If you are “upside down” or “underwater” – the value of your home having declined below the amount you owe on it – you are not alone. Nearly 20 million homeowners in the US are facing this scenario right now. It’s psychologically lousy for all of them and financially lousy for those who must sell because of a job loss, reduction in pay, divorce, death or other reason. For them, it’s a financial train wreck.
A short sale can be an good solution for you. Of course, your lender has to approve the deal as they have accepted the home as collateral for the loan. The right questions to ask are 1) How it works, 2) What becomes of the shortfall amount, 3) What tax liabilities will there be and 4) how can I be protected from future deficiency suits. Let’s start with number one.
How Short Sales Work
The short sale wokrs just like a traditional sale except for one important added step. When a good buyer is found the deal is sent to the lender as an application for a short payoff. The application includes an explanation of your situation, the offer and a settlement summary called a HUD-1.
The application also includes a HUD-1Worksheet of the expenses involved in the execution of this purchase contract, and showing the net proceeds that the lender will receive. One of the items on the HUD-1 is the payoff amount of any “junior” lien holders. Typically, these lien holders settle for a small fraction of the amount owed as their claim on the collateral is subordinate to the 1st, or senior mortgage. That, by the way, is why they always charge higher rates – they are more exposed to loss.
Your lender then reviews the application and gets their assessment of the value of the home and the appropriateness of the offer. They do this by hiring a local Realtor to provide a Broker Price Opinion (BPO) or by using the Automated Valuation Model (AVM). The AVM is a computerized estimate of net proceeds if the home goes to foreclosure and the lender must sell it themselves. Usually this evaluation takes at least 30 days.
People seem to be getting more familiar and more comfortable with short sales. However, some misconceptions still exist. These are the most common.
Myth #1 – My Lender Will Foreclose Rather than Bother with a Short Sale
Short sales are expensive. But, foreclosure is even more expensive with added fees to vacate, clean, insure and secure the home. And, foreclosure delays settlement by many months which is also expensive.
Myth 2 – You have to be in default to get approved for a short sale
Once the case, it is no longer. Lenders are looking for verifiable hardship and monthly cash flow shortfall. Beyond that the deal hinges on determining the current market price and finding a qualified buyer.
Myth #3 – There is Not Enough Time to Negotiate a Short Sale Before the Trustee Sale (Sheriff’s Sales)
This is a myth that probably hurts homeowners the most. Many do not realize that foreclosure is a process, and that there is time to stop a trustee sale right up to the day of the sale. I have convinced trustees to phone the auctioneer to stop the sale the very morning of the auction (not recommended!).
The foreclosing party-in most cases a lender-can delay foreclosure up to the final day of the process. In these trying times, many lenders will delay the foreclosure with as little as a phone call from you explaining that you are trying to sell, and almost all lenders will delay foreclosure with a legitimate short sale purchase contract.
4. Embarrassment
As many as 50% of homes with mortgages in the U.S. will be upside-down by 2011. Short sales are becoming common even in the high-end neighborhood where “responsible” people live! Get over it.
Myth 5 – Buyers Shy Away for Short Sales
The opposite is true. Smart buyers and smart agents know that there are great deals to be had in short sales.
Short sales are an important tool, helping our housing market adjust to the new economic realities. They will continue to be a major factor for years to come.
Want to find out more about actually getting short sales done? Visit Rockwood’s site at Home Loan Modification Grab a totally unique version of this article from the Uber Article Directory
