Q. Why would a Lender want to allow a Short Sale?
A. The reason is simple. A short Sale has a lowers loss severity on their investments than a foreclosure. The complete foreclosure process is very expensive and time consuming. The lender has to spend money with an attorney to foreclose, and then spend more money with an attorney to evict. They often have to put money back into the property to get all the junk/trash out and do rehab. They then have to hire and pay for a realtor to sell it. With no mortgage payments coming in, the losses keep mounting with each month that goes by. In a downward trending housing market like today, as each month passes, that house is worth less and less. So if they could take that money today (even at a loss), skip the foreclosure process and cost involved, and reinvest it in a new mortgage where they will start earning interest they come out ahead. Thus, it is in their best interest to do a short sale if the sales price they are accepting is close to the market value of the asset.
Q. How does a foreclosure versus a Short Sale show up on the homeowner’s credit?
A. It depends on how the creditor reports to the credit bureaus. Generally, a foreclosure will show up as FLORCLOSURE, and can stay on the homeowner’s record for up to seven years. Anytime the homeowner applies for a new loan or has their credit run, the foreclosure will likely show up. More and more employers are running credit for job applicants. A Short Sale is listed as SETTLED DEBT, and is much less harmful to the homeowner’s credit than a foreclosure. It is not Paid in Full as it would be if the full balance was paid off on the mortgage, but a Short Sale is much better credit wise than a foreclosure. Please have your homeowners consult a credit company for more information.
Q. How long does it take to complete a Short Sale?
A. Every situation and mortgage servicer is different but a number of items can accelerate the process. A Large part of the success will depend on you, If you get the “Homeowners Package back very quickly, it will help tremendously in setting up the file. Additionally, once an offer is received, the short sale package is sent to the Mortgage Servicer, the current average turnaround approval is 30 days. Some lenders are better than other and this is an average.
Q. I have a client who has an Auction Date coming up soon, can that be postponed?
A. As long as we can build a good completed Short Sale package to the Mortgage Servicer there is an excellent chance of postponing the Auction Date. Most Mortgage Servicers DO require an offer on the property to consider postponing a sale date. Thus, a completed “Listing Package” must be received by your realtor and or person/company negotiating your short sale. If this is done at least two weeks before the Auction Date, a great chance for postponement exists.
Q. Can we still complete a Short Sale after the Auction Date?
A. Typically the answer is NO. After the Auction Date, there is a small window of time where the sale is finalized and the title is transferred to the new owner. After that title has been transferred, the homeowner no longer owns the property and that listing agreement is no longer valid. Thus, no Short Sale can be completed. However, in some states, there is a redemption period. If at the Auction, a mortgage servicer is the winning bidder, a Short Sale can still be negotiated.
Q. What is a Deficiency Judgment?
A. When a creditor(lender) files a lawsuit for a judgment against the debtor(borrower) through the courts in an attempt to collect an amount not covered by the value of the security that was put up for the loan or installment payments? In other words if the Lender recoups less money than owed, whether it be via a Short Sale or Foreclosure, then they have the right to collect whatever that difference is. However, with the right negotiator working on the borrower’s behalf, the deficiency judgment rights can be waived. Some states do not allow for a deficiency judgment to be pursued, depending upon the type of the foreclosure and loan.
Q. What is a 1099-C?
A. If a federal government agency, certain agencies connected with the Federal Government, financial institutions, credit unions, or an organization having a significant trade or business of lending money (such as a finance or credit card company) cancels or forgives a debt on which you owe $600 or more, this form must be provided to you by that canceling agency or lender.
Q. What liability does the homeowner have when doing a Short Sale?
A. In a Short Sale, it is possible the bank could issue a 1099-C to the homeowner for the deficiency in what the lenders are forced to cancel. This means the homeowner could face a taxable income of that difference on their taxes. If the homeowner has a negative net worth (including the house), this can often be canceled so there are no tax consequences that occur from the 1099-C.
The lender will sometimes ask the homeowner for an unsecured note for that cancelled debt or portion of it. This is similar to an I.O.U. However, when it must be done to make a Short Sale go through, often a partial amount of the cancelled debt is required in the form of an unsecured note often at great terms, such as 0% interest. In those situations, the other potion of the cancelled debt is considered settled and forgiven.
If the homeowner falls behind on their payments they will likely experience a negative late payment on their credit file. A mortgage late on the homeowner’s credit report may impact the ability of the homeowner to get credit in the future, or the rate at which he may borrow.
There are no guarantees a Short Sale will be accepted by the lender. A lender has the right to demand the full balance owing to them and not a penny less. This is not generally in the best interest of the lenders if the offer is at or near market value, hence the lenders are doing Short Sales. However, should they choose to not accept a Short Sale, the property may go to foreclosure auction.
Q. Does the homeowner need to give me or my company power of attorney to conduct the Short Sale?
A. No, homeowner’s should not give a power of attorney to Short Sell their property unless under advisement of an attorney.
Q. What is a Deed-In-Lieu of Foreclosure? Is it better than a Short Sale?
A. A deed-in-lieu of foreclosure is when a borrower deeds the property back to the lender. By deeding the property to the lender, the borrower is giving up all right, title and interest in the property. The lender will then hire a realtor and look to dispose of the asset as soon as possible for the maximum value.
Additionally, lenders have requirements to qualify for a deed-in-lieu. They generally are:
The property is required to be listed on the market for at least 90 days before they will consider a deed-in-lieu.
No junior lien holders (like second mortgages)
Current on property taxes
In essence the same risks that occur for a foreclosure could still happen in a deed-in-lieu. It does not mean that all of them can occur, but they may.
Generally speaking, a Short Sale is a much better alternative than a deed-in-lieu because:
1. Tax liability reduction. There is no knowing what a lender may sell a property for when the lender owns it. Especially today’s environment, lenders are quick to dump their bank-owned property because of the rising inventory. So in s Short Sale, you know you are selling it for top dollar. There is no guarantee a bank may do the same.
2. You usually have to put it on the market anyways for a deed-in-lieu. Generally, you have to try to market and sell the property for 90 days. You may as well try to do a Short Sale in that time frame.
3. Better credit. A deed-in-lieu can show as a voluntary foreclosure. A Short Sale will usually show as a settled debt, which is much better than a foreclosure.
4. The homeowner gets to live there for free while you try to sell it as a short sale. This saves the homeowner money for their next home.
5. The lender may come after you for difference down the line. The lender in a deed-in-lieu in most states could still come after the borrower for the deficiency judgment. Who knows how large that will be too when you just leave the keys for the bank to sell it for whatever they want to.
Time is of the essecense when facing forclosure contact me today for more information or a free consultation. |