Many homeowners today are finding themselves in a position where the value of their home has dropped to the point that it is now worth less than what they owe on the balance of the loan. For most homeowners who are upside down and want to get out from under their mortgage payments there are two options, a foreclosure or a short sale. Recent data from the mortgage industry showing that nearly one-quarter of all Americans with mortgages are underwater with their home loans means there are millions of households out there evaluating their options. If you are one of them, you need to fully understand the difference between a short sale and a foreclosure, and how each option might impact your credit scores.

The main difference between a short sale and a foreclosure is that a short sale occurs when the lender agrees to accept less than the total amount owed on the mortgage loan. In contrast, a foreclosure is the legal termination of all rights of the borrower as the owner of the home and the lender takes possession the home. This means the home ultimately becomes the property of the lending institution in a foreclosure. Neither a foreclosure nor a short sale is a particularly great thing to have on your credit report. Both are considered negative actions by credit scoring companies because they are indications of likely future credit risks as afar as lenders are concerned. In general, both a foreclosure and a short sale can have a similar negative impact on your credit score depending on the specific details of the actions.

Factors can include any additional or extra information that might be reported on the mortgage account and included in a foreclosure or short sale, such as late payments associated with a mortgage account prior to the foreclosure or short sale and how recently those past due payments took place in relation to the action. The borrower’s overall credit profile is also taken into consideration and lenders will look at how the consumer is managing other credit obligations like credit card accounts or car loans. High balances and late payments don’t look good no matter where they occur.

Surprisingly, it turns out that if you have a good overall credit history, your credit score will suffer more than if you were already a historically known credit risk. The negative impact on a credit score is more severe on a credit report that has no history of missed payments and has low balances on active credit accounts. The impact is less severe if there are already indications of high-risk behavior like missed payments already being reported because the negative history has already impacted the credit score which will always start out be lower because it is reflecting the higher risk.

This means that whether or not a short sale will have less impact on a credit score than a foreclosure depends on the specific credit situation of the borrower in most cases. For most homeowners will average credit histories, a short sale should have less negative impact on their credit score than a foreclosure will, depending on the specific details of the borrower’s history.

Most home owners know that a short sale is far better for your credit rating than simply walking away and letting the lender foreclose on a home. Some people mistakenly think a short sale will be the end their credit, but that is not the case, one of the main advantages of a short sale over a foreclosure is that your credit rating suffers less damage.

Immediately following a short sale your credit score will probably drop between 50 and 100 points. At that point you will be carrying less debt. Debt reduces your credit score and you will have a lower debt to income ratio following a short sale. Less debt will help your credit score and within a few years it should return to normal ratings. Any specific problems on your credit can be remedied through debt a dispute and negotiation process later.

In many cases, a short sale can erase your upside-down debt altogether and you will be eligible to purchase another home much sooner. All home loans owned or insured through Fannie Mae, Freddie Mac, FHA, and the VA have policies in effect that mandate debts be erased following a successful short sale. Under the Fannie Mae program you are eligible to buy another home in 2 years. FHA programs allow you to qualify for another FHA loan within 3 years.

Something people often fail to realize is that a short sale costs the homeowner practically nothing as all of the expenses are paid for by the lender. When a lender forecloses on a house to sell it again, they will pay all the costs associated with the entire transaction. In a short sale, the lender will also pay all of the costs including title insurance, any county taxes or fees on the sale, attorney’s fees, as well as any Real Estate commissions owed.

People who never plan to purchase another home and really don’t care about their credit rating at all could theoretically stop making their mortgage payments during a short sale which could take as long as 9 months to a year to complete. During that time they could save the money not spent on the mortgage or apply it toward a rental property if necessary. However, the better option is obviously to continue making your mortgage payments and complete the short sale process with your credit rating somewhat intact.

A short sale happens when a lender is shorted on a mortgage, this means that the lending bank accepts a sales price that is less than the total loan amount that is due.
The reason most lenders will comply with a short sale is to avoid the time, trouble and costs of a foreclosure. In the past, most lenders would not allow a short sale if the homeowners were current with their loan payments. Today, that is not the case as more banks are realizing that there can be other factors contributing to a potential default, and they are actively seeking ways to head off future problems before they get started.

Getting a lender to approve a short sale is more than just a matter of economics and proving that the amount of money the bank will receive from a short sale is more than it would get from foreclosing on the property. These days aspiring short sellers will also have to submit a letter of hardship explaining why the seller can not pay the difference due upon sale. The hardship letter will also indicate why the seller has or when they will stop making the monthly payments too.

Proving financial hardship to your lender requires accurate information as to the exact nature and depth of the problems involved. Lenders will not accept vague claims and speculation either, they want facts. Solid evidence of financial hardship that will be accepted by a lender includes unemployment, divorce, medical emergencies, sudden illness, bankruptcy and death in extreme cases.

Human nature includes trying new things and people have tried to get lenders to accept many new tactics in order to qualify for financial hardship status and most of them fail. One of the things that a lender will not consider as a hardship qualification includes being broke because you spent all your money on something else you thought you needed. That’s just bad decision making and not financial hardship. Likewise, just because your wife is pregnant and you’re starting a family does not constitute a legal hardship. It may definitely be a hardship in the home, but the pregnancy was a lifestyle choice. Wanting a new house or being unhappy with your existing one is not a hardship either, it is not the lender’s problem care if you have decided your home is no longer suitable for you or your family.

A short sale will not show up on your credit report, but the status of your loan may show that has been redeemed, which is often reported as Paid in Full for Less Than Agreed and that can affect your credit rating. Even if the damage to your credit report may not seem as bad as a foreclosure would have been, your creditors may not make the distinction. As with most major legal and financial issues in life, it can be a real help to consult with an attorney before attempting to pursue a short sale on your own.

Many homeowners are surprised when they find out they can still owe money to the bank after a real estate short sale if the agreed upon price was payment of the loan in full.
The homeowners may still owe the difference between the mortgage balance and the discounted short sale amount as the result of a deficiency judgment. The best short sales will be ones where the bank accepts payment in full without pursuing a deficiency judgment. The difference between the mortgage balance and the short sale may be declared as income on their income tax return by means of an IRS form 1099.

The 1099 form is given to the homeowners as a result of income they’ve received on paper as a result of a short sale. In situations where the bank accepts a $50,000 sale on a $100,000 mortgage, it is the same as if the sellers had actually made $50,000 on the deal and the 1099 will reflect that amount. This can have adverse affects on tax brackets, credit ratings and may even cause IRS penalties too. The bank has the right to seek a deficiency judgment for the shortage on the actual amount received versus the amount that was due. In the above example, the judgment recorded against the homeowners would be $50,000.

In cases where the homeowners can prove financial hardship, it is possible to ask the bank to waive its right to a deficiency judgment. In cases where the bank does pursue a deficiency judgment, the homeowners can still file for bankruptcy at a later date in order to remove the judgment. However, the lender cannot pursue a deficiency judgment against a homeowner and issue a 1099 at the same time. The lender must choose one option or the other, not both. If the lender agrees to waive the deficiency as a condition of a short sale, the homeowners can rest assured they will eventually be receiving a 1099 in the mail. The best option for most homeowners considering a short sale is to deal directly with the lender whenever possible.

Short sales have become a fact of real estate life in those parts of the country where home values have dropped substantially. A short sale can be good for sellers facing foreclosure as well as for buyers looking for a good deal on their next home. However, completing a short sale can be complicated and time consuming, so it is important to understand both the pros and cons of a short sale deal.

A short sale creates a situation where a seller facing the threat of foreclosure agrees an with their mortgage lender to accept a sales price for the property that’s less than the amount of money they actually owe on it. The result is that the seller does not make a profit on the sale but he does avoid most of the problems that would result from a foreclosure.

Advantages

One of the main advantages of a short sale is that the sellers avoid going through a lengthy foreclosure process and they also avoid the negative impact of a foreclosure on their credit rating score. The seller and the lender might work together to determine the details of the agreement in a short sale, but when a short sale is completed correctly, the sellers will avoid owing the balance of the loan above the selling price.

The advantage of a short sale for buyers is obviously the ability to purchase a new home at a discount price. An additional benefit for the buyer over foreclosures is that there’s little risk that the buyer will need to take any action to remove the seller from the property.

The mortgage lenders can benefit from a short sale as well. The lenders don’t have to worry about getting involved in a long foreclosure process and they don’t have to maintain the home. The main thing the lender wants is their money back and they don’t really want the responsibility of selling a home either, so the short sale can actually be a good way out.

Disadvantages

The main problem with short sales pops up when a seller learns that not all lenders will relieve the seller of the responsibility of paying off the balance of the loan. In this case, even though the seller is avoiding a foreclosure, a short sale can still affect their credit. If the loan does not need to be repaid fully, the seller should get a written statement from the lender stating the fact. If there is still a balance to be paid, the sellers should discuss the matter with the lender to figure out how the shortage amount will be reported to the credit agencies in order to minimize the damage. Another potential problem for sellers is that there is no guarantee they will be qualified for entering into a short sale. Most lenders will not enter into a short sale agreement with sellers who have missed multiple payments.

Short sales can present problems for buyers too because getting a good deal on a short sale price is not as easy as it might sound at first. Interested buyers should take care when entering into a short sale and make sure they do the necessary homework and assemble accurate paperwork. Buyers who are seriously considering entering into a short sale would do well to obtain the services of a real estate professional to help answer questions and navigate the short sale process before they make any offers.

Everyone knows the real estate marketplace in the United States is in a difficult period following the bursting of the bubble in home mortgage prices last year. Now more Americans than ever before are facing the threat of foreclosure and many are looking for viable ways to avoid it. One option that is attracting a lot of industry interest lately is a real estate short sale. Short sales are becoming an increasingly common tactic for homeowners who want to avoid foreclosure. Short sales and foreclosures are two more types of properties that add to an already growing group of so-called bargain homes on the market that include distressed properties and auction homes too.

One big difference between short sales and foreclosures is that a short sale will always take place before the home is officially repossessed or foreclosed on by the lender. A short sale property will get sold much quicker than it normally takes to complete a foreclosure sale. The sort sale is faster and allows all parties to get back to their normal lives much sooner.

While the overall effects of a short sale are usually less damaging and costly than a foreclosure or bankruptcy sale, they can still have some negative ramifications for the seller’s credit rating. A short seller’s overall credit score could drop by as much as 200-300 points in some cases, however most lenders will view short sale sellers as less risky than foreclosed sellers.

When everything goes well, a short sale can bring a good result for both the homeowner and the lender. A short sale provides an opportunity for the seller to dodge foreclosure and all the negative implications a foreclosure brings with it. The short sale allows a property to return to home ownership sooner and allows the lender to receive most of the value of the loan sooner. The lender also avoids incurring more legal or maintenance costs as the foreclosure process winds its way through the system for a few years.

Overall, short sales do present a more attractive option for distressed sellers than foreclosures do. However, completing a short sale is never an easy or simple process and potential short sellers should always seek competent legal and tax advice before jumping into a deal.

It’s a fact that real estate mortgage lenders lose a lot of money when they get a house back in a foreclosure. That’s the main reason so many lenders today prefer to accept a short sale instead of getting a house back in foreclosure. The problems for lenders in the current real estate market can be solutions for seller’s who are facing the threat of foreclosure and are looking for ways to avoid it. Short sales are not particularly simple or easy to complete, but in the right circumstances they can make perfect sense and provide some economic relief for everyone involved.

The best time to conduct a short sale is while an owner is still able to make the loan payments. However, homeowners who are behind in their loan payments and feel the shadow of foreclosure moving toward them can do themselves a favor by taking the steps necessary to complete a short sale on their own before things get worse. With a bit of motivation and research it’s possible to conduct a short sale by yourself.

Savvy short sellers will need a financial calculator, access to online financial services or mortgage broker and a competent real estate agent in order to complete their own short sale. After you’ve got the tools needed, follow these steps to complete your short sale:

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The first step in a short sale is to assess the true value of your property. When selling with the help of a real estate broker, the broker will provide an appraisal of the current market value. If you are selling the property without a broker you will have to do your own market analysis of your property as compared to similar houses in your area.

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The second step is to determine the actual cost of selling the property including the closing costs. A real estate broker can provide an estimate of closing costs or you can contact a local title company or real estate attorney to determine what the closing costs will be for the seller.

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Step three is to determine the total amount owed against the property including all loans and liens.

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Use a good financial calculator and crunch the numbers. Ad up the totals and subtract the total amount owed against the property from the estimated selling price. The result will always be a negative number on a short sale calculation.

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Next step is to get in direct contact with the lender or lenders if there are more than one loan. Start with the customer service department and ask to speak to a supervisor or manager who has authority over the mortgage loan department.

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The second to last step is to ask the lender if they are willing to work with you by reducing the amount owed or making other arrangements to reduce loan. You can also approach the real estate agent or anyone else making money off the transaction to see if they would be willing to make concessions in order to get the transaction completed and everyone paid off.

7-
After all the other steps have been completed it is time to sell the property and pay off the lender. That’s it.

For the many homeowners in the United States who owe more than their property is worth today, short sales are an increasingly common reality. Most short sales occur when the current value of a home are not enough to cover the sellers’ mortgage obligations including closing costs, property taxes, and any real estate commissions. Some short sales are the result of people who default on their loans and are already headed for foreclosure. The majority of short sales come from sellers who simply find themselves upside down, owing more than their home is currently worth after all the costs are totaled.

The title company and the lender can supply exact figures on closing costs and loan balances and potential short sellers should always get a home inspection to determine if any repairs are needed the home. If a home has more than one mortgage or a home equity line of credit, the seller will have to get approval from each to proceed with a short sale.
A home with two mortgages makes a short sale more complicated because the lender holding the second mortgage is usually the one that has to absorb most of the loss.

Some loan experts advise their clients to inform the lender as soon as possible of a potential short sale. However, others point out that without a viable purchase offer in hand, the bank really won’t consider the option. In addition to all the financial documents outlining income and debt obligations, short sellers should also submit a letter explaining the exact circumstances that make it impossible to pay back the full amount of the loan. The seller needs to be able to prove actual financial hardship to the lender and those that have the assets or income to pay the loan will not be approved. The homeowner who is still making loan payments on time and has a credit rating worth preserving is the ideal candidate for a short sale.

When pricing a short sale property most short sale experts say to put the price at or near fair market value despite the temptation to start with the total payoff amount owed and go downward from there. The bank will have a formula for what percentage under market value they will accept, with most ranging from about 8% under loan value to nearly 20% under. Short sales can be good purchases, but the bank is not going to give a property away.

The time it takes to complete a short sale will vary from lender to lender, but generally it will take from 30 to 60 days to receive an approval of a sale from the lender. Sellers need to make sure any potential buyers understand and accept the approval delay period before making an offer. Something many sellers do not realize is that a purchase contract on a short-sale is legally binding as soon as the earnest money has been deposited. If lien problems arise and the sale is not approved for any reason, the seller can face legal problems for failure to execute the contract. This problem for the seller can be avoided by including a clause in the sales contract that requires the lenders to approve the offer and release all liens by a specified date.

The real trick to getting a lender to approve a short sale is simply a matter of economics. The seller’s job is to gather the numbers and do the math that clearly proves to the bank that the amount of money it will receive from a short sale is more than it would get from foreclosing on the property.

Many Americans are Hoping for a Loan Modification

HOPE!

wikipedia defines hope as:

“A belief in a positive outcome related to events and circumstances in one’s life. Hope is a feeling that something desired may happen, when the outlook may or may not warrant it.”

When I traded stocks I was taught that four letter words hurt you as a trader more than they helped you. The main bad words were FEAR and HOPE.

FEAR kept you from fully maximizing on your trades and HOPE kept you in them long enough to pay the hefty price.

Now as a Real Estate Broker I meet people who are in danger of losing their home to foreclosure. Like stocks, the real estate market has its ups and downs. And like stocks the same emotions play out. Fear and Hope are prevalent. Of those I think HOPE is worse,  its hurting people more than just having a foreclosure.

EXAMPLE

We will call this person Tom,

Tom was behind on his mortgage three months and $14,000 in back payments not including fines and looming legal fees. Based on public record I knew he was in need of my services and offered to do a short sale on his property. He told me that he was working on getting a loan modification. It made sense, he was working but went thru a divorce and this hurt his ability to stay current. He just had to prove to the lender that since the property had lost 50% of its value it would be in their best interest to work with him.  So he had his buddy refer him to an attorney who was going to work on the loan  mod. The attorney charged him $4,000 to work on his file and off they went.

Five months later the banks responded… DENIED! Tom thinking that his attorney didn’t know what he was doing  fired his loan modification company and hired another one he heard on the radio, they charged him $4,500.

One month later after the loan mod company didn’t return any phone calls or emails he decides to visit the location only to find out that the business had gone bankrupt, Ouch!  (people still think radio and tv add credibility!)

But he was still hopeful so he paid a third company $3,000 to help him. This company did work on it like the first had and three months later he got his answer. DENIED! What!! how could this happen, it doesn’t make sense. The government said that programs exist and that banks had to help people!! Arrrrgh!! How could this happen you say, it doesn’t make sense, banks took tarp money!!!!

Well what happened is the investor sold the note the moment that Tom’s loan went into default. Huh? what does that mean you say? That means that the servicer or bank as most people know them (Bank of America, Chase, Citi) don’t own the loans. Investors do,banks hold a small number of loans but not many. So the many investors who do own these loans sell them to other investors who buy bad debt. Sometimes the same attorney who helped your on the loan mod is buying bad debt to resell. (yes it happens, I have had bank reps tell me that attorneys are there best note buyers, especially on second loans.) Don’t act surprised, these are the waters you enter when in these situations.

Most investors don’t know the homeowner and yes they don’t care. All they know is that they lent money for the purpose of collecting a profit, short or long term the word is PROFIT. Like your 401k at work, you save to be able to retire and live off the interest. Some of these loans were actually purchased with other peoples retirement money but that is a whole other topic for another day.

So again, without the homeowner even knowing, the investor sold that $380,000 note for $90,000 (property worth 180,000) The new investor has purchased the note for ONE REASON, LIQUIDATION. The old investor probably did it for tax breaks , or maybe his buddy buys it to resell, who knows, the point is money is moving. and Toms house is the prize!

Not FAIR right, well there’s another four letter word for you. Maybe they have LUCK, and Tom needs real HELP, see a pattern here?

We spoke with an exec at Bank of America who admitted that only 10% of loan mods have been made permanent. Of those 10% they did, 80% re defaulted.  So why are the banks pushing them if they really don’t help??? Well like we said earlier, gov programs! They have to try and help even though many people will be denied, its called Public Relations!

But back to Tom…

So after Tom paid $11,500 of hope money he was told SORRY. We are foreclosing next week!  So again hopeful Tom sues the bank which delayed the foreclosure for a week.  And then the day came, FORECLOSURE! No stopping the train, this was done and done. Right?

Well hope reared its ugly head again, this time he hoped that he could reverse the foreclosure and hope that the bank could not make him leave his home. After a couple of misfiled court documents and other delay tactics he was eventually evicted.

So hope won him

$11,500 in fees, foreclosure and finally eviction, all in his credit record for him to keep for 10 years. From here on he can HOPE to get cell phone or lease on apartment in the near future.

This is a real scenario by the way.  I have been in situations where the banks have screwed up and this was the only tactic left. But this was not Tom’s case at all.

Tom should have short sold the home. He owed about $400,000 for a home that was worth $180,000. What if he was successful with the loan mod? What did he actually accomplish? He would really be renting his home without a landlord. It would be a temporary fix at best.  He would be responsible for repairs, insurance, and taxes only to have issues with the loan in 2 to 5 years. He could have rented a MUCH, MUCH NICER HOME while his credit improved.

The WORST PART OF THIS STORY is he would be ready to buy right about NOW because this happened 2 years ago. He would have been eligible to buy again. And those 11k would have been perfect for a down payment.

I guess when it comes to business, hope and money don’t mix!

Michael-Edward Cruz
California Real Estate Broker 01758933
760-689-BANK (2265)

http://www.mikerebroker.com

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