Short Pays (aka Short Sales)
Short pay-offs and redemptions are alternative techniques to allow an owner to close on the sale of property worth less than the debts secured by it. Depending on the circumstances surrounding a particular property and seller, either alternative may be possible with each option having its own pros and cons.
A "short pay-off" or "short sale" is a transaction in which a lender agrees to accept less than it is owed to permit a sale of the property which secures its note. (Throughout these materials, the term "lender" or "lenders" refers to the collection of institutions aligned on the "lender's" side, which might include the holder of the note, a loan servicer, and a private mortgage insurance company.) HUD seems to call these sales "Pre-Foreclosure Sales."
In a typical short pay-off, the lender agrees to accept the net proceeds from the closing (the sales price, minus the cost of closing the transaction, including your commission), perhaps with some additional consideration from the seller (such as a promissory note) in exchange for releasing its lien. Lenders do not agree to short pay-offs to be generous. In negotiating the short pay-off, the lender needs to be convinced that it will come out better than it would by foreclosing on the property and pursuing the seller/borrower for its losses. Though short pay-off procedures vary somewhat from lender to lender, most lenders need to be convinced of the following:
The sales price under the proposed contract is equal to or higher than the amount for which the lender would be able to sell the property after a foreclosure. The lender will require a market analysis from the REALTOR®; listing the property. The lender will often confirm the market analysis by contacting its own sources, such as an appraiser or the real estate agents which handle its REO sales.
The commission under the proposed transaction is equal to or less than the commission it would pay its agent for selling the property after foreclosure. The lender will want to know as precisely as possible the amount of proceeds it can expect to receive from the sale. The more precise the estimate, the better.
The lender will want an explanation of the circumstances which created the need for the short pay-off transaction. Common explanations include divorce, medical problems, death, birth of a child taking one wage earner out of the work force, birth of children making the existing home too small, loss of a job, or a job transfer creating the need for a move.
That the seller doesn't have the money to make up the shortfall on their own. To verify the financial condition of the seller/borrower, the lender will require: financial statements showing the seller's assets, liabilities, income, and expenses; the seller's tax returns for the previous two years; and the seller's paycheck stubs for the most recent pay periods. The most common disputes which arise in short payoff sales concern the seller's financial condition. On the one hand, the lender will be reluctant to approve a compromise without having the ability to analyze the financial strength of your seller. On the other hand, if this information is provided, there are potentially grave consequences for your seller if a short pay-off is not approved. The lender will have a significantly easier time pursuing your seller for a post-foreclosure deficiency. In certain circumstances, providing the financial information actually decreases the likelihood of closing on the short pay-off.
A borrower with minimal assets, little income, and a willingness to file bankruptcy has little to lose by providing financial information. However, most candidates for short pay-offs have some assets, a good job with garnishable wages, or a desire to avoid bankruptcy. Candidates for short pay-offs need legal advice regarding the advisability of submitting financial information to the lender. Though a refusal to submit financial information to a lender greatly decreases the chances of closing, a refusal to submit financial information does not necessarily preclude closing on a compromise sale.
If you are in the early stages of the foreclosure process and would like to consult with a representative as to how you can stop the foreclosure by requesting a Short Pay-Off or Short Sale, call 805-279-0143 for a free consultation. You may have options.
If you are looking to purchase a distressed property in foreclosure or Short Pay-Off or Short Sale request, call 805-279-0143 for more information or for a list of available properties.
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When considering whether or not to hire us to help you sell your property, it’s important for you to completely understand the foreclosure process.
In short, rather than facing a foreclosure, a homeowner would want to apply for a SHORT SALE with the bank, simply to prevent long-term tax, legal &/or credit consequences, which are typically more harmful to you down the road.
I recently read an article online that helped explain the process briefly. It read:
Short Sale and Foreclosure Effects on Credit
The Impact of Short Sales / Foreclosures on Credit Reports
Sellers may wonder whether a letting a property go into foreclosure would be easier and smarter than going through a short sale. With a foreclosure, and depending on state laws regarding foreclosure, a seller could stay in the property, essentially rent free, for four months to a year before being forced to evacuate. But that fact alone does not mean a foreclosure is better.
Whereas a short sale involves offering the home for sale, generally listed through MLS. Potential home buyers will make appointments to view the home, some will make lowball offers, agents might hold open houses and, in general, a seller's life will be disrupted, all in the hopes that a buyer will buy the home.
Basics of a Short Sale
Short sales happen when a lender agrees to accept less than the amount owed against the home because there is not enough equity to sell and pay all costs of sale.
Not all lenders will negotiate a short sale, and that is why a real estate agent and/or a real estate lawyer can be a tremendous help by contacting the lender's loss mitigation department to find out.
You can't just wake up one morning and decide you're going to sell your home at a loss by asking for a short sale. Typically, lenders won't even consider a short sale if your payments are current. Lenders will be more agreeable to negotiation if your payments are in arrears. Plus, if you have cash assets, the lender might try to tap those accounts. Doing a short sale is not for the faint of heart.
How is the Seller's Credit Affected?
According to David Steep, division manager at Vitek Mortgage, sellers will take a bigger hit on their credit report by going through foreclosure or giving the lender a deed-in-lieu of foreclosure. Steep says the points lost on a FICO score are as follows: Foreclosure or Deed-in-Lieu of Foreclosure
Both of these solutions affect credit the same. Sellers will take a hit of 250 to 280 points. This means if a seller's FICO score before foreclosure was 680, it could dip as low as 400.
The affect of a short sale on a seller's credit report is much less damaging. The ding on credit will show up as a pre-foreclosure in redemption status, Steep says, which will result in a loss of 80 to 100 points. This means a short sale with a previous FICO of 680 will see it fall to 580 to 600.
Waiting Period Before Buying Another Home
Foreclosure or Deed-in-Lieu of Foreclosure
Steep says a seller who wants to buy another home after foreclosure will end up waiting about 36 months before a lender will offer any kind of interest rate that makes sense.
Short Sale
The good news for short sale sellers is the wait is much shorter before buying another home. "They can buy again in about 18 months at a good interest rate," says Steep.
Short Sale / Foreclosure Deficiency Judgments
The bad news is a seller could be subject to a deficiency judgment for the difference between the loan amount and the amount paid. In California, purchase money loans are not subject to deficiency judgments; however, hard money loans, equity loans and refinances are. Other states have laws regarding personal guarantees, which could also result in a deficiency judgment if the home owner is personally liable for loan repayment.
The lender has sole discretion whether to pursue a deficiency judgment in those instances when the judgment is permitted. To determine whether a pending foreclosure or short sale is subject to a deficiency judgment, talk to a real estate lawyer.
If you're a seller trying to decide whether to let a home go through foreclosure versus attempting a short sale, salvaging your credit is the main advantage to doing a short sale. But seek legal and tax advice before making that decision.
She goes on to say…
Qualifying for Short Sales
Short Sale Requirements - Do You Qualify for a Short Sale?
Short sales is a hot buzz phrase. Some sellers who decide that their home won't sell at the price they had imagined often start to wonder if they should do a short sale. A short sale doesn't always solve problems, but it most assuredly can create problems. Short sales are not the "saving grace" some home sellers would like to believe. What is a Short Sale?
A short sale happens when the lender is shorted on a mortgage, meaning the lender accepts less than the total amount that is due. If your mortgage is $100,000, but your home is worth, say, $90,000, you are $10,000 short, not including costs to close the sale such as real estate commissions, recording fees or title and escrow charges.
Sometimes, to avoid going through the costs of foreclosure, a lender will sanction a short sale by letting a buyer purchase the home for less than the mortgage balance while the home is in pre-foreclosure stage.
Here are sample steps of a short sale:
Seller signs a listing agreement with a real estate agent subject to selling as a short sale with third-party approval. The agent finds a buyer who makes an offer for less than the amount of the mortgage. Seller's lender accepts the buyer's purchase offer.
Transaction closes when the buyer delivers the funds, the lender releases the lien and the seller delivers the deed.
In fairy-tale land, everybody lives happily ever after. Except the seller. There are consequences.
Qualifications for a Short Sale
Before you eagerly climb aboard the short sale bandwagon, consider the following to determine whether you may qualify for a short sale. If you cannot answer yes to all four requirements, you may not qualify for a short sale.
The Home's Market Value Has Dropped.
The Mortgage is in Default.
A lender will not consider a short sale if the payments are current. As long as the lender is receiving timely payments, the lender is satisfied.
The Seller Has Fallen on Hard Times.
The seller must submit a letter of hardship that explains why the seller can not pay the difference due upon sale, including why the seller has stopped making the monthly payments.
Examples of hardship are:
Unemployment
Divorce
Medical emergency / sudden illness
Bankruptcy
Death
The Seller Has No Assets
The lender will probably want to see a copy of the seller's tax returns and / or a financial statement. If the lender discovers assets, the lender may not grant the short sale because the lender will feel that the seller has the ability to pay the shorted difference.
For example, if the seller has cash in a savings account, owns other real estate, stocks, bonds or even IRA accounts, the lender will most likely determine that the seller has assets. The short sales that get accepted are those where the seller has no money or assets.
Short Sale Consequences
A short sale is dependent on a buyer making an offer to purchase. If you do not receive an offer, you will not qualify for a short sale. So even if you meet all the other criteria, it is possible that no one will buy the short sale. It is also dependent on the lender accepting the buyer's offer. If the lender rejects the offer, a short sale will not take place.
Tax Consequences
If the lender agrees to the short sale, the lender has the right to issue you a 1099 for the shorted difference, due to a provision in the IRS code about debt forgiveness. Some situations are exempt from debt forgiveness according to the Mortgage Forgiveness Debt Relief Act of 2007.
You should speak to a real estate lawyer and a tax accountant to determine the amount of short sale tax consequences, and whether you can afford to pay those taxes, if any.
Blemished Credit Report
A short sale will show up on your credit report as a pre-foreclosure that has been redeemed. Short sales affect credit ratings. While the damage to your credit report may not be as significantly bad as a foreclosure, for example, some creditors may not make the distinction. Always seek legal counsel before attempting to pursue a short sale. A real estate agent cannot give you legal advice.
Now, a lender will generally not consider a short sale if the payments are current. As long as the lender is receiving timely payments, the lender is satisfied. If you are not currently in default, that’s ok. The bank generally won’t speak to either of us until you are in default and won’t consider a negotiating a short sale and your credit unless you have an offer.
Once you’ve made the decision to apply for a short sale, you can expect the lender will require some or all of the following (which we will help you with):
· Authorization to Receive & Convey information
· Residential Listing Agreement
· Letter of Hardship
· Signed Purchase Contract
· Net settlement worksheet (estimate HUD)
· BPO (Broker Price Opinion)
· Completed financial statement
· Two (2) years income tax returns
· Three (3) months bank statements
· Payoff demand statement(s) from mortgage holder(s)
· Last 2 month’s mortgage stubs from lien holder(s)
· Copy of the NOD (if already filed)
As long as the property is salable (you’re willing to show it to agents/buyers, keep it clean, gather information as needed, etc.) we are fully committed to helping you through this difficult time.
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