Navigating Short Sales: What to Do When the Sale Price Leaves You Short

If you’re thinking of selling your home, and you expect that the total amount you owe on your mortgage will be greater than the selling price of your home, you may be facing a short sale. A short sale is one where the net proceeds from the sale won’t cover your total mortgage obligation and closing costs, and you don’t have other sources of money to cover the deficiency. A short sale is different from a foreclosure, which is when your lender takes title of your home through a lengthy legal process and then sells it.

1. Consider loan modification first. If you are thinking of selling your home because of financial difficulties and you anticipate a short sale, first contact your lender to see if it has any programs to help you stay in your home. Your lender may agree to a modification such as: Refinancing your loan at a lower interest rate; providing a different payment plan to help you get caught up; or providing a forbearance period if your situation is temporary. When a loan modification still isn’t enough to relieve your financial problems, a short sale could be your best option if:

  • Your property is worth less than the total mortgage you owe on it.
  • You have a financial hardship, such as a job loss or major medical bills.
  • You have contacted your lender and it is willing to entertain a short sale.

2. Hire a qualified team. The first step to a short sale is to hire a qualified real estate professional and a real estate attorney who specialize in short sales. Interview at least three candidates for each and look for prior short-sale experience. Short sales have proliferated only in the last few years, so it may be hard to find practitioners who have closed a lot of short sales. You want to work with those who demonstrate a thorough working knowledge of the short-sale process and who won’t try to take advantage of your situation or pressure you to do something that isn’t in your best interest. A qualified real estate professional can:

  • Provide you with a comparative market analysis (CMA) or broker price opinion (BPO).
  • Help you set an appropriate listing price for your home, market the home, and get it sold.
  • Put special language in the MLS that indicates your home is a short sale and that lender approval is needed (all MLSs permit, and some now require, that the short-sale status be disclosed to potential buyers).
  • Ease the process of working with your lender or lenders.
  • Negotiate the contract with the buyers.
  • Help you put together the short-sale package to send to your lender (or lenders, if you have more than one mortgage) for approval. You can’t sell your home without your lender and any other lien holders agreeing to the sale and releasing the lien so that the buyers can get clear title.

3. Begin gathering documentation before any offers come in. Your lender will give you a list of documents it requires to consider a short sale. The short-sale “package” that accompanies any offer typically must include:

  • A hardship letter detailing your financial situation and why you need the short sale
  • A copy of the purchase contract and listing agreement
  • Proof of your income and assets
  • Copies of your federal income tax returns for the past two years

4. Prepare buyers for a lengthy waiting period. Even if you’re well organized and have all the documents in place, be prepared for a long process. Waiting for your lender’s review of the short-sale package can take several weeks to months. Some experts say:

  • If you have only one mortgage, the review can take about two months.
  • With a first and second mortgage with the same lender, the review can take about three months.
  • With two or more mortgages with different lenders, it can take four months or longer.

When the bank does respond, it can approve the short sale, make a counteroffer, or deny the short sale. The last two actions can lengthen the process or put you back at square one. (Your real estate attorney and real estate professional, with your authorization, can work your lender’s loss mitigation department on your behalf to prepare the proper documentation and speed the process along.)

5. Don’t expect a short sale to solve your financial problems. Even if your lender does approve the short sale, it may not be the end of all your financial woes. Here are some things to keep in mind:

  • You may be asked by your lender to sign a promissory note agreeing to pay back the amount of your loan not paid off by the short sale. If your financial hardship is permanent and you can’t pay back the balance, talk with your real estate attorney about your options.
  • Any amount of your mortgage that is forgiven by your lender is typically considered income, and you may have to pay taxes on that amount. Under a temporary measure passed in 2007, the Mortgage Forgiveness Debt Relief Act and Debt Cancellation Act, homeowners can exclude debt forgiveness on their federal tax returns from income for loans discharged in calendar years 2007 through 2012. Be sure to consult your real estate attorney and your accountant to see whether you qualify.
  • Having a portion of your debt forgiven may have an adverse effect on your credit score. However, a short sale will impact your credit score less than foreclosure and bankruptcy.

© Copyright the National Association of REALTORS®.

 

Author: Lee Gosselin, Associate Broker & Owner

$25B settlement reached over foreclosure abuses – NBC12 News,for Richmond, VA |

WASHINGTON (AP) – A landmark $25 billion settlement with the nation’s top mortgage lenders was hailed by government officials Thursday as long-overdue relief for victims of foreclosure abuses. But consumer advocates countered that far too few people will benefit.

The deal will reduce loans for only a fraction of those Americans who owe more than their homes are worth. It will also send checks to others who were improperly foreclosed upon. But the amounts are modest.

And few think the deal will do much to help struggling homeowners keep their homes or to benefit those who have already lost theirs.

About 11 million households are underwater, meaning they owe more than their homes are worth. The settlement would help 1 million of them.

“The total number of dollars is still small compared to the value of the mortgages that are underwater,” said Richard Green, director of the University of Southern California’s Lusk Center for Real Estate.

Federal and state officials announced that 49 states joined the settlement with five of the nation’s biggest lenders. Oklahoma struck a separate deal with the five banks. Government officials are still negotiating with 14 other lenders to join.

Bank of America will pay the most to borrowers: nearly $8.6 billion. Wells Fargo will pay about $4.3 billion, JPMorgan Chase roughly $4.2 billion, Citigroup about $1.8 billion and Ally Financial $200 million. The banks will also pay state and federal governments $5.5 billion.

The settlement ends a painful chapter of the financial crisis, when home values sank and millions edged toward foreclosure. Many companies processed foreclosures without verifying documents. Some employees signed papers they hadn’t read or used fake signatures to speed foreclosures – an action known as robo-signing.

President Barack Obama praised the settlement, saying it will “speed relief to the hardest-hit homeowners, end some of the most abusive practices of the mortgage industry and begin to turn the page on an era of recklessness that has left so much damage in its wake.”

The deal requires the banks to reduce loans for about 1 million households that are at risk of foreclosure. The lenders will also send $2,000 each to about 750,000 Americans who were improperly foreclosed upon from 2008 through 2011. The banks will have three years to fulfill terms of the deal.

The states have agreed not to pursue civil charges over the abuses covered by the settlement. Homeowners can still sue lenders on their own, and federal and state authorities can still pursue criminal charges.

The deal, reached after 16 months of contentious negotiations, is subject to approval by a federal judge. It’s the biggest settlement involving a single industry since the $206 billion multistate tobacco deal in 1998.

But for the many people who lost their homes to foreclosure in the past two years, some of them improperly, a check for $2,000 is small consolation.

“Two thousand dollars won’t cover my moving costs,” said Brian Duncan, who was evicted from his Tempe, Ariz., home last April.

Iowa Attorney General Tom Miller, who led the 50-state talks, said the $2,000 represents the homeowners’ best hope of getting reimbursed. They would have had trouble winning settlements in court because of the time-consuming complexity of litigation, Miller said.

Mike Heid, president of Wells Fargo Home Mortgage, said the agreement “represents a very important step toward restoring confidence in mortgage servicing and stability in the housing market.”

Mark Vitner, a senior economist at Wells Fargo Securities, said the settlement may help the housing market in the long run. That’s because it lets banks proceed with millions of foreclosures that have been stalled. Many lenders had refrained from foreclosing on homes as they awaited the settlement.

“We’ve got a lot of issues to work our way through in the housing market,” Vitner said. “What this settlement does is allow that process to get started.”

For the banks, the settlement comes mainly as a relief. The amount they have to pay isn’t as large as many expected, and all have set aside adequate reserves. The cash portion of how much each bank has to pay is relatively small.

“It’s really a wash,” said Paul Miller, bank analyst at FBR Capital Markets. “A billion dollars is nothing for these large trillion-dollar banks.”

The bulk of the settlement will go toward reducing underwater mortgages and refinancing some of them. But the banks had realized they weren’t going to collect the loans and had already written down their value, Miller noted.

The deal requires banks to make foreclosure their last resort. And they can’t foreclose on a homeowner who is being considered for a loan modification.

Still, the federal government has a dubious track record of enforcing such rules. The Obama administration’s signature foreclosure-prevention program has failed to help more than half of those who have applied to have their mortgage payments lowered permanently. Many have complained that the program is a bureaucratic nightmare.

Critics also note that the settlement will apply only to privately held mortgages and not to those owned by mortgage giants Fannie Mae and Freddie Mac. Banks own about half of all U.S. mortgages, or roughly 30 million loans. Fannie and Freddie own the other half.

The deal is “another sad example of Wall Street not being held accountable for fraud, perjury and crimes that created the greatest economic crisis since the Great Depression,” said Dennis Kelleher, CEO of Better Markets, a group that advocates stricter financial regulation. “The math does not add up in a massive ‘robo-signing’ scandal that is nothing more than systemic criminal conduct.”

The settlement also ends a separate investigation into Bank of America and Countrywide for inflating appraisals of loans from 2003 through most of 2009. Bank of America acquired Countrywide in 2008