The Short on Short Sales
In June of 2008, I wrote about a then emerging trend in the discussion of home sales, the “short sale.” At the time, I was still a Loan Officer in the mortgage industry and wrote that having worked in the field since 1998, “not until recently have I ever discussed the term ‘short sale.’” Times have certainly changed.
Today, as a local realtor, the short sale can’t be missed. In fact, it’s included in virtually every discussion with prospective buyers and in many cases, prospective sellers. But despite all of the media attention about what’s been happening in the housing industry the last few years, most people don’t grasp the magnitude and reality unless it hits home. Pun intended.
The lack of this understanding became very apparent to me while talking with two friends recently about the possibility of selling their home. Amidst the process of a break-up, they now needed to sell the home they had purchased in 2006 with 100% financing. Having paid $340,000, they were hoping for a “modest” profit.
By most estimates, prices have dropped between 10 and 20% from their highs in mid-2006. On the short end of that, they were looking at a price around $300,000, I hoped. With a good idea of what homes in their neighborhood had sold for in recent months, I cautiously asked if they had a price in mind.
So what do you think their response was? Having heard them mention “modest profit” earlier, my fingers were crossed. “Well we’re hoping for maybe $375,000.” That’s what I was afraid of.
I politely responded that in my professional opinion their price wasn’t likely, at least not now. Then, after asking if they’d heard of short sales, the “deer-in-the-headlights” moment came after I gave them a brief description. In an instant, their hopes of walking away with at least some profit turned into a sad reality that they were facing a daunting situation, both to their credit and to their futures.
Fortunately, they weren’t behind in mortgage payments so they weren’t in default or facing foreclosure. That would’ve complicated matters. Regardless, when confronted with this type of conversation, I try to start with the basics and address a few of the more confusing and little known facts about the rather complicated process.
A short sale occurs when the bank who holds the mortgage on a house agrees to accept less than what is owed on that mortgage to satisfy the debt owed by the borrower. For many, this sounds too good to be true. “Why would a bank want to do this?” Simply put, it saves them money. It gets bad debt off their books so they can reinvest that money by giving another loan to another borrower.
Banks don’t want to own and maintain property. Instead, they want to loan and collect money. Lenders lose an estimated average of $50,000 - $75,000 on each property they take back thru foreclosure. Not all lenders accept short sales, and those who do typically have established procedures to be followed.
But for those who do, if a short sale is less of a loss than a projected loss from a foreclosure, the lender will likely accept a short sale. While the process can take three to six months from start to finish, it will eventually result in a win-win situation, where the lender mitigates its losses and the seller gets out from under the property without a foreclosure on his/her credit.
Speaking of which, most people also question a short sale’s impact on their credit. While a foreclosure could affect a FICO score by as much as 300 points, there’s less certainty about the effect of a short sale. Experts dispute the range as being anywhere from 100 to 300 points, currently.
A foreclosure may remain in a borrower’s credit history for up to 10 years and makes him/her ineligible to qualify for a Fannie Mae backed loan for up to five years. After a successful short sale, however, the loan is usually reported as “Paid as Agreed,” allowing those with good credit to purchase another home after just two years.
A common myth with short sales is that you must be delinquent (default) on your mortgage to start the short sale process. This was true in the past, but not today. Rather, homeowners must prove financial distress by submitting a Short Sale Hardship Letter explaining why they can no longer make their mortgage payment. Qualifying hardships include unemployment, divorce, catastrophic medical event, bankruptcy, or a death in the immediate family.
As mentioned earlier, lenders have unique guidelines for processing short sales. Contact your specific lender(s) and request they send you their requirements. Get everything in writing.
The general qualifications for a short sale are:
• Provable financial hardship;
• Behind on payments or facing imminent and likely default;
• No equity in the property;
• Insufficient liquid assets;
• A lender or loan type with a clearly defined short sale process.
The scope of the short sale subject falls well outside the limitations of this column. It’s complicated and specific to each lender and scenario. Most importantly, it takes time and patience to be successful.
With just one issue of Letters remaining this year, I’ve decided to make this a Two-Part Series and devote the final issue to the buying side of the equation, having focused on the selling side here.
Until then, should you find yourself facing the prospect of a short sale, or worse yet, foreclosure, don’t wait to get advice. Plan ahead and seek help from professionals. Legal, tax and real estate advice are just a phone call or email away.
Chris can be reached at email@example.com.