Thursday, January 31, 2013

Short-sale process streamlined. 

A lot of people are asking this same question these days. To be specific, a “short sale” is when a mortgage lender agrees to accept less than full payoff on a home so that the owner can sell the property and get out from under the mortgage. It happens when a home is “underwater” or valued less than the current mortgage balance. It is estimated that as many of 30% all homes in the US are currently “underwater” but only a smaller percentage are candidates for a short sale.

Lenders have become more interested in short sales than in the past. They have learned that the home will usually sell for about 20% more than in foreclosure. The owner remains in the home until the day of settlement, which reduces vandalism, and the cost of upkeep.  The owner benefits too. The lender may agree to file a less incriminating  credit report and/or permanently “forgive” all or part of the deficiency. They will also have a place to live until the day of settlement.

Not all owners qualify for a short sale. As a minimum there must be some financial adversity. This means job loss, income reduction, death of a wage earner, divorce, illness or some other situation resulting in financial hardship. The fact that the home is underwater, or was an imprudent investment, does not constitute hardship by itself.  A borrower with a substantial income, net worth and significant assets, beyond the home in question, will not normally qualify. Does the homeowner have to be broke? Absolutely not. But if the borrower has other meaningful assets the lender may only agree to a partial deficiency settlement or arrange a payment plan over time. In summary, the lender wants to get as much as possible without pushing the borrower into further financial difficulty. Money in retirement accounts is generally considered "off limits" in terms of measuring the borrowers assets.

Does the borrower have to be delinquent or in default of his payments? In the past if the borrower was current the lender assumed he was managing despite the hardship and would continue to do so and a short sale would not be approved.  More recently however,  some lenders have adopted a more proactive posture and will consider an application from a non-defaulting borrower. The idea is to avoid foreclosure, which always results in higher costs and reduced proceeds to the lender. Lenders are very cautious about so called “strategic defaults” where the borrower deliberately withholds payments in order to build the case for a short sale. For that reason lenders require a complete financial disclosure as part of the short sale application. Concealing financial assets in a short sale is bank fraud and  should never be considered. 

How is a short sale implemented?  The borrower will normally retain a Realtor who knows how the process works. The Realtor will compare the loan balance with the current net market value, taking into account all the selling costs. If the net proceeds are short and the borrower has  experienced some financial hardship, the Realtor will contact the lender and get a short sale “checklist”. This is a list of all the documents the lender will require to consider the petition. It includes all bank and brokerage statements, several years’ tax returns, evidence of the hardship and other supporting documents. 

When a Contract results the lender will request an appraisal of the property or more likely a Broker Price Opinion (BPO) from a third party as part of their evaluation. The lender will assign a "negotiator" who will review the supporting documents, review the contract and either approve, deny or modify the request. Once approved, the owner and contract purchaser are clear to close. 

What happens to the borrower after closing depends on the outcome of the negotiations between the homeowner and the lender. In the ideal case the shortfall is "forgiven" and the lender files a credit report notation "satisfied at less than full amount". This is the standard notation for short sales. It will affect the owners credit score for 3 years and may prevent another home purchase during that period. It is much less damaging than a foreclosure. In the worst case the lender may require the owner  to bring money to closing from other resources or execute a promissory note for a portion of the shortfall. 

There are no adverse Federal or State Income Tax consequences if the property is a primary residence as per a recently enacted tax law. If it is investment property the "forgiven" portion of the debt is taxed as ordinary income,   

Each lender has its own policy regarding the initiation of an application. Some will not even consider a review until a contract has been executed. Others may indicate "preliminary approval"  at the listing stage. Your Short Sale Realtor should determine the policy of the lender in question. The review period varies by lender  and can be as short as two weeks or as long as several months. In general, the process has improved greatly over the past year. A common problem is buyers becoming discouraged if the process becomes too lengthy. On the other hand short sales often represent a bargain and that serves to keep the prospect "on the hook" for longer than normal .

The biggest obstacle to consummating a short sale is determining who own the mortgage and who is authorized to approve the deal. In some cases it is simple and straightforward. In others it is more challenging. Also, the expertise of various lenders and their service companies varies enormously. Some big lenders have gotten very good at it and others are just learning. 

Choosing a Realtor who understands the process in important. If the Realtor routinely does "BPO's" (Broker Price Opinions) for lenders that is a big plus. That Realtor will know how to set a price that conforms to the lenders expectations. If the price is too high the home won't sell. If it is too low the lender will balk. Unlike a regular sale the owner doesn't get any money at settlement. The objective is to get relief from the debt so maximizing the price is not the objective. Short Sales entail considerably more work for the Realtor so a slight increase in commission may be warranted. That is especially true if the lender requires the Realtor to "discount" the commission which has become quite common. . 

Readers having questions should email the undersigned

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