12/1/09

What is a “short sale”?

A short sale is a sale in which the bank that owns the mortgage agrees to allow the owners to sell the property for less than the current value of the mortgage- an amount “short” of the total amount due. The seller is then released from his or her obligation to pay the balance on the loan.

Why are short sales so common?

As you have likely heard in the media, home prices have been dropping away from the tremendous highs they reached over the past few years. Part of what drove prices up was the availability of adjustable-rate mortgages and interest-only loans that allowed people purchase homes they likely could not afford. These types of loans offered buyers low payments for a fixed term, usually of two years. After two years, the payments increased, either because the interest rate on the mortgage increased or because the buyer was now required to pay on the principal amount of the loan, rather than just the interest on the loan. The increased payment left many borrowers struggling to pay their mortgages. When combined with the effects of the slump in the job market, which left many homeowners unemployed or underemployed, the effects were catastrophic for the housing market. Large numbers of borrowers got behind on their payments, most ending up “upside down” on their mortgages, meaning that they owed more on the mortgage than the home was actually worth, thus many defaulted on their loans.

When someone defaults on a home mortgage, the bank has the right to foreclose on that property, meaning that the bank takes ownership, evicts the former owners, and usually attempts to sell the property to recuperate their losses. However, since banks are not in the real estate business, this process is time consuming and inefficient, especially because these homes have often suffered neglect due to the poor financial situation of their former owners. A short sale is often the preferred alternative to foreclosure, because the bank likely gets a better price than they would get on a foreclosed property with less hassle on their end. The former owner is able to stay in the home until it is sold, giving him or her time to make new arrangements. The buyer has a chance to get a great deal on a property, provided they have the patience to wait on the paperwork.

There are exceptions to this, of course; not everyone selling their home as a short sale is in financial straits. For example, if you purchased a home at the height of the market, intending to stay for some time, and ended up being transferred by work to another city, you might need to sell your home when values are down. If you would not have the resources to make up the balance on the mortgage after the sale, a short sale might be a wise choice.

How will a short sale affect my credit and my ability to get another mortgage?

This is one of the major benefits to a short sale over a foreclosure. A short sale is bad for your credit, but not as detrimental as a foreclosure. A strong credit score is important, because whether you lose your home in a short sale or a foreclosure, you will be unable to get a new mortgage for about three years; in that time you will most likely be renting, and you will want to bring the best possible credit score to your potential landlords. In the long run, a short sale is far easier to recover from than a foreclosure.

If you are having trouble making mortgage payments, it is best to talk to someone sooner rather than later. Kathy and her team are not just there to sell your home; because she believes creating a long-term relationship with her clients, Kathy is more than willing to work with you to find a solution, whether she sells your home or not.

Should I consider buying a property listed for short sale?

If you are looking to purchase a home listed as a short sale, prepare to wait. The entire process can take months. It can take 2-3 weeks for the lender to even indicate that they have received the initial offer and begin to decide how much they are willing to accept for a particular property. Once the bank responds positively, the real work begins. The next step is a home inspection, though foreclosure and short sales are sold as-is, since the current owners are not in a financial position to do repairs and the bank will not pay for improvements. This can be particularly tricky for customers with FHA loans, which have stringent requirements for the condition of the home purchased. The neglected state of many short sale properties is an obstacle requiring patience, dedication and the expertise of a seasoned realtor.

Kathy and her team have worked extensively on both ends of short sales, and she knows what works and what doesn’t.

Can I sell my property as a short sale?

Only your mortgage lender can decide whether your home qualifies for short sale, however, there are a few basic guidelines that can let you know whether this avenue is worth pursuing. The most fundamental requirement is being upside down on your mortgage; i.e., the amount of your mortgage is greater than the home’s current value. Beyond this, the requirements become a bit more stringent. The bank will not discuss options unless you are behind on your payments, and they may want a valid reason for leaving the home, such as a work transfer to a new city or state. You will need to provide financial documentation and letters describing financial hardship. Banks also often prefer that you have made an attempt to renegotiate your loan prior to applying for short sale.

You should also know that a short sale may not fully release you from all financial obligations; if the bank stands to lose a substantial amount of money, they may require you to sign a promissory note for a portion of the outstanding balance.

Please note that you cannot apply for a short sale without an active offer on your property. Lenders do not deal in hypothetical situations, but an experienced realtor can guide you through this complicated process. Kathy and her team have considerable experience working with banks to arrange short sales and marketing homes for short sale. Whether you are leaving the area or struggling to make payments, her expertise can help make the process as painless as possible.

I’m behind on my payments- when should I seek help?

Yesterday! The sooner you seek help the better. Kathy is not just there to sell your home; she and her team believe in developing long-term relationships with their clients. She will work hard to find solutions that keep you in your home, and she has experience working with a variety of lenders. If you have no choice but to sell, she can help you stay in your home as long as possible to give you the opportunity to get back on your feet and find a new place to live. The sooner you seek help, the more options you will have, so don’t wait until two weeks before your home is to be auctioned on the courthouse steps.

How long does a short sale take?

Short sales can take weeks and months to process, so patience is key. The name of the game is “hurry up and wait.” Most banks are heavily backlogged, so there is little that can be done to expedite the process, aside from making sure that the proper documentation is sent in a timely manner. This process can be frustrating for both the buyer and the seller; it can seem as though nothing is happening for weeks, and then suddenly a property is ready to close. A good realtor will keep you apprised of the situation. Kathy and her team know through experience when to push, and when pressure will only hinder progress.

If you are selling your home as a short sale, it is imperative that you bear in mind at all times that your home is for sale; delaying moving preparations will only cause you greater anxiety when the closing date finally materializes.

If you are considering purchasing a short sale property, make sure you have the patience to wait out the process; it is not a good option for buyers looking to move into a new home as quickly as possible.

What about bank-owned properties?

A bank-owned property is a property the bank has foreclosed on, evicting the previous owner for failure to pay his or her mortgage. These properties are not always in very good condition and are sold as-is; they may require serious work to bring up to a reasonable standard. Despite these difficulties, they are an excellent option if you are willing to put in some work to get a bargain. The state of these properties is due to the financial straits of the previous owner and his or her reaction to being evicted from his or her home. Banks are rarely inspired to do a great deal of maintenance on these homes, and so they also suffer from the neglect of being unoccupied. With a bit of patience and care, however, they can be restored into lovely homes full of personal touches.

Purchasing a bank-owned property is also time consuming, as again, banks are backlogged dealing with these properties, and FHA loans can complicate matters due to stringent requirements regarding the condition of the home, particularly in regard to environmental conditions like mold.