Short Sales / Foreclosures

When and how did Short Sales become such a major player in home selling in the past 10-15 years?

From 2003 to 2006, we experienced increasing rates in homes for sale. Inventory was high, but so were sales. Rising home valuations created large amounts of equity in homes, which owners tapped into to finance consumer spending. Additionally, mortgage programs and loans were made readily available through sub-prime mortgages and other programs. This allowed more individuals to be able to become homeowners with as little as zero down payment.

As a result, by mid-2006, the “bubble popped”. As large numbers of buyers, predominantly investors, started having to pay higher mortgage rates as their low introductory-rate (sub-prime) reverted to standard and sometimes unreasonably high interest rates, they found themselves without the means to pay. Higher mortgage rates combined with leverage equity payments drove many owners into challenging debt to income positions, leading them to sell their home below market value or consequently, in foreclosure. Defaults in payments on mortgages began in overwhelming numbers.

By late 2006, homeowners’ troubles became apparent in home values. This is where the decline in real estate began. The result: homes offered significantly below market value and distressed properties (financially and physically). Between 2008-2011, the real estate market was bouncing back from the real estate “bubble.” In 2012, Central Florida started seeing a return in the market where it was now feasible to buy and sell.

Fortunately, short sales and foreclosures have continued to decline and are no longer dominating the listings and sales. They may, however, still be the only option for sellers.

Are you underwater on your mortgage and short sale is the only way out? Here is some information about your short sale options.

Owner Options

Short Sale

In a short sale, the lender agrees to discount a loan balance because of an economic or financial hardship on the part of the owner/borrower. The home owner/borrower sells the mortgaged property for less than the outstanding balance of the loan, with the approval of the lender (s) and turns over the proceeds of the sale to that lender. The lender will typically incur less of a financial loss than if they foreclosed or allowed the borrower to continue non-payment. So a short sale is an alternative for owners that causes less damage to a seller’s credit history than a foreclosure. For the bank, the short sale is typically faster and less expensive than a foreclosure. Depending on what is negotiated between the seller and the lender (s) a short sale may not eliminate and deficiency in the loan balance.

Foreclosure

The foreclosure process for residential mortgage loans is a bank or other secured creditor selling or repossessing the property after the owner has failed to comply with an agreement between the lender and borrower called a “mortgage” or “deed of trust”. Commonly, the violation of the mortgage is a default in payment of a promissory note, secured by a lien on the property. When the process is complete, the lender can sell the property and keep the proceeds to pay off its mortgage and any legal costs, and it is typically said that “the lender has foreclosed its mortgage or lien”.  This process is often more expensive for the lending institution and in today’s market many lending institutions are being forced to produce original documentation and follow exact procedures depending on the statutes of the residing state. A foreclosure’s impact on an owner’s credit history is significantly more negative than a short sale.

What should you do?

  1. Take action! If you sense you will not be able to pay your mortgage in upcoming months DO NOT DELAY! Contact a financial counselor and create a strategy by reworking your budget. Present your situation and budget with your lender and see what options they offer for negotiating your current mortgage. Note: many lenders tell homeowners that they cannot be helped until they become delinquent on payments; however, they may be more prone to assisting on the rare occasion that the mortgage is fixed and has equity.
  2. You can find a list of counseling agencies approved by the Department of Housing and Urban Development at http://www.995hope.org/ . It’s best to speak with someone trained to assist in loss mitigation and who can find ways to solve your problem. If you wait 60 to 90 from your last payment, you’ll be dealing with collection agencies and this will complicate your situation.

So what options do you have available to you as an alternative to foreclosure:

  • Forbearance: This option temporarily suspends payments, allowing you time to make up the shortfall. If an agreement is reached and you are able to meet its terms, the lender should not take foreclosure action against you.
  • Repayment Plan: A lender might be willing to spread the owed amount over several future payments until the loan is caught up.
  • Loan Modification: A lender might be able to modify your existing loan to allow you a more manageable monthly payment. Although this may increase the loan amount over the life of the loan, the monthly payments would be more affordable.
  • Refinance: If there is sufficient equity remaining in the property, a lender might consider refinancing your loan. In this instance, missed payments would be calculated into the new loan balance.
  • Partial Claim: If you have an FHA loan and meet HUD’s guidelines, you may be eligible for a Partial Claim, which is an interest-free loan designed to help homeowners reinstate a delinquent loan. This would be an additional loan to your original mortgage, and would be paid back either after the original mortgage is paid off or the property is sold.
  • Forgiving a Payment: Although extremely rare, a lender may sometimes forgive a missing payment provided you agree to then remain current on your mortgage from that point on. This option is extremely unlikely, but does occur.

Short Sale

A short sale is “a negotiated settlement between the lender and the borrower, and the lender cannot do anything to violate such an agreement.” In this option, your home is sold for less than the mortgage owed to lender.

Deed in Lieu of Foreclosure

In this option, you have no other option that to relinquish your home to your lender. Under this arrangement, you transfer all ownership and avoid any lengthy process of short sale or foreclosure, and thus causing less damage to your credit.