What is a Short Sale and is it right for me?

March 15, 2011

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Have you wondered what a Short Sale is? 

Is it right for me?  What’s involved?  What are the long-term ramifications?

A Short Sale is:  A sale and closing of a property when the underlying lender(s) are not paid the full amount that they are due, under the terms of their current mortgage note.

Many people have heard rumors and mis-information about this process… let’s see if I can shed some light on the process for you.

For years, Realtors have been assisting clients with navigating the frustrating process of potential Loan Modification and/or Short Sale in order to sell their home. 

There are many types of relief that a homeowner can seek to try and avoid foreclosure of their home.  The type of loan that you have will determine what options may be available to you – way too many possibilities to discuss here.  If your plan is to stay in your home for 2 years or more, I would suggest you consider engaging one of the many third party entities that provide in-depth financial analysis & assistance navigating loan modification options with your lender/government programs. They also can provide other long range financial/budgeting assistance.  This would not be a Realtor… and this service from a third party is subject to a variety of fees.  Ask lots of questions before hiring someone to help you.

If, due to a major change in your financial situation, your home is no longer affordable for you in the long-term, a Realtor maybe able to help.  Involvement of a Realtor can be very helpful and cost effective in this situation…but first you must have decided that you are not going to try and stay in the home long-term.  There are Realtors in the marketplace with specific training and expertise in assisting in Short Sales.  If you are considering trying to attempt a Short Sale, make sure you are working with a one of these Realtors. 

Here is a checklist of issues that might help you decide if Short Sale is possibly a viable option for you:

  • Are you current on your mortgage payments?
  • Are you able to make next month’s mortgage payment?
  • If you are or are about to be behind in mortgage payments; do you have the ability to make up the payments (with penalties and interest) in the future?
  • Are the reasons that you are behind in payments a short-term issue?
  • Do you want to remain in this home as your primary residence for more than 2 years?

If you answered “yes” to any of the above, then you are probably better served in looking at other loan modification possibilities.

If you answered “no” to all of these, then you are well on your way to a likely foreclosure on your home – a short sale may be advisable.

In order to complete a Short Sale, you will need to provide your lender with the following information:

·        Hardship Letter– describing in detail why you can no longer make the mortgage payments in full.

·        Monthly Household Budget – showing that there is not enough income to support your monthly bills and the full mortgage payment.

·        2 months of paycheck stubs – for all sources of income.

·        Profit and Loss statement – if any self-employment income

·        2 months of statements – for all checking, savings, and retirement accounts (or most recent quarterly statement).

·        If the property is listed for sale with a Realtor– a copy of the listing contract, any amendments for price reductions, MLS data sheet, MLS pricing history report.

·        An Accepted Offer to Purchase – from an unrelated buyer.

·        A preliminary Title Insurance search

·        A HUD-1 estimated closing statement– based on the proposed accepted offer to purchase.

·        Authorization Form – if you want anyone other than you to help in the communication with the mortgage holder, then you must sign an authorization to allow the mortgage company to communicate with that person (likely your Realtor).

Much of the above is requested by the mortgage holder in what they refer to as “the package” that they will send you to fill-out.  Once “the package” is returned to the mortgage holder, they will verify all the information is there and complete.  This takes several days.

Then they will place your file in their Loss Mitigation Dept. for 120 days, in order to process your request.  Most mortgage holders do not report negatively to the Credit Bureau any missed payments once your file enters Loss Mitigation status.  Also, they typically suspend the foreclosure processing and any debt collection calls to you.

Now you wait… and wait…. until a negotiator from the Loss Mitigation Dept. is assigned to your file.  Depending on the mortgage holder, this can take from 30 to 90 days typically. 

Usually just before a negotiator contacts you or your agent, an appraisal will be ordered for your home to establish a third party opinion of value for the mortgage holder.  This value will be used when calculating the adjusted payoff demand from the mortgage holder. Hopefully, it’s a lower demand than what is actually due.  

You as the seller might be required to pay certain closing fees or costs associated with the accepted offer (home warranty, etc.) in order to get approval.  If you are given approval and a payoff figure that can be paid from the net proceeds of the accepted offer price, then you can close.  It’s likely that you will be required to close in a very short time- 14 days or so from the approval or your file.  If you can not do this, then the mortgage holder must re-evaluate the file for approval based on an achievable closing date.

Why would you go though all of this?

Well, for some people, they feel strongly that “morally, it’s the right thing to do”.   They just can’t hand over the keys to the mortgage holder and walk away leaving the “bank” with the problem…

But for most people there is an important future impact that makes them want to go through the process… 

According to mortgage lenders, a Short Sale can allow you able to be approved for another mortgage in roughly 3-5 years.  This could be longer or shorter depending on your unique individual circumstances and what you do to re-establish good credit history, after the closing.

Having a foreclosure (Sheriffs Sale, Deed in Lieu) in your history will likely make it impossible to get a mortgage loan for 5-7 years, after the final court date- again, depending on your situation and what you do post foreclosure to re-establish credit.

Believe it or not, this is a highly simplified version of the process.  As you can see, it takes a lot of coordination and communication on the part of the seller, the buyer and any Realtors involved.  That is why it’s in your best interest to get experienced well-trained short sale help.  Having the right people in your corner – people that you trust – can make this a reasonable and dignified process. 

In these economic times, many, many good people find themselves in very tough positions- with many hard decisions to make.  It seems most of us think that this is a problem for “someone else”, “in another neighborhood”, “I’ll never be there”- watch out!  I have helped people in every price point of home through the short sale process. Chances are, you know someone who has been though this or is going through this right now… and they just did not tell you about it.

Questions?…  I am sure you have many. 

I look forward responding to your posts.

Tom Weber, Manager First Weber East Towne office

photo credit http://www.flickr.com/photos/lwr/4486713705/


Thank you for reading the First Weber Wisconsin real estate & Wisconsin living blog for information on what happens in a short sale situation and how to determine if a short sale is right for you.

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