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Short Sale Q & A
Our Goal is to help you Short Sale
History:
Over the four year period (2004-to-2007), lenders have funded THREE TRILLION dollars in sub-prime loans. To date the rate of foreclosures is running 7% to 12% on many of these types of loans. That’s about 2,500,000 loans over the next 12 months.
As and when the interest rate on these loans adjusts upwards, unfortunately so does the foreclosure rate soar at an even higher rate:
- It is estimated that there are over TWO MILLION homeowners 30 days+ late on their loan payments to date.
- Many of these loans are 90% or 100% loans originated in areas where the resale value has dropped resulting in a drop in equity of between 10% up to 30% in severe cases.
- Over 200,000 of those 100% loans will fail this year and almost every case will be a candidate for a Short Sale, available for at least 20% less of their real value.
- We believe the foreclosure rate will skyrocket as the low two-year pay rate is phased out this year and next year. These problem people with distressed properties will have more problems over time, while these loans are slipping into foreclosure at 10 times the national average.
Forecast:
How many foreclosures this year? --1,250,000 to 1,500,000 is a conservative projection.
Some RE Financial Experts project as much as 7 million foreclosures starting 8/24/07 ending 12/30/11
Although rates are pretty stable and may even decrease from time to time, real estate sales and refinancing are going down. Underwriting guidelines are tightening up. Loan programs are getting harder and more difficult to qualify for. More and more people simply walk away from their distressed properties, without realizing the severe negative consequences regarding their tax liability and credit history.
REO’S and Foreclosures are up --way up, which means that the banks are sitting with more and more inventory, which consequently causes them to experience liquidity problems.
This is the time to act: get to know your rights the law and your options during the mortgage meld down. Our goal is to stop your foreclosure and give the homeowner a fresh start. We are specialists in working with lender’(s) and/or banks: to negotiate your current loan(s) by providing you with a unique, professional Short Sale plan that you and your lender can accept.
We fully understand that once in default, homeowners have a serious problem and only a short time to overcome the real possibility of losing their property.
The Law:
KNOW THE LAW - Every State has different foreclosure laws that govern how long it takes a lender to foreclose on a home. Time can vary from 60 days to 9 months. Please click on the following link for more information regarding this subject pertaining specificaly to California foreclosure proceedures: Non Juditial Foreclosure Law
What are the alternatives to Foreclosure and why should you try to avoid a foreclosure at all cost?
There are ten basic alternatives to foreclosure. Call us to discuss these options.
1. Do Nothing – If a homeowner does nothing, they most likely will lose their home at foreclosure auction. Loan applications generally ask if the applicant has ever been foreclosed upon. Credit reports also disclose this damaging information. Not the best option.
2. Payoff/Refinance – Completely paying off the entire loan amount plus any default amount and fees. Usually this is accomplished through a refinance of the debt. New debt is at a normally higher interest rate and there may be a prepayment penalty because of the recent default. With this option, there should be equity in the home, and the borrower needs reasonably good credit.
3. Reinstatement – Paying the entire default amount plus interest, attorney fees, late fees, taxes, missed payments and fees.
4. Loan Modification – Utilizing the existing mortgage company to refinance the debt or extend the terms of the loan. This may allow the homeowner to catch up at a more affordable level. To qualify, you must prove to the lender you have fixed the problem that caused the late payment.
5. Forbearance – Lender may be able to arrange a repayment plan based on the homeowner’s financial situation. The lender may even be able to provide a temporary payment reduction or suspension of payments. Information will be required from the lender to show that you are able to meet the new payment plan requirements.
6. Partial Claim – A loan from the lender for a 2nd loan to include back payments, costs and fees.
7. Deed in Lieu of Foreclosure – Give the property back to the bank instead of the bank foreclosing. Banks generally require the home be well maintained, all mortgage payment and taxes must be current. Most loan applications ask if this has ever happened.
8. Bankruptcy – This option can liquidate debt and/or allow more time. We can refer you to a qualified bankruptcy attorney.
--Chapter 7 (Liquidation) The purpose of a Chapter 7 bankruptcy is to completely settle personal debt. This option is very difficult to qualify for!
--Chapter 13 (Wage Earner Plan) This is basically a restructure of debt plan: payments are made toward a plan to pay off debts in 3-5 years.
--Chapter 11 (Business Reorganization) A business debt solution.
9. Sale – If the property has equity (money left over after all loans and monetary encumbrances are paid). The homeowner may sell the home without lender approval through a conventional home sale. In this case, the homeowner will get cash from the sale.
10. Short Sale - also known as a pre-foreclosure sale, can be negotiated with your lender by your Real Estate Professional if what is owed is MORE than the property’s value.
*Typical restructuring plans:
* LOAN MODIFICATION - 99% of all "A" type lenders and 70% of sub-prime lenders (with high interest rates) will negotiate a loan modification where most of the delinquent payments and foreclosure fees are added onto the back end of the loan. Payments can remain approximately the same. In some cases the interest rate will be reduced permanently.
* FORBEARANCE PROGRAMS - Typically 30% of sub-prime lenders (with high interest rates) will only offer a workout program that requires you to immediately pay at least 20% or more of the total delinquencies including foreclosure fees, plus the balance of the delinquency will be added to their regular monthly payments over a period of 6 to 48 months. Forbearance plans do not remove a foreclosure action but simply stop it in place until the loan is current.
* FORBEARANCE PROGRAMS OFTEN FAIL IF THE LENDER IS NOT FORCED TO CONSIDER THE ABILITY OF THE BORROWER TO PAY!
* Please note: Short Sale Center believe that bankruptcy is the absolute last resort.
Why are lenders willing to take a discount on a Short Sale transaction?
Apart from the lengthy time and the costly process of going through a foreclosure process there are several other reasons why lenders will much rather accept a short sale:
- First of all, banks do not like excess inventory and bad loans on their books; therefore, if they see an opportunity where they can sell the property without a huge loss, they will do it.
- Secondly, lenders know they could lose a lot more money if the property goes to auction. There are so many fees involved if the property goes to auction, that they would be better off taking the discount beforehand and be finished with the headache of it all.
- Since foreclosures are currently, undoubtedly at an all time high, this fact basically translates into more and more losses for the lenders resulting in more and more lenders discounting properties. It is therefore safe to say that most lenders will accept a short sale; however, you may come across one or two lenders who will not discount, unless one can proof to them that the numbers work in their favor, then they will most likely do it.
When is the best time to apply for a Short Sale transaction?
It is best to do a short sale when the property is in the pre-foreclosure state. Yes, one can perform a short sale when the bank owns the property. There are two stages within pre-foreclosure:
- The first stage being those individuals who are behind on payments.
- The second stage is those who are 3 or more payments behind with a notice of default. (Once the notice of default has been recorded, banks become motivated, so you are more likely to get a discount. Until that time, very rarely will a bank ever discount a mortgage that soon. Why would they? The homeowners still have time to cure the loan and make up the back payments.)
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People with a long term or permanent hardship, when the homeowner in default is unable to solve the problem that created the hardship. (i.e. permanent loss or long term loss of income and/or a job)
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Homeowners monthly income and expense statement show that there is a deficit (monthly expenses exceeds borrowers monthly income) with no possibility of curing the problem.
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Loan to value problems, preventing the home owner to refinance: keep in mind that most lenders will require an 80%LTV in the current market, while stated income loans are virtually impossible to do.
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Long term loss of equity: most homeowners who have bought with a 100% or even 90% financing are experiencing a complete wipe out of their equity, which will most likely remain in the negative over a fairly long term period.
Can a Short Sale transaction be approved without any late payments?
Applying for a short sale while your monthly payments are still being paid up to date, is called an Eminent Default”. Our experience has proved that most lenders will consider an “Eminent Default Short Sale” provided the property has been listed for three months or more.
Which are the best potential properties to qualify for a Short Sale ?
The best properties to perform a short sale on are:
- The houses that need lots of work and repairs because lenders will give you a bigger discount if they see they are "don't wanters".
- Properties with large 2nd mortgages are also treated as gold because the 2nd mortgage is often wiped out at the foreclosure auction: lenders with a 2nd and 3rd mortgage position would rather have something than nothing.
- Any property on which there have been one or more late payments on the mortgage.
- Any Upside Down property, with negative equity as a result of the mortgage meld down in the current market place.
What liability do I have when doing a short sale?
In a foreclosure, your house is sold at an auction, which typically causes the difference of the total amount you owe and the foreclosure sale price to be much greater. This means you have a higher potential tax liability. Additionally, the bank may come after you for a Deficiency Judgment.
The positive effects of a successful short sale are immeasurable:
- A Short Sale will eliminate a deficiency judgment.
- Minimize your tax liability.
- Keep the foreclosure off your credit.
New legislation was recently passed by congress, called the Mortgage Forgiveness Debt Relieve Act of 2007: which makes it impossible for lenders to 1099 you for the difference in what you sell your property for and what you owe, provided you qualify under certain criteria i.e: (1) property is owner occupied and a residential private property, (2) no cash out refinance took place where funds was utilized for personal use other than property improvements, or acquisition money, (3) the amount forgiven is limited to certain amount depending on your marital status.
However this law is temporally and it was passed for only a three year period, retrospective to January 2007. This means the IRS can not consider the difference as income; therefore you can not be taxed on that income, the bank can not ask you to pay a portion of the difference back in the form of an unsecured note.
We have included the following link to the complete Mortgage Forgiveness Debt Relieve Act of 2007 for your convenience, also see: Exclusion of Income Realized as a Result of Modification.
(Please consult a tax consultant.)
What is a Deficiency Judgment?
A Deficiency Judgment can arise when the bank sells the house at foreclosure auction. The bank can sell the house at auction for any amount less than the total amount owing of the debt plus fees. A deficiency judgment can arise if the bank sells the house for less than the mortgage debt. The lender then holds you responsible for the unpaid portion of the loan:
For instance, if you owe $600,000 to the mortgage servicer and they see proceeds after the auction of $350,000, the remaining difference of $250,000 can be moved into a judgment against you. This will also appear on your credit report along with the foreclosure.
The lender may be allowed to take further legal action such as garnishing wages to pursue payment based on the laws of your state. Some states have restrictions and regulations on deficiency judgments, but unfortunately the majority does not.
Some lenders will choose the deficiency judgment while others may pursue a path to write off the loan. If they choose to write off the loan, the lender may issue a 1099 form which you will have to pay taxes on for the calendar year.
What is a Nonrecourse loan
A nonrecourse debt or non-recourse debt or nonrecourse loan is a secured loan (debt) that is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable.
If the borrower defaults, the lender/issuer can seize the collateral, but the lender's recovery is limited to the collateral. If the property is insufficient to cover the outstanding loan balance (for example, if real estate prices have dropped), the lender is simply out the difference.
Thus, non-recourse debt is typically limited to 80% or 90% loan-to-value ratios, so that the property itself provides "overcollateralization" of the loan. A lender of non-recourse debt depends crucially on an accurate assessment of the credit of the borrower, and a sound knowledge of the underlying technical domain as well as financial modeling skills.
Does Leonard Scott Realty buy my property?
No, we never take ownership of properties - this reduces your liability. There are people/companies who say they will conduct the short sale for you and buy your property. Watch out! This places a lot of potential liability on you. Our business model is to sell your property for as much as possible, which reduces the liability on you. Other people/companies will buy your property at a very low price so they can turn around and sell it for much more than what it is really worth! The banks do not like this and often refuse their short sales and/or ask you to pay back the difference.
The following chart shows a comparison of the processes of Mortgage Judicial Foreclosure and Trust Deed Non-Judicial Foreclosure.
In California, lenders may foreclose on deeds of trusts or mortgages in default using either a judicial or non-judicial foreclosure process.
Judicial Foreclosure
The judicial process of foreclosure, which involves filing a lawsuit to obtain a court order to foreclose, is used when no power of sale is present in the mortgage or deed of trust. Generally, after the court declares a foreclosure, your home will be auctioned off to the highest bidder.
Using this type of foreclosure process, lenders may seek a deficiency judgment and under certain circumstances, the borrower may have up to one (1) year to redeem the property.
Non-Judicial Foreclosure
The non-judicial process of foreclosure is used when a power of sale clause exists in a mortgage or deed of trust. A "power of sale" clause is the clause in a deed of trust or mortgage, in which the borrower pre-authorizes the sale of property to pay off the balance on a loan in the event of the their default. In deeds of trust or mortgages where a power of sale exists, the power given to the lender to sell the property may be executed by the lender or their representative, typically referred to as the trustee.
Comparison of a Judicial Foreclosure and a Non-Judicial Foreclosure.
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Mortgage Judicial Foreclosure |
Trust Deed Non-Judicial Foreclosure |
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Borrower Defaults |
Borrower Defaults |
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File Complaint (Initiate Law Suit) |
Beneficiary authorizes Trustee to proceed with Foreclosure |
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Record Lis Pendens |
Record Notice of Default |
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Court Hearing Date set for Sale |
Period of Equitable Redemption Trustor can reinstate |
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Advertise the Sale |
Advertise the Sale |
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Sell to highest bidder Buyer pays cash at sale. |
Sell to highest bidder Buyer pays cash at sale. |
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Buyer receives Certificate of Sale |
Trustee conveys Trustee's Deed to Buyer |
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Period of Statutory Redemption (Right of Redemption) |
Deficiency Judgment Unlikely |
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Sheriff's Deed Conveyed to Buyer Evict Mortgagor |
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Possible Deficiency Judgment |
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What are the advantages of using Short Sale Center
instead of other firms?
One should definately go with a company who specializes in Short Sales and Loss Mitigation if you expect to have any success in closing your short sale. Short Sale Center hires people who have worked in the financial and mortgage banking industry. We know the “ins and the outs” of the banks and the right questions to ask further more we have relationships with banks from all over and we proud ourselves in our relentless and vigorous mitigation strategies when negotiating on our clients behalf..
Negotiating a short sale with your lender is a tedious, complicated and difficult process, generally because it is a daunting task finding a bank oficial who has the authority to accept a discount, the process is complicated as a result of various reasons:
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The negotiating only begins once you get in touch with the right person: one can expect the process to involve a lot of waiting on hold and being bounced around an intricate maze of automated voice mail systems : which involves call around to locate the lender’s “Loss Mitigation Department.” We know how to bypass most of these issues.
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More than likely, you can expect different lenders to have different names for this department, while most lenders do not even have such a department. One can also expect to find lenders who have seized operations and are no longer in business as of the date of this document (April 10th 2008) 250 major US lending institutions have Imploded (since late 2006), there are 20 more on the Ailing Watch list and many more are expected to Implode before the end of 2008.
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Most often they simply make it as hard as possible for the home owner because they just can’t be bothered to give you the time of day although it is more likely that they simply don’t have the right answers.
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Lenders, their agents or attorneys will always fight until the very end to try and retain as much profit as possible in an attempt to cut their losses (nobody likes to loose money, especially the banking/financial industry): therefore it obviously requires very specialized negotiating skills to convince them to accept a short sale. Most of the times it involves multiple offers upon counter offer and counter offer, which can be very aggressive and often hard ball negotiations.
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The lender will also ask for financial information about the borrower. In other words this basically involves sort of a backwards loan application, the borrower must prove that he is broke and unable to afford the payments. The borrower must show that he has no other source of income or assets to repay the loan. This process may involve as much, if not more paperwork than an original mortgage application!
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The documentation required from the lender can be very confusing and it can also be extremely complicated to complete: the hardship letter, (which is telling the lender why the homeowner are not making or will not be able to make future mortgage payments) income statements, pay stubs, and so on. Be prepared to have everything together because if you don't, our negotiations may fail and the request for a short sale will definitely not be accepted.
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When there are two or more lenders involved and the lender in second or third position stand to lose all or most of their money, then the chances of negotiating a short sale and getting your request approved by both lenders becomes close to zero. We have the ways and means to negotiate such complicated and intricate deals.
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Last but not the least Short Sale Center has an extensive nationwide network of contacts with lenders so we can negotiate favorable sale terms on your behalf and help you avoid bankruptcy and foreclosure. We find that a properly negotiated short sale on your property can usually prevent a negative impact on your credit. Besides, our services are most of the times free to the property owner.
Do I need to give LeonardScott Realty power of attorney?
No, you should never give power of attorney to short sell your property. We require a simple Consent/Authorization form from our clients which authorizes us to negotiate on their behalf, it also entitles us to obtain all the relevant financial statements and documentation necessary to successfully negotiate and complete the transaction.
I have an Investor who says he can buy my house and negotiate a short sale with my bank- Is this okay?
This is very common tactic used by investors to try to buy houses at a discount for their own profit – please do not be suckered into this! You lose either way! Why do they do this? Because they have nothing to lose, they lowball the lender and if the lender accepts, they get a great buy on a house. If it doesn’t go through, then you will likely go to foreclosure and it doesn’t cost them anything. Either way you lose! If it does go through, you just increased your potential tax liability (read below) by having the mortgage company take a bigger loss than necessary. Additionally, if it doesn’t go through you wasted valuable time, that you could have been using to get a realistic short sale offer through and protect your credit.
How does a foreclosure and a short sale show up on my credit?
Foreclosures show up as FORECLOSURE, and can stay on your record for ten years. Anytime you apply for a new loan or have your credit run: the foreclosure will show up and it usually requires a disclosure which you will have to make on most credit and job applications. A short sale is listed as SETTLED DEBT, and is much less harmful to your credit.
(Please consult a credit company for more information.)
What is the cost of conducting a short sale with Short Sale Center ?
A consultation to analyze your specific situation is completely Free and with Zero Obligation. If it is determined that conducting a short sale is right for you, a minimal administration fee of $650.00 is due at the time you sign up with Short Sale Center .
Remember the time frame in successfully conducting a short sale application often exceeds three months and it never takes less than two months: there is an abundance of phone calls, faxes, emails, paperwork and other financial documentation together with hardball negotiations involved in this whole process.
You will probably agree that no one can possibly justify a minimal fee of $650.00 for such a daunting task which involves the time and attention of several negotiators and administrative staff throughout the three month (or longer) period.
Our incentive is obviously to sell your property as quickly as possible, since the listing commission is where we actually get paid for our services. Which again gets paid by the bank/lender'(s) and not by you!
Therefore, the $650.00 is the only cost to the home owner - no other hidden fees can be added since you are protected by our water tight contract.
Please call us today to better understand your current situation and options at (831) 622-9830 or Email us at Support@ShortSaleyh.com
How long does it take for you to complete the case once we fill out the paperwork?
Typical cases are completed within three months. If you have a foreclosure sale date approaching, we can complete it sooner. In the past we have found buyers quickly and have used our relationship with the banks to push back your foreclosure sale date.
Remember that a lot of time gets consumed because of insufficiency and incompetence:
· Know How is very important when it comes to negotiating with lenders/bankers, talking and understanding their industry jargon is often an impossible task for the novice!
· Tenaciousness is required when negotiating a $200k or $400k loss for a bank – no one likes to loose money no matter the circumstances or the amount!
· Efficiency is required in preparing the financial and other personal documentation which always differ on a case by case basis from lender to lender!
· All lender requests, whatever it may be and regardless of how insignificant it may seem to be, is absolutely extremely time sensitive: It is therefore your responsibility to provide us with such documentation and information in a timely manner in order to expedite the process!
Other pertinent information from the lenders perspective:
Property:
The lender will want all information about the property, the borrower and the deal he has made with you.
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Specifically, the lender wants to know what the property is worth. The lender will generally hire a local real estate broker or appraiser to evaluate the property (called a broker’s price opinion or “BPO”).
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The borrower can also submit their own appraisal or comparable sales information. In addition you will want to offer as much specific negative information about the property as possible. Also, include some relevant information about the neighborhood and the local economy if things are bad (copies of newspaper articles with “bad news” may help). A contract’s bid for repair estimates should also be submitted, which, of course, should be the highest bid you can obtain!
- The most common reason for short sale bids being rejected is as a result of a property being valuated for less than the actual market value. Lenders aren’t emotionally attached to their properties, so they aren’t as likely to give you “steal.” Many short sales fall through if the lenders BPO comes in too high, which is often the case. You can’t pull the wool over a lender’s eyes - if the property isn’t in need of serious repair, it is unlikely you can convince the lender that the property is worth a whole lot less than the appraised value.
Sales contract:
Finally, the lender generally wants to see a written contract between you and the seller.
- The lender wants to make sure the seller isn’t walking away with any cash from the deal. Generally, the contract must be written so that the buyer pays all costs associated with the transaction, so that the “net cash” to the seller is the exact amount of the short pay to the lender.
- A preliminary HUD-1 settlement statement is often requested, which can be difficult, since many title and escrow companies simply won’t prepare one in advance of closing. We can prepare a preliminary HUD-1 for you and submit it to the lender.
Will my lender or servicer still try to contact me?
From the time you become a client with Short Sale Center, it is in your best interest to let our office handle all correspondence with your lender and servicer. In the event that either party happens to call you, do not give them any information regarding your account. Instead, simply inform them that the LeonardScott Short Sale Center is now handling your case, and refer them to your respective specialist at (831) 622-9830.
Do I have enough time to conduct a short sale?
Until the foreclosure sale date has passed, you have time to resolve your situation by selling your property and negotiating a short sale. If you have not been appointed a foreclosure sale date, plenty of time will be available for our specialists to list and hopefully submit a short sale request packet. For individuals with a sale date, by submission of your short sale request, we hopefully will be able to delay the proceedings and therefore listing and selling your property must be handled in a more rapid manner. We will be able to request a sale date postponement with the necessary materials regardless of when your sale is scheduled. Time is of the essence, and submitting all materials to your Account Manager as quickly as possible is very important. A short sale packet cannot be proposed until all requested materials have been received by your personal Account Manager. Please remember, every day that passes, the bank accrues more fees and penalty charges on your account, and they will continue to accumulate until the process has stopped.
How do I Qualify?
Qualifying for a short sale is based on financial need. All lenders require proof of financial hardship. FHA, VA and conventional loans, along with each mortgage servicer, have their own criteria. If you are behind or about to fall behind in your payments we can get you qualified. The earlier in the process you start, the higher the likelihood of success.
Please note that a Short Sale is not for everyone - a typical candidate for a short sale is the borrower with at least two or more of the following criteria:
- "Reverse Loan Qualification" - In other words the borrower who does not qualify for his/her existing loan anymore! Since we have to proof that your financial situation has deteriorated beyond the point where you qualify for any loan on the property.
- "Excessive Increase in Interest Rates" - Your adjustable rate mortgage has increased beyond the point where you can afford the loan anymore.
- "Loss of Equity" - The value of the property is below existing loan to value's in your particular neighbor hood! In other words you have lost all or most of the equity in your property as a result of the mortgage melt down.
- "Financial Hardship" - You are experiencing a permanent or long term financial hardship.
Please click on the The Mortgage Reality Check link to find out more about Short Sale Qualification.
Is all of the information I provide confidential?
Yes, all submitted statements and information regarding your case are provided only to individuals who are authorized decision makers. LeonardScott Short Sales Center will only provide the lender, servicer and attorney handling your account information regarding your personal and financial situation. Any other third party requesting information must have a written authorization signed by the borrower and co-borrower.
Why not just let the home go to foreclosure sale?
As you probably know, nothing is that simple. A foreclosure sale does irreparable damage to your credit and your future. A foreclosure will prevent you from obtaining another home loan for quite some time and remains on your credit for up to 10 years. Homeowners with foreclosures on their credit record will not only struggle with obtaining a new home loan, but many cannot find a place to rent without significant collateral. Smaller purchases such as cars or furniture will also be difficult to secure following a foreclosure.
You should contact LeonardScott Short Sales Center, whether your hardship includes any or a combination of the following:
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Need to reduce your interest rate.
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Extend the time to pay back your loan.
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Sell your house for less than you owe the bank.
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Put the past due payments on to the end of your loan.
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Putt your past due payments in to the balance of your loan.
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Give the house to the bank or the government in exchange for what you owe.
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Any of the many other options available to you as described in this Q & A questionnaire.
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