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Home Foreclosures and Short Sales
Foreclosures and Short Sales PDF Print E-mail

The current U.S. housing market and financial crisis have caused tremendous stress and heartache for families across America. If you or someone you know is among the millions today affected by the prospect of foreclosure, understand that you are not alone.

What is a Short Sale?

Home sellers should consider a Short Sale when the value of their home is LESS than the amount of their outstanding loans. For example, if your home is worth $250,000 but you have a loan of $260,000 then a short sale is a consideration. Obviously, if you do not have to sell your home, you could wait out the market and hope for a turnaround in real estate values.

However, if you do have to sell your home you basically have three options. First, you can bring cash to the table. In the example above you would sell your home for $250,000 and pay another $10,000 to the lender out of your pocket to pay off the loan on your property. Second, you could let the home go into foreclosure. The lender will go through the foreclosure process, force you out of your home and then auction it off to the highest bidder at a foreclosure or Trustee's auction. The third option is to pursue a short sale. You contact the lender, explain the circumstances and convince them to take less than full value of their loan.

In the case above you may tell them you have a buyer for $250,000 and it's very unlikely there will be a buyer at a higher price. If they will accept $250,000 for their $260,000 loan then you can proceed with a short sale. Sometimes the lender will consider a short sale before you have a buyer and you can market your property and, if you find a buyer, take their offer to the lender for consideration. The lender may or may not accept the offer.


What Are The Steps In A Short Sale?

• Short sales are not necessarily complicated but do require some work on your part and your agent's part if one is involved. Figure out the true value of your property. Many times a real estate agent can provide a market analysis and give you a good idea of what your home might sell for. You can also use Zillow or other real estate related sites to determine the rough value of your home. If the market is moving down keep in mind that your homes value may be moving down as well and estimated valuations may be valid for only a short time.

• You also need to calculate your estimated closing costs. Items such as a title report, escrow, appraisal, attorney fees, agent commissions, unpaid property taxes etc. may add up to a substantial amount of money.

• You will need to know how much you owe on your property. Include all loans on the property in your calculation.

• Calculate your equity. Normally the value of your home is more than the total of the loans and closing costs. If your closing cost estimate plus your loan amounts are higher than the value of your property then a short sale is a possibility.

• You will need to contact your lender and explain your situation. Be sure you talk to someone who has the authority to make the required decisions. Usually lenders have a loss mitigation department that you can contact. Lenders are under no obligation to accept a short sale but many times it is in their best interests to do so. Some lenders will not consider a short sale until you have missed a payment or two. Some will not accept short sales at all. You will need to know where your lender stands with regard to short sales so contact them as soon as possible.

• Consider your tax obligations! Do not underestimate this! Many times there can be a substantial tax obligation after a short sale has occurred. Be sure to talk with an accountant or tax attorney to figure out how much money you may owe the IRS if you proceed with a short sale.

Find a buyer and sell your property. The lender will still have to approve the buyer's offer but once they do you can sell your property.


Obama's Loan Modification Program

You've probably heard about President Barack Obama's plan to rescue the housing market. He believes that restructuring distressed mortgages will help to keep struggling home owners in their homes. He also believes that this will help slow or stop the decline in housing prices. To this point $75 billion has been allocated toward modifying distressed loans and the Administration claims that it can help up to 4 million homeowners. Unfortunately, over half of those loans that have been modified have re-defaulted within six months.

Can Obama's plan help you? Well, let's look at it's main components:
• First, the Obama administrations loan modification plan focuses on payments, not prices. They assume that home owners will want to stay in their homes as long as they can make the monthly payment regardless of the value of their home. This may or may not be the case. Evidence has shown that some homeowners will walk away from their homes even if they could make the payment only because the value of their home has fallen far below what it was once worth.

• Second, Obama's loan modifcation program requires loan servicers to lower the borrower's monthly payments to no more than 38 percent of the borrower's gross monthly income. The federal government would then subsidize a portion of the payment so that the borrower would only be paying 31 percent of their gross monthly income. Obama's plan does not require loan servicers to reduce the pricipal amount of the loan. The servicer can reduce the interest rate to as low as 2 percent, extend the loan to a 40 year amortization, or forbear a part of the pricipal at no interest. So, if these terms would help you stay in your homne then you should take a serious look at the Obama Loan Modification Program.

Why would loan servicers want to participate in this program? Well, for one, they will get $1000 for every modification plus an additional $1000 each year for up to three years if the borrower continues to make the payments on the loan. The borrower too can get up to $1000 knocked off of their loan principal each year for up to five years if they make their payment s on time.

Of course, in the Obama Loan Modification Program only owner-occupied primary residences will be considered and only those with loan balances less than $729,750. Applicants will have to sign an affidavit of financial hardship and verify their income and only loans originated on or before January 1, 2009 will be eligible for the program.

So, does the Obama Loan Modification Program sound like it could help you? If so, then give your lender or loan servicer and call and see if you qualify.


The Hardship Letter

The Hardship Letter is usually part of the short sale package and is written by the seller or their representative. It is used to explain to the lender the reasons for the borrower's need for a short sale. Reasons such as divorce, job loss, medical issues, etc. can and should be included. Usually just a one page letter with the pertinent information will suffice.

A simple letter in the following form should suffice:

Date

Lender Name
Address
Loan Number

Dear Sir/Maam,

{In this section explain your hardship and why you must utilize a short sale - some example hardship reasons are listed below}

  • Unemployment
  • Reduced Income
  • Divorce
  • Separation
  • Medical Bills
  • Too Much Debt
  • Death of my Spouse
  • Death of a family member
  • Payment Increase
  • Business Failure
  • Job Relocation
  • Illness
  • Damage to Property
  • Military Service
  • Incarceration
  • Other (Please Specify)

Borrower's Signature

Date

Co-Borrower's Signature

Date


The Credit Consequences of a Short Sale

The credit consequences of a short sale and foreclosure vary slightly. The general consensus is that a short sale will show up on your credit report as a 'settlement', 'settlement for less than owed' or a "pre-foreclosure in redemption". Also, since most lenders will not consider allowing a short sale until a few payments have actually been missed you may also have a few 'lates' on your credit report. Neither of these marks is a good thing to have but it's possible to get them off of your credit report within a few years or less. A short sale can drop your credit score by 80-100 points. There is also the possibility that through negotiation with the lender you can avoid having the short sale reported to a credit agency.

A foreclosure on your credit report can take 7-10 years to remove and can cost your credit rating (FICO) up to 200-280 points which is a very big hit. So, if you have no better alternatives, pursue a short sale aggressively and avoid foreclosure.


Broker's Price Opinion

The Lender will want to see a Broker's Price Opinion (BPO) to get an idea of what the property is worth. The BPO is usually produced by either the agent for the seller or sometimes by an agent or appraiser working for the lender. The BPO will contain comparable sales of similar houses in the neighborhood, with adjustments made for condition and attributes, to determine what the market value of the subject property is.


Real estate professionals with the Certified Distressed Property Expert® (CDPE ) designation have trained extensively to understand the options , solutions, and effective methods for dealing with homeowners facing hardships. Don't risk your financial future and the potential sale of your home with an agent who does not have all the solutions.

Call Donna today!

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With nearly 30 years of combined Real Estate success, they wait to assist you in these difficult times.