction may make a lower payment possible. The goal is to keep you in your home if it is possible. Not everyone will qualify. Those who can't afford to make even a reduced payment will have to consider other options.

Protect Yourself

• If you do find yourself in a position where a work-out isn’t possible seek a qualified professional for assistance.
• Make certain you understand the details of any agreement.
• Don’t trust someone to “take care of it for you”. Get it in writing.
• Will the lender charge off the outstanding debt or will they want it repaid?
• How much will you have to come up with at closing?
• In your state can they sue for the deficiency? Will they?
• How will the lender report this to the credit agencies? It’s up to their discretion.
• Will you owe taxes in the debt being forgiven?

As always there are those who are looking to profit from the misfortunes of others. Beware of the scams popping up on the internet, television radio, and in print.

• There is never a fee to get assistance or information from your lender or a HUD-approved housing counselor.
• Beware of any person or organization that asks you to pay a fee in exchange for housing counseling services or modification of a delinquent loan. Do not pay – walk away!
• Beware of anyone who says they can “save” your home if you sign or transfer over the deed to your house. Do not sign over the deed to your property to any organization or individual unless you are working directly with your mortgage company to forgive your debt.
• Never make your mortgage payments to anyone other than your mortgage company without their approval.
• Never let someone tell you to quit talking with your lender.
• Don’t believe anyone who tells you a short sale “won’t hurt your credit that much”
• Never, Never, Never let someone talk you into a short sale until you look at the alternatives.

This is by no means a complete description of short sales or other options.
If I can answer any questions or if you have a comment please e-mail me reagentearl@gmail.com or visit www.earlboyer.com

Laws and regulations vary from state to state.
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