Every day, I look at the pre-foreclosure list on Staten Island (lis pendens), and I can honestly say that the majority of these homes either never enter the market or, if they do enter the market, they don't sell at all. It has come to my understanding that many homeowners never do anything about their situation. In all honestly, I can see why; it's a combination of many factors: uncertainty of their financial situation, anxiety, failure, and embarrassment all factor into the lack of seeking help. Now is as good a time as any to review the basics of a short sale.
What is a short sale?
When a homeowner can no longer afford to continually pay their mortgage, they have more options than having their property foreclosed. One of those options is a short sale, also called a short pay. In the case of a short sale, the homeowner will have to sell their home for less money than is owed to the bank. Due to the current conditions of our market, short sales have become quite popular.
Who is qualified?
everyone who wants a short sale is able to get one. To be considered for a short sale, a homeowner must demonstrate hardship. Hardship can be one or more of the following examples: loss of employment, a change in salary, divorce, a medical condition, job relocation, business failure, or the loss of a spouse.
How does a short sale work?
When you apply for a loan, you do everything possible to prove to the bank that you can afford to pay the loan. When it comes to applying for a short sale, you do just the opposite; you want to do everything possible to prove to the bank that you cannot afford to pay the loan any longer.
A short sale package is a combination of the following:
• A hardship letter
• The last two week of pay stubs
• The last two month of bank statements
• The last two years of tax returns
• Secondary and any other existing liens
• A copy of a listing contract
• A comparative market analysis to demonstrate adequate listing price
A hardship letter is a detailed, written explanation outlining the reason to justify a short sale. If you are unemployed or did not file taxes, a letter explaining your situation is necessary. In addition, an itemized monthly expense statement is expected. Lenders also require the homeowner seeking consideration of a short sale to hire a licensed Realtor to market and manage the sale of the home.
The government has actually created incentives for homeowners, mortgage banks and loan servicing companies, to encourage short sales, in lieu of foreclosure. When a homeowner carries out and completes a short sale, they will receive a total of $1,500 in distribution to help cover some of the moving expenses. You may ask yourself why our government is encouraging short sales. As struggling homeowners faced with unemployment and loan modification programs being no longer available, more and more homeowners are in default.
What is the bank's roll in the process?
A short sale must be approved by the bank in order for it to take place. The good news is that banks are interested in cooperating more frequently now than ever before. While the Short Sale Contract awaits acceptance, the lender will continue to foreclose. If the bank does not accept the Short Sale, the house would go to auction. Many fees would be associated with this, which the bank would have to pay. In some cases, the bank would eventually have to take the house back, which they do not want to do.
What is the Realtor's roll in the process?
The process of completing a short sale for a real estate agent is not an easy task to uphold and requires a lot of knowledge, experience, time, and dedication. One of the things I understand when helping a homeowner in distress is that time is of the essence. I understand that until the short sale closes, the property is still on its way to foreclosure. The foreclosure clock is ticking, so gathering all necessary documents and having them ready to go is a must.
It was only a few years ago that short sales were extremely lengthy and could take up to nine months to complete. I remember the first time I completed a successful short sale in only thirty days for a homeowner at 32 Danny court in Staten Island, NY 10314. This was a true indication that lenders had finally improved their process and put a system in place. These days, short sales take less time and are handled more efficiently, as long as a complete short sale package is accompanied with a contract of sale.
As I write this, I remember receiving a phone call on a Friday afternoon from a homeowner at 38 Country Lane in Staten Island, NY 10312. The caller was anxiously crying for help, telling me that her home was going to be sold at a foreclosure auction in seven days. She told me that her family would wind up on the street, as they had nowhere to go. I felt hopeless at first; I can still remember thinking to myself, Oh my god! Seven days is not enough time-how am I going to help this family of five with a cat and a dog, and keep them in the house, at least for now? We filed an order to show cause and were able to stop the foreclosure auction sale. The house was then sold three months later.
I know that it's difficult to make personal financial adversity public, but it can be worse if you don't take action and seek help-especially when help is available to you.
What are the Credit Score consequences?
Late payments will definitely exacerbate your credit score. By the end of a foreclosure, these missed payments may add up to an entire year's worth. A foreclosure will usually result in the loss of 250 to 300 points off of your credit score for a period of three years. However, a short sale will be noted on your credit report as "final settlement" and will only deduct fifty points from your credit score for a period of only twelve to sixteen months on average.
A foreclosure will show up for five years when applying for a loan from Freddie Mac or Fannie Mae. With a short sale, a period of only two years will be considered on a primary residence home. If you are an investor and your investment property resulted in a foreclosure, it will take at least seven years before you will be considered for a loan.A foreclosure will stay on your credit report for ten years; a successful short sale is not reported on your credit report.
What are some other ways that a short sale is more beneficial than a foreclosure?
Will a $1,500 incentive entice homeowners to complete a short sale? Well, maybe not as much as we think. However, there are far greater benefits here to consider. The greatest benefit of a short sale, as opposed to foreclosure, is avoiding the associated issues which arise with foreclosures, known as a deficiency judgment. A deficiency judgment, known to the I.R.S. as debt relief, is the end result of a court case-you have a civil action against you for the uncovered portion of the mortgage balance, you've been sued, you've lost, you owe the bank a certain amount of money, and a judge orders that you must repay the debt. This is the worst scenario in a foreclosure action. The deficiency judgment itself has a new trade line to your credit report in addition to a trade line you already have in foreclosure. The judgment is good for twenty years; it will not allow you any credit at all until it is paid and removed from your credit report. As we in the United States all know, without credit, there's not much we can do.
Foreclosures are also much more public than short sales. They involve much mail being sent to the homeowner's house on a daily basis, along with calls from the bank to their home and even their workplace.
Employers are increasingly relying on background and credit checks as one of the determining points for eligibility, so a foreclosure may affect your current or future employment status. In addition, loan applications will not ask about short sales. They will, however, ask if you have ever had a foreclosure.
How does this make the future brighter for homeownership?
Homeownership in the future can be done in half the time it takes to do a foreclosure, when doing a short sale. A foreclosure implies that no action was taken by the homeowner to try and resolve their financial obligation and a short sale, negative though it may be, implies that an initiative to resolve the situation was taken.
Homeowners: If you are in a distressed financial situation and a hardship prevents you from making your monthly mortgage obligations and selling your home for more than what is owed to your lender in today's real estate market, you must make sure that you have an agent who has much experience in short sales. While the success of short sales nationwide may be less than thirty percent, that is not completely true for every agent. When dealing with a short sale, you really only have one shot, so you want to make sure that your chances of success are high. All I can say is that I can most certainly help. The service is free, the consultation is free and most importantly, it is handled with the utmost compassion and care.
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