Short Sales
A Short Sale is a solution for home owners whose property values have declined below the current outstanding mortgage amount due on the property. A sales contract is prepared and presented to the lenders, along with a hardship letter from the owner, and BPO (Broker Price Opinion) indicating the current value of the property. The transaction is negotiated through the Bank's Loss Mitigation Department, and with approval the owner is able to proceed with the sale after the bank releases the lien and accepts the shortfall. A Short Sale is the best exit strategy for owners of depressed real estate. Paying a $400,000 mortgage on a condo that is now worth $150,000 is not a good investment. The Banks will take a lesser loss selling now, rather than going through the foreclosure process that could drag out over two years. Also, a Short Sale is less damaging to the seller's credit than a foreclosure.
SHORT SALE VS. FORCLOSURE
| Issue | Short Sale | Foreclosure |
|---|---|---|
| Credit Score | A short sale itself will minimally affect your credit score, usually around 50 points. Late payments usually have the largest negative impact on your credit score from a short sale and can average 30 points or more each. | Your credit score could be lowered 300+ points and will stay on your record for 10 years! |
| Credit History | There is not a credit reporting item for a short sale. Upon sale, your mortgage company will typically report the short sale as 'Paid', 'Settled in full', or 'Paid as Negotiated' on your report. | A foreclosure will remain on your credit for 10 years and is permanent in the public records of your county. |
| Current Employment | A short sale is not an actual item on your credit report and typically will NOT affect your employment. | Your employer has the right and many times will actively check your credit if you are in sensitive positions. Sometimes a foreclosure is grounds for immediate re-assignment or termination. |
| Future Employment | A short sale is not an actual item on your credit report and typically will NOT affect future employment. | Employers do check your credit history for many job applicants. A foreclosure one of the most negative items you can have on your credit and may affect future employment. |
| Future Loan with a Mortgage Co. | You typically do not have to declare to future mortgage companies that you previously performed a short sale | On the federally mandated standard loan application form 1003 you will be required to answer ‘YES’ to the question ‘Have you had property foreclosed upon or given title or deed in lieu thereof in the past 7 years?’ Answering ‘yes’ affects the interest rate you will receive |
| Future Fannie Mae Loan – Primary Residence | After a successful short sale you can be eligible for a Fannie Mae backed loan after only 2 years | After a foreclosure you will be ineligible for a Fannie Mae backed loan for a minimum of 5 years |
| Future Fannie Mar Loan – Non-Primary | After a successful short sale you can be eligible for a Fannie Mae backed loan after only 2 years on non-primary residences | After a foreclosure you will be ineligible for a Fannie Mae backed investment loan for a minimum of 7 years |
| Deficiency Judgment | It is typical for the lender to give up the right to pursue a deficiency judgment against the borrower. This is stated in approval letters, and is not legal to collect in many states. | The bank has the right to pursue the deficiency judgment in all foreclosures (except in states where there is no deficiency) |
| Deficiency Amount | A short sale home is sold at or near market value and in most cases is a greater value than a foreclosure sale which results in a lower deficiency. This deficiency is typically forgiven. Helping to cut your lenders loss as well is also the ethical thing to do. | If the home does not sale at a foreclosure auction it will have to go through the bank REO system. This will result in a longer time to sell and potentially a higher deficiency judgment for the homeowner. |
SHORT SALE PROCESS
If a homeowner is struggling to keep up payments, or has already defaulted on their mortgage payments, either situation warrants the beginning of a short sale attempt. The process can be worth the time and challenges, to preserve your credit score and save thousands.
Info to submit to Bank- Letter of authorization, which lets your agent speak to the bank
- Copy of offer with proof of funds from Buyer
- Copy of listing agreement
- HUD-1 or preliminary net sheet
- Completed financial statement
- Seller's hardship letter
- 2 years of tax returns
- Recent payroll stubs
- Last 2 months of bank statements
If there are 2 or more mortgages on the unit this same info will need to be submitted to all financial institutions. Also, if the homeowners association dues (condo fees) are in arrears, a letter from the management or attorney will be needed to confirm the amount payable in order to prepare the HUD. The title company can assist in receiving this information.
Banks Procedure- Bank acknowledges receipt of the file. This can take 15 days to a month
- A negotiator is assigned. This can take 30 to 90 days
- A BPO (Brokers price opinion) is ordered
- A second negotiator may be assigned. This can take another 30 days
- The file is sent for review and final approval
- The bank issues a short sale approval letter
- Approval letter must be sent to secondary mortgage holders
- 2nd mortgage holders issues statement to release their lien for agreed amount
- Closing takes place with all liens removed from title
It should be noted that a short sale does not always go smoothly. Many of these transactions have not been able to close because of the second mortgage holders demanding more than the first bank will agree to, and/or the overdue homeowners association fees not being covered by the proceeds. In these cases the buyer or seller will have to come up with the deficiency amounts which can be in the 10’s of thousands of dollars.
SHORT SALE OFFERS
A Seller trying to achieve a Short Sale, needs to find an all cash buyer with a lot of patience. Because of the high incidence of mortgage defaults, nearly all banks and financial institutions have an over flow of files to deal with. Most banks will say the process takes 3 months, but depending on the situation and timeliness of information being submitted, a short sale can take over 1 year. It is recommended that back-up offers are accepted, as many buyers will back out or not follow through with the closing after such a long waiting period. Deposits are usually lower because of the uncertainty of the situation. Whereas on a normal transaction the deposit is usually 10%, most short sale buyers will only put up $1000 with their offer. The key is to get any offer possible, to get the process started. Once a short sale is approved and the price that the banks will be willing to accept is realized, even if the buyer walks the property can now be marketed as a pre-approved short sale that can close within 30 days.
MORTGAGE FORGIVENESS DEBT RELIEF ACT OF 2007
Normally under US law, when a lender decides to forgive all or a portion of a borrower's debt and accept less, the forgiven amount is considered as income for the borrower and is liable to be taxed. However, after the signing of the Mortgage Forgiveness Act of 2007, amendments have been made to remove such tax liability and allow the borrower and lender to work freely together to find a common solution that is beneficial to both parties. This protection is limited only to primary residences - rental properties and second homes are ineligible for relief. The amount of forgiven mortgage debt allowed to be excluded from income tax is limited to $2 million per year. This tax relief was extended covering debts discharged through the calendar year 2012.
Florida Condo Connections LLC has successfully negotiated Short Sales with:
