5 Important Tips When Considering a Short Sale

[tweetmeme]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.

For additional resources and assistance on short sales, contact your local Real Estate Resource Center.

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.

For additional resources and assistance on short sales, contact your local Real Estate Resource Center.  You may have other options available to you.  Find out what they are to make better financial decisions.


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Top 5 Answers for Homeowners about Strategic Mortgage Default

1. Should I intentionally default on my home mortgage?

Today, many people are ‘intentionally’ or ‘strategically’ defaulting because cash is more valuable than credit. Because many of the banks were unethical, some borrowers don’t feel the ‘moral obligation’ to pay, especially when the banks are being less than cooperative as buyers try to work things out. Rather than defaulting, the best thing to do is use the Section 702 program of the Obama act, which allows a qualified third-party buyer to take possession and make a ‘bona fide’ offer to the bank. This helps show the debt ‘settled’ on your credit and can eliminate the second mortgages completely. Walking away and allowing the bank to foreclose still allows the second lender to render a judgment—and possibly garnish your wages. You may also have to file for bankruptcy to recover from the credit nightmare.

In addition, it is always best to gain the most knowledge to make the best decision for yourself and your family.  There are great workshops and seminars that reveal the different programs the are available to homeowners and discuss the pitfalls people may encounter.  For specialized assistance in saving your home, consult a specialist and discover real options that fit your scenario.

2. As a borrower, what are some ways I can gain leverage with my mortgage holder?

One way to gain leverage with a lender is to establish a ‘substitute mortgage’—a security pledge that is offered to the seller’s lender, with a third party (lawyer or Escrow company) for a lesser amount of the current payment. Over time, this will result in a significant amount of collected funds that can be used as negotiating leverage to release the borrower from the debt, or dictate terms for a loan modification in the borrower’s advantage.

3. Why have loan modifications and foreclosures become the predominant answer for so many in distressed property situations, and why can this be problematic?

The reason why loan modifications and foreclosures have become the answer for so many is because many real estate professionals erroneously consider the short sale process to be too complex. Not knowing how to orchestrate the transaction and not having the correct forms and contact information with all the different parties is overwhelming for many Realtors, so they forego an option that would otherwise be in the owner’s best interest. The result is unnecessary spending of tax payer’s funds that are being used for the alternative solutions, when capital contributions from the ‘street level’ can be used to offset the losses and payoff the delinquencies without requiring such taxpayer contribution.

For specialized assistance in the short sale process, consider discussing your options and the entire process with a specialized short sale consultant.

4. Why is a short sale strategy more advantageous than a loan modification or foreclosure approach?

The reduced payoff in a short sale can release you from the debt obligation. This allows you to re-establish your credit faster and re-enter the market much wiser. A loan modification actually builds a debt trap around the borrower who is emotionally attached to a property, milking the borrower for every last nickel. A foreclosure ruins a homeowner’s credit and takes a much longer time period to recover from.

If you find out you need more work to fix your credit, consult with a credit repair specialist to discuss your options and find out what is right for you.

5. I’ve heard borrowers in default need a ‘General Public Disclosure?’ Why

Many people are not aware of the ‘alternatives’ when facing foreclosure. The state and the federal agencies do not provide any literature to default borrowers as a ‘preventative’ measure. Knowing your options, as detailed on a General Public Disclosure document, can make all the difference in establishing a deal that’s in the homeowners’ best interest.

Source:   Marian Anthony (RISMedia): Real estate finance expert, author and speaker, Marian Anthony is the President of Anthony Realty Group (ARG)–a San Diego-based consumer advocacy agency that helps educate real estate professionals throughout Southern California to better assist home buyers and investors. Anthony is also founder of the California Default Mortgage Hotline—a non-profit public interest group availing financially-stressed homeowners in mortgage default with validated information and industry resources.

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New Policy: Fannie Mae will Penalize Borrowers who Walk Away

Seven-Year Lockout Policy for Strategic Defaulter

Fannie Mae  announced today policy changes designed to encourage borrowers to work with their servicers and pursue alternatives to foreclosure. Defaulting borrowers who walk-away and had the capacity to pay or did not complete a workout alternative in good faith will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure. Borrowers who have extenuating circumstances may be eligible for new loan in a shorter timeframe.

Fannie Mae will also take legal action to recoup the outstanding mortgage debt from borrowers who strategically default on their loans in jurisdictions that allow for deficiency judgments. In an announcement next month, the company will be instructing its servicers to monitor delinquent loans facing foreclosure and put forth recommendations for cases that warrant the pursuit of deficiency judgments.

Troubled borrowers who work with their servicers, and provide information to help the servicer assess their situation, can be considered for foreclosure alternatives, such as a loan modification, a short sale, or a deed-in-lieu of foreclosure. A borrower with extenuating circumstances who works out one of these options with their servicer could be eligible for a new mortgage loan in three years and in as little as two years depending on the circumstances. These policy changes were announced in April, in Fannie Mae’s Selling Guide Announcement SEL-2010-05.

Source: Fannie Mae

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4 Important Enhancements: More Help for Homeowners

Improvements to the Home Affordable Modification Program (HAMP) – More Help for Homeowners

1. Temporary assistance for unemployed homeowners while they search for re-employment

• Mortgage payments reduced to affordable level for a minimum of three months, and up to 6 months for some borrowers, while eligible homeowner looks for new job

2. Requirement to consider alternative principal write-down approach and increased principal write-down incentives

• All servicers required to consider alternative modification approach that emphasizes principal write-down with incentives based on the dollar value of the principal reduced

• The principal reduction and the incentives will be earned by the borrower and investor based on a pay-for-success structure

3. Improvements to reach more borrowers with HAMP modifications

• Improvements to borrower solicitation requirements including clear performance timeframes for both servicers and borrowers and a prohibition against initiation of a new foreclosure referral when a borrower is cooperating with the servicer to obtain a modification

• Borrowers in active bankruptcy must be considered for HAMP upon request  Increased incentives for servicers to provide permanent HAMP modifications  Expansion of HAMP to include homeowners with FHA loans

4. Helping homeowners move to more affordable housing

• Relocation assistance payments to homeowners receiving foreclosure alternatives doubled

• Increased incentives to servicers and lenders, including increased incentives for extinguishment of subordinate liens, to encourage more short sales and other alternatives to foreclosure

Download the HAMP Enhancements Overview report (pdf) for more information.

Source:  The Washington Report (NAR)

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Gov’t to Speed Up Mortgage Relief – What’s the bigger issue?

In horse racing, it’s called showing the horse the stick, and the U.S. Department of Treasury gave the nation’s largest mortgage companies a long look at it Monday [Nov. 30, 2009].

Now, it will have to see how they respond.

Concerned that mortgage firms were moving too slowly to get struggling homeowners into affordable permanent loans, the Obama administration announced a series of immediate steps, sending so-called SWAT teams into lenders’ offices; promising twice-daily progress reports and threatening financial sanctions and public shame if results don’t improve.

Assistant Treasury Secretary Michael Barr said the banks simply have “not done a good enough job” in moving people to permanent loans.


What has happened so far

Overall, the administration considers its Making Home Affordable program — announced last February — a success, at least so far. With financial incentives for companies that service loans and collect payments, as well as for the lenders themselves, the intent remains to modify 3 million to 4 million home loans by 2012 for people paying more than 31% of their income for their monthly mortgage.

But nine months in, only 651,000 loans — about 1 of 5 eligible loans nationwide — is under a trial modification, envisioned as a 3-month-long period during which the mortgage companies collect documentation from the borrower and make sure he or she can afford the new amount. If not, the loan can revert to earlier terms, making foreclosure more likely.


The bigger issue

John Courson, president and chief executive of the Mortgage Bankers Association, said lenders and servicers are not dragging their feet because the incentive is already there for them not to. The payments they stand to get under the program are withheld until modifications are permanent.

It has become clear, he said, that some people can’t document the income they say they have to qualify for the program; in other places — particularly in hard-hit areas like Michigan, where joblessness is high — people have trouble paying even the lesser amount.

“If you don’t have a job and you don’t have adequate income,” Courson said, “you can’t make the payment.”


Full article: Todd Spangler (Free Press Washington Staff)


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Why are Short Sales rising?

What is a short sale?

A short sale is a transaction in which the lender, or lenders, agree to accept less than the mortgage amount owed by the current homeowner. In some cases, the difference is forgiven by the lender, and in others the homeowner must make arrangements with the lender to settle the remainder of the debt.

Why is the number of short sales rising?

Due to the recent economic crisis, including rising unemployment, and drops in home prices in communities across the nation, the number of short sales is increasing. Since a short sale generally costs the lender less than a foreclosure, it can be a viable way for a lender to minimize its losses.

A short sale can also be the best option for homeowners who are “upside down” on mortgages because a short sale may not hurt their credit history as much as a foreclosure.

As a result, homeowners may qualify for another mortgage sooner once they get back on their feet financially.

Resourceful links to Short Sale policies:

Freddie Mac Short Sales Commission Policy (PDF 128K)  (Oct. 27)
Fannie Mae Short Sales Commissions Policy and Appeals Process (PDF 299K) (Oct. 27)

Foreclosure Alternative Program Fact Sheet (PDF 44K)

Source: National Association of Realtors

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What is Loss Mitigation?

Loss mitigation comes about when a homeowner is in danger of losing his property to foreclosure. When this happens, the bank or financial institute with whom the homeowner has the loan will sometimes bring in loss mitigation in order to modify the loan in such a way that both parties can continue working together and avoid foreclosure. Lending institutions are typically more willing to engage in loss mitigation the sooner the homeowner lets them know he is in danger of being unable to pay the mortgage.

Function
In engaging in loss mitigation, the lender is attempting to salvage the terms of the loan, in the hope that the homeowner will be able to return to the original terms of the deal in the near future. In the meantime, the loan may be modified in a variety of ways, including lowering the interest rates on the loan, reducing the balance or forgiving past fees and defaults.

Types
Loss mitigation does not always include simple readjustments of the terms of the loan agreement. Sometimes the lender and homeowner will agree to a short sale. This means the lender will accept a full payoff of the loan, even though it is not what the balance of the loan is truly worth. This way, the homeowner can turn around and sell the home for its full value. The bank may also engage in short refinance, where they knock a few thousand dollars off the balance so the homeowner can refinance with another institution.

Benefits
Loss mitigation typically benefits both the homeowner and the lending institution. The homeowner is able to avoid foreclosure and possibly bankruptcy, sparing himself an enormous black mark on his credit, as well as putting him in a difficult situation with his homestead. It benefits the lender by reducing the hit they would take if they went through with foreclosure, which can put a great deal of financial stress on a lending institution.

History
Loss mitigation is nothing new, but it’s only since 2006 that the field has experienced such growth. This, of course, is a product of the housing market decline, which saw many families being forced to the point of foreclosure when they lost their jobs, or simply because they misunderstood the terms of the original (often predatory) loan. Before that time, loss mitigation was used sparingly, and accounted for only a small section of a lending institution’s total workforce department.

Considerations
Loss mitigation is preferable to foreclosure (especially for the homeowner) in almost every situation, particularly in the housing crisis. With homes declining in value, and an uncertain future when it comes to a rebounding market, homeowners stand to lose tremendous amounts of equity in their mortgages. Without this equity, straight refinance is difficult to achieve, and negative equity can result. When this happens, we will see (and have seen) a situation where homeowners are willing to skip loss mitigation and allow the home to go into foreclosure.

Original article by Shawn Bryan.


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When should you consider a Loan Modification?

Besides the attractive interest rates on the current mortgage market, banks are also offering new incentives such as the New Homeowner Stimulus Programs which allow Home Loan Modifications for homeowners with existing mortgages. This presents you with opportunities to get into a better home loan arrangement.

If one of the following scenarios describes your situation, applying for a home loan modification will be a good move for you.

Scenario One

Unexpected circumstances have caused hardship in your financial situation. You want to save your home from foreclosure or a short sale. If you can get into a different payment program which will defer your payment for a short period of time and lower your interest cost on the remaining balance of the mortgage, then a loan modification is definitely worth consideration. In many cases, your expected mortgage payment will not exceed 31% of your monthly gross income, and the late fees and penalties will be waived. Consult a reputable agent who knows the Standard Waterfall Guidelines for more details.

Scenario Two

You should apply for loan modification if you have a bad or toxic mortgage on your home, especially if the home loan you have is based on negative amortization. This means that the amount of balance you owe will increase with time since your monthly payment falls below the true interest amount due. Through the Home Loan Modification program, you can convert your present loan to a safer, fixed-rate conventional home loan that ensures that the principal on your mortgage will decrease over time and be paid off at the end of the loan term.

Scenario Three

There is a change of your income level due to retirement or employment status. You may wish to access part of the home equity accrued during past years of ownership. You may wish to improve your cash flow. Now is your chance to modify your home loan to a longer term, especially when you are offered a good interest rate for a longer term loan. Some loans can even be extended beyond 30 years. You always have the option of paying more into the principal when you wish.

In all of the above scenarios, a critical part of the decision is to seek help from a reputable agent who is knowledgeable and honest. Many people have fallen into traps when they place their trust in a questionable agent or broker. A good agent will seize the good opportunities for his/her clients without rushing them into transactions they do not feel comfortable with.

Original article by Spring Stillman.

To see how a Loan Modification program could be right for you, visit us online.

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