The Art of Short Sales » negotiation

Short Sale Questions and Answers!

Nick — Sat, 27 Feb 2010 19:46:38 +0000

Is a Short Sale RIGHT for the Borrower?

This is a question often asked by both people facing foreclosure.

Why would someone sell his or her house utilizing a Short Sale method? To put it simply, to avoid a foreclosure on the homeowner’s record and to decrease the length of time a lender will require prior to lending to the borrower again and the cost of a reduced credit score. How long? Lenders indicated 18 – 24 months of “Good” payment history on the borrower’s credit report for individuals who went through a short sale compared to 3 to 7 years for those that went through a foreclosure.

Everyone Wins

It isn’t often in real estate transactions that virtually all parties with a financial interest can be winners in the same transaction. A successful Short Sale is one of those rare situations where everyone wins.

The Seller Wins by avoiding foreclosure and all the credit damage that goes along with it. The property gets sold, all the loans get paid off, or forgiven and the existing lender pays all the sales costs. In most cases, the Seller has no out-of-pocket expenses.

The Mortgage Holder Wins by reducing the loss they absorb to get the delinquent loan off their books. Mortgage companies know that the costs associated with acquiring a property through a foreclosure hit their bottom line – hard. To resell the property, the mortgage company frequently needs to invest money in clean up and repairs, and they need to pay staff to manage and maintain the property as well. This is precisely why they have set up Loss Mitigation Departments to resolve delinquent mortgages before the foreclosure is complete.

The Buyer Wins by acquiring a property at below market price. While some Short Sales will be bigger bargains than others, nearly all Short Sales will represent a good deal for the buyer. This is especially true for buyers who intend on making the property their personal residence.

Why would a lender accept a short sale?

In today’s economy of rising foreclosure rates, most mortgage lenders are increasingly willing to work with borrowers faced with a financial hardship to accept a discounted payoff on a mortgage, more commonly referred to as a short sale. If a borrower is faced with a hardship that makes it likely that they will be unable to meet their obligation on their mortgage the lender typically prefers to settle the matter as opposed to taking the property through foreclosure.

If a lender does take back the property there are not any guarantees that they will recoup their cost and have their original loan paid to them when they sale the foreclosure property. Keep in mind, the lender would become responsible for a variety of costs, including property maintenance, utilities, HOA fees, and might risk destruction of the property by vandalism. Furthermore, lender-owned properties (REO) may take a long time to sell, in part because so many REO properties are now for sale.

Not to mention the reserve requirements. For a loan which is in “Normal” status, meaning that the borrower is making on time payments and is not delinquent or in foreclosure banks, must hold in reserve a certain percentage of their deposits. This number is usually around 3 percent of the deposits on hand. The issue is that banks must keep a reserve against anticipated losses. In fact, in the state of California, newly chartered state banks need to set aside reserves against loan losses equal to 5 years worth of losses for banks of similar size.

For all delinquent and non-performing loans lenders must set aside funds in reserve to deal with potential losses. Because of this, the lending power of a bank is diminished and the loss to the banks of their ability to make additional loans utilizing the same amount of reserve is extremely hampered.

If mortgages perform poorly after they are sold, it could impact the lender’s ability to sell their loans on the secondary market. A successful Short Sale gets the loan payoff resolved quickly.

Lender’s Options upon Borrower’s Loan Default

Foreclosure:

In order for a lender to recover their outstanding loan balance of a non performing loan, the lender may begin the foreclosure process and seize the property. To do this, the lender must foreclose on the defaulting borrower’s real property which secures the loan.

In the state of California, there are two types of “foreclosures”: A trustee’s sale and a judicial foreclosure.

On certain loans, a lender has no choice and must conduct a trustee’s sale. With a trustee’s sale, a lender cannot go after a deficiency judgment. A deficiency occurs when the current market value of the property is less than the loan on the property.

Loan Workout:

Basically, the borrower and the lender work out a modification of terms of the original loan agreement. Some of these options may include a forbearance agreement, deferment of outstanding loan payments, renegotiating the loans interest rate, which affects the monthly payment amount, even reduction of principal amount and loan payoff date.

Forbearance Agreement:

A Forbearance Agreement is a written agreement with your mortgage company in which you arrange to keep your home. The agreement will normally include two primary elements:

The borrower’s promise to remain current on the mortgage going forward

Some plan for making up the delinquent interest and other charges. It may mean making additional payments to the mortgage company or the delinquent amount could be added to the loan to be paid later.

Deed in Lieu of Foreclosure:

A deed to real property accepted by a lender from a defaulting borrower to avoid the necessity of foreclosure proceedings by the lender and cost associated to a foreclosure.

Short Sale:

A short sale is a transaction in which a lender allows the real property securing the loan to be sold for less than the remaining mortgage amount due and accepts the proceeds as full payment of the loan.

Short Payoff:

With a short payoff, the lender accepts less than the remaining mortgage amount as full payment of the loan. The property need not be sold. Just a note however, that some lenders do not differentiate between a short sale and a short payoff.

How is the Borrower’s FICO score affected?

The disadvantage for a seller who has a foreclosure is much greater over a seller who goes through a short sale. Here are the numbers involved:

Foreclosure on the Credit Score

A seller who goes through a foreclosure and has a foreclosure on their record may have a reduction of 250-280 points on their FICO. If the borrower started off with a FICO score of say, 725 prior to a foreclosure, after a foreclosure is posted against their credit score their FICO could be severely less then 500. What is worse, is that the foreclosure will be on their record for 7 years.

Short Sale on the Credit Score

The affect of a short sale on a Borrower’s credit report is much less damaging and the light at the end of the tunnel is much brighter. First, the short sale will show up on the borrower’s credit repost as a pre-foreclosure in redemption status rather then a completed foreclosure. The reduction of the borrower’s credit score is typically only 80-100 points. The above example would be a reduction from 725 on the FICO score to only a 625 FICO score. As you can see, the difference between a 625 FICO score and a sub 500 FICO score is tremendous.

Is the method by which lenders report a short sale a negotiable item?

Typically speaking, no. The short sale is usually reported to credit reporting agencies as settled for less than the full balance. Remember, the short sale shows up as a pre-foreclosure in redemption not a foreclosure.

What is a deficiency judgment?

A deficiency judgment is a judgment obtained by the lender in court against the borrower for the difference between the unpaid balance of the secured debt and the amount produced by sale or the fair market value of the security, whichever is greater, in a judicial foreclosure. A lender may obtain a deficiency judgment only with a judicial foreclosure. With a trustee’s sale foreclosure, the lender cannot go after a deficiency judgment.

There are five situations in which a deficiency judgment may not be pursued:

Trustee’s Sale – A lender may not pursue a deficiency judgment against the borrower should the lender opt to foreclose by a trustee’s sale foreclosure.
Seller Carryback – If the purchase money loan for any type of real property is financed by the seller and secured by that same property, the lender/seller may not obtain a deficiency judgment against the defaulting borrower/buyer.
Purchase Money – If the loan is obtained to purchase a residential 1-4 unit dwelling all or part of which is owner occupied and the loan is secured by that property, the lender may not obtain a deficiency judgment against the defaulting borrower. This loan is entitled to “purchase money” protection. Note, however, that should the buyer refinance the home, the new loan is no longer “purchase money.” Thus, the buyer would lose the protection against a deficiency judgment in the event of a default if the lender elects to use a judicial foreclosure process.
3 Month Time Limit – An action for a deficiency judgment must be brought within 3 months from the time of judicially-ordered sale.
Fair Value Limitations – A deficiency judgment is limited by the difference between the amount of the indebtedness and the fair market value of the property, unless the actual sale price exceeds that value.

Holders of a junior deed of trust (second, third, etc.) should note that if the “wiped-out” junior lien is not purchase money or seller carryback, then the junior lien holder may sue on the note and the borrower on the junior loan may be personally liable.

What are the hardships that a bank looks at as justification for approving a Short Sale?

(See our earlier blog post about writing a Hardship Letter for more tips!) The borrower must have a legitimate excuse for falling behind… The inability to pay the mortgage, the loss of a job, death in the family or an illness would be an acceptable reason to fall behind on your Mortgage temporarily.

A big key to getting Loss Mitigation to accept a hardship is to submit a strong hardship letter. The hardship letter sets the tone for the entire file.

Family illness or injury

Illness or injury in the extended family – particularly if it forces relocation

Job relocation when the property is equity deficient

Job loss or significant income loss

Divorce or split of domestic partners

Adjustment in mortgage payment or unforeseen increase in living expenses

Also keep in mind that if the borrower has other assets, like real property, or the ability to borrow money the lender is not going to accept borrower as having a hardship.

I am current on my mortgage; will my lender consider a Short Sale?

The answer is, maybe. Some lenders will accept a Short Sale file for approval on loans that are not delinquent. Other lenders will not accept the file until the loan is delinquent.

There are two loans; can a Short Sale still be accomplished?

Yes. You can work with both lenders (many times the same lender holds the 1st and the 2nd loans) to put together a Short Sale transaction. Even if the value of your home is below the balance of the 1st mortgage, you can normally get the two lenders to cooperate.

The property is in rough shape and needs work; can I still do a Short Sale?

Absolutely. In fact, lenders are more motivated to do a Short Sale on a property that needs work than on a property that doesn’t. The lender knows the risk of loss goes up when they foreclose on a property that needs a lot of work.

Aside from expense of completing the work, lenders are simply not set up to get the work done. They are in the loan business, not the fix- it business.

The process is a difficult process to say the least. It requires training and understanding of the laws and lender procedures.

What are the tax effects of a short sale?

Great news has come out of Washington that help people facing foreclosure or short sale. Until recently, if the value of a borrowers house declined and their bank/lender forgave a portion of their mortgage (via a short sale or deed in lieu), the tax code treated that amount forgiven as ordinary taxable income.

For a borrower already financially strapped, this makes a bad situation worse. When a borrower is worried about making their payments, higher taxes are the last thing you need to think about.

On December 20, 2007 the “Mortgage Forgiveness Debt Relief Act of 2007” became Public Law No: 110-142. The law is retroactive to January 1, 2007 and will extend until December 31, 2009. The passing of this bill creates a three-year window for homeowners to either refinance their mortgage or sell, and pay no taxes on any debt forgiveness that they receive.

The newly-enacted relief for mortgage debt forgiveness is Congress’s response to the problems generated by the subprime crisis, short sales, rising foreclosure rates and price corrections in some markets. Thus, when a lender forgives some portion of a borrower’s mortgage debt in a short sale, a foreclosure, a workout with the lender or some similar circumstance, the borrower will NOT be required to recognize income or pay tax on the forgiven amount.

Here is an excerpt of the law:

“Mortgage Forgiveness Debt Relief Act of 2007 – Amends the Internal Revenue Code to exclude from gross income amounts attributable to a discharge, prior to January 1, 2010, of indebtedness incurred to acquire a principal residence. Limits to $2 million the excludable amount of such indebtedness. Reduces the basis of a principal residence by the amount of discharged indebtedness excluded from gross income. Disallows an exclusion for a discharge of indebtedness on account of services performed for the lender or any other factor not directly related to a decline in the value of the residence or to the financial condition of the taxpayer. Sets forth rules for determining the allowable amount of the exclusion for taxpayers with non-qualifying indebtedness and taxpayers who are insolvent. Extends through 2010 the tax deduction for mortgage insurance premiums.”

It is strongly recommended that the borrower seek the advice of a professional tax advisor.

If a borrower does do a Short Sale, how much will they have to pay to sell their home?

Zero. A borrower cannot pay, nor receive, any proceeds from the short sale of real property. All costs, commissions, title, escrow fees, repairs and such are paid by the lender as part of the Short Sale approval.

The agreement to sell is subject to approval by existing lender(s) of a Short Sale at no cost to Seller. Seller shall not be required to deposit funds to close escrow.

How to Write a Hardship Letter that Gets the Bank to Say “Yes!”

Nick — Tue, 08 Dec 2009 18:29:14 +0000

A well-crafted and ironclad hardship letter is probably one of the biggest components to getting a short sale approval from the bank. Without clear description of the dire straights the borrower finds themselves in, no lender will willingly short the loan. So how do you go about writing a letter that will get the banks attention? Whether you are writing your own letter or helping a homeowner write a letter, here are some things to consider:

1. The Reasons for the Hardship

Be CLEAR about what your hardship reasons are! It could be a number of things, including (but certainly not limited to)

Loss of a job
Illness
ARM adjustment
Property tax hike
Divorce

In any case, you first need to compile and assess what the most compelling reasons for hardship are. Put yourself in the bank’s position as a lender. If there is a way you can make the mortgage payment,they are not going to allow a short on the loan. So be very clear what circumstances have are making it impossible to keep up with the mortgage payment.

2. Be Specific about your Hardship

Once you have established your reasons for hardship, you need to put in the effort to understand how that hardship has impacted you specifically. For example;

Job loss, and family income has dropped by $2400 per month
Medical Bills due to “X”, which total over $50,000
A divorce which puts child support and alimony burdens of $1200 per month
My ARM has increased my mortgage payment by $800 per month

Secondly, you need to demonstrate how this hardship impacts your ability to make a mortgage payment. If you make $8,000 a month and your mortgage went from $1000 per month to $1500 per month; good luck getting them to approve a short sale! You need to show how the hardship pushed you outside of your ability to make the payment.

Banks often think of mortgage payments in terms of percent of gross income, so you might consider using this. Let’s demonstrate with an example. Assume your mortgage payment is $1700 per month. Your household income was $5000 a month and then you lost your job, and the new household income is $2200. This means that your mortgage payment went from a reasonable 34% of your income to a whopping 77% of your income. Any bank will look at that number and say, “Yikes!”

3. Gather supporting information and Market Conditions

Think about circumstances outside of your own that are impacting your market area. Remember, the bank will want to be certain other options have been exhausted – such as selling your house. You will need to show that this is also not an available option. This can be done by doing things like:

Showing a recent appraisal of your home
Understanding comparable sales and the general market in your area
Itemizing pieces of disrepair on the house that negatively impact the properties market value (i.e. an old roof or broken A/C unit)
If the house is on the market, how long it has been one

4. Writing the Letter

ONE PAGE ONLY! Make sure you keep it concise – no lender wants to read a 4-page hardship letter. Get it into a single page!

Keep it in easy to read paragraph format.

The layout of your letter should look something like:

At the top of the letter, put the bank’s name and address. You might want to address it directly to the loss mitigation department. Each bank has unique ways of handling transactions so it helps to do some research ahead of time.
In the RE: line, put in “Request for Short Sale”, and your loan number
Your first paragraph should describe what happened briefly and make it clear you are unable to afford the mortgage. Don’t be ambiguous here – you can’t afford it!
1. RIGHT: “My family has gone through significant hardships recently that make it impossible for me to afford my mortgage.
2. WRONG: “I recently lost my job and we have had to cut out cable TV and gourmet dinners…. it’s getting really tough to afford our payments!
Your second paragraph should talk about the market conditions that have driven down your home value
3rd and possibly 4th paragraphs are details, details, details. Use the information you gathered up above to make your case more clearly.
Closing a- restate that you cannot afford the mortgage, and there are no other options besides a short sale.
Make sure to sign and date the letter, and include your own contact information.

5. Distribute!

Send the letter to the appropriate party (bank, attorney, investor, or real estate agent you are working with).

Once the letter is with the bank, you can feel confident that you built the best possible case towards convincing the bank to accept a short sale!

What do you think?

Do you have other tips or advice on what makes a successful letter? Go ahead and share in the comments!

Why do banks reject short sale offers?

Nick — Mon, 30 Nov 2009 14:54:25 +0000

I was reading this blog over the weekend and it gave some of the reasons short sales are rejected by banks:

The point is short sale involves a loss in the part of the lender. That is why before they accept any request for it, your package, the reasons and all details of your short sale needs to be evaluated properly. Lenders are being strict about this and as much as possible, they would want a loss to its minimum. They would even compare it to the loss they would incur in foreclosure. If the loss is greater, chances are they would rather go with foreclosure.

Reasons for Rejection

Aside from comparison of losses, bank may reject offers for the following reasons:

1. Banks require heaps of documents before a short sale could be accepted. Believe it or not, with so many applications on file, your package could end up missing one or more document. If this happens, your request may be rejected even if it not your fault.

2. The offer was too low. Banks use brokers price opinion to determine if your offer is just right. Remember, offering way below the outstanding balance of their loan would normally mean bigger losses in the part of the bank.

3. Your reason for having a short sale is not justifiable. In short, you are unqualified.

These are just some of the reasons that could lead to short sale rejections. When this happens, there are two things you can do. It is either you just allow the foreclosure to go through or you can still try the second time around.

Counteroffer for Rejected Short Sale Offer

You can always make a counteroffer if your request was rejected. However, bear in mind that the waiting could bring you closer to foreclosure. If you think, you have time, why not. First things first, you need to do the following things:

1. Learn the reasons for rejections.

2. If it was about the price, keep your offer near to the brokers price opinion. However, if you get a BPO for your property, the best thing to do is to use comparative market analysis to keep it close to that value.

3. Your reason for short sale should be hardships. And you must know what kind of hardships is accepted. It should not be about break ups and shallow problems. It should be anything that has lead to financial crisis. However, there should be enough evidence to back it up. So always, have documents on hand to prove such state.

As you can see, these things do not guarantee you that your short sale will be accepted for the second time around. However, it increases your chances of not being rejected. Lastly, just be diligent in making follow-ups so that if problems are encountered along the way, you can do something about immediately.

What comes to mind immediately is how Short Sale Artisan can help with these common problems. Looking at the reasons given for offers being rejected :

Missing / Incorrect Paperwork – Short Sale Artisan makes it easy to generate documents, and see what has been generated and what remains to be done. Documents are always accurate and properly formatted as they are pre-filled with entered data.
Offer Too Low – It’s always easier to lowball an offer and then go up from there; (it’s a lot harder to go the other direction!) , but your offer does need to be reasonable. There are a lot of variables in a short sale transaction and our proprietary offer calculator takes the guesswork out of coming up with that magical number.It will give you suggestions and then you can use your intuition to decide whether to use the offer that is calculated or create your own offer. But creating a reasonable offer which takes into consideration all the factors is a critical step.
You are unqualified - Short Sale Artisan provides you with all the tools you need to be qualified – properly formatted paperwork, professional templates, and task management abilities that put you in charge of the process.

Short Sale Artisan fills the needs and helps you be more profitable by tackling each of these common hurdles. Check us out today!