Working with Your Lender To Avoid Foreclosure
Short sales can be, quite frankly, unappetizing transactions. When a short sale occurs there could be embarrassment to a family, credit destruction, and dignity loss. If a homeowner can no longer pay the mortgage, then there are alternatives to a bankruptcy or foreclosure on the property. A short sale is one.
Over the past few years, short sales can account for half of the sales, due to the economy. In real estate, when lenders agree to a short sale, it tells everyone that the lender is willing to accept around, or less than, half of the amount due. Some lenders won’t accept short sales or less than is due payoffs. Sometimes, for them, it’s more financially sound to go into a foreclosure. Some properties and sellers won’t be able to qualify for a short sale.
If you are thinking about a short sale, it’s a good idea to obtain legal advice (good real estate attorney), and call your accountant to discuss consequences of short sales. Real estate agents aren’t usually CPAs or lawyers, so that’s why it’s a good idea to call those other two experts. The IRS can think about debt forgiveness for part of your income, except for some conditions to do with the Mortgage Forgiveness Debt Relief Act, started in 2007.
A lender who has accepted a short sale may still legally go after a borrower for any difference, if they wanted to. The amount of the difference is known legally as a deficiency. A lawyer will be able to tell you if your loan can qualify for this type of a claim or judgment. All lenders vary in their requirements, and borrowers may have to dig up a lot of documentation if they want to get into a short sale.
What May Happen on a Short Sale?
1. Call the lender. Find the person at the lender’s location who handles short sales. Get the manager’s name as they can make decisions.
2. Submit a latter of authorization. Lenders won’t want to disclose any of your info that’s personal, without you authorizing it. If you are working with a title company, real estate agent, closing agent or a lawyer, writing a letter will garner you better cooperation. Such a letter should includes: Property address, the date, your name, loan ref number, and your agent’s contact info and name.
3. The preliminary net sheet is an estimate (closing statement) showing the sale price, unpaid loan balances, costs of the sale, payments due, real estate commissions, and late fees. A lawyer or your closing agent can make this out for you, unless you can calculate it yourself. If, after all of these items are calculated and there’s cash show on the bottom line, then you won’t really have to get a short sale.
4. A hardship letter is needed and the sadder it is, the better. Pour it on and tell the lender how you got entwined in your current financial bind and that you’d like the lending company to agree to less than the total amount due. You can always have a professional write this letter. Lenders are like everyone else and an honest plea for reduction of amount owed because you got sick, were laid off, or had a family tragedy, may work. If your situation is because of criminal behavior or dishonesty then don’t expect a sympathetic ear.
5. You’ll need proof of your assets and income. Lenders will always be interested to see if you have money market accounts, savings accounts, bonds or stocks, cash, other real estate, negotiable instruments, or anything of value. Lenders need this to make sure that the debtor simply cannot pay back any forgiven debt.
6. Gather bank statements and make certain they don’t reflect large cash withdrawals, unaccountable deposits, or a large number of checks as these will be questioned. If you have these items on your statement, explain them to the lender. Also, you may want to tell them about all of your deposits as they can then determine if they will continue.
7. Have a comparative market value done. Property values go up and down and markets decline. If this is the reason that your home would sell for less than is owed on it, then a CMA will show it. Your real estate agent can prepare this report for you. It should show which homes are priced similarly, which are active, which are pending, and what’s sold in that range during the last 6 months.
8. The listing and purchase agreement is the last item to think about on a short sale. When an agreement to sell is reached with a potential buyer, any lender will require a copy of your agreement to list. The lender may want to renegotiate percentages for commissions and can refuse to pay for such items like termite inspections, or home protection plans.
If all goes well, your short sale will be approved by the lender. When you are in negotiations with the lender, you can ask that they don’t report any adverse credit to credit agencies. They are, however, under no obligation to do this. Some credit report status may be set in stone, but others may be negotiable.