Wednesday, December 8, 2010

Short Sales Are the Latest Trend in Real Estate; Is it the Right Choice for You?

As common as short sales are, they are equally a mystery. Many people have heard the term but have no idea what a ‘short sale’ actually means. Does it mean that the contract is shorter? Or that the length of time in which the loan has to be paid off is less? Neither. A short sale is basically a solution that homeowners have been tapping into lately, designed to ease the burdens of the present economy’s negative impact. By doing a short sale, people are able to save their home from going into foreclosure – and in the process soften the impact on their credit and future home-buying capability.

How Do I Know If a Short Sale is Right for Me?

Not everyone qualifies for a short sale but if it IS right for you the benefits will have a long-lasting and ultimately positive impact on your financial outlook, as opposed to losing your home to foreclosure. People in dire financial situations are usually the ones to have their applications approved. The most common reasons people seek short sales are:

• Loss of employment
• Relocation or insufficient equity
• Health circumstances
• Divorce
• Unseen sudden increase in living expense

How Does a Short Sale Measure Up Against Foreclosure?

There are three areas where the difference is felt between a short sale and a foreclosure – and these areas weigh heavily in homeowners’ decision on which route to take when facing difficult financial circumstances. Your credit score, credit history and eligibility to purchase another home are each impacted by both decisions.

Credit scores for a short sale are affected significantly less than as with a foreclosure. Choosing the former will only result in a drop of 50-90 points, whereas a foreclosure will lower your score by as much as 250-300 points.

Purchasing another home after you’ve been through a short sale is relatively easier, since you can start that process as early as two years from the date of the short sale. Foreclosures hinder your ability to venture into a new home for at least 7 years.

Whenever your credit suffers a blow there is always a recovery period that goes along with it. The time it takes to recover from a foreclosure is typically ten years and it can go even longer than that. A short sale is unreported, giving you the added benefit of having a “paid in full” status showing on your credit report.

What Would Make a Lender Accept LESS Money?

Given the choice, less money is better than no money and with a short sale the lender is at least coming out somewhat on top. Clearly, the options for homeowners in a financial bind are either a loan modification or a foreclosure. Here are some of the things lenders have to deal with in foreclosures that they are otherwise spared by going the “less money” route:

• The cost of legal proceedings for eviction or repossession
• Loan payment loss during foreclosure proceedings and until the home is resold
• Maintenance and repair of home prior to resale
• Government penalties in terms of loan-freezing when reselling in the market

Commonly Asked Questions about Short Sales:

If a property needs work, can I still do a short sale?

Lenders are more motivated to do a short sale on a property that needs work than on one that doesn’t because they know the risk of loss is heightened with foreclosure when much work is needed on the property.

How long does it take to complete a short sale?

Several factors affect the time required to complete a short sale, including the number of mortgages tied to a property since it would take longer to negotiate with two or more lenders. It takes about 8 to 15 weeks for the lender to receive and evaluate the proposal. Home buyers and sellers should keep in mind that this is a lengthy process. Also, working with a specialist who knows how to manage the transaction is extremely useful. Sometimes, the buyer may get cold feet at the last minute causing the transaction to fall through.

Why do lenders accept less than they are due?

On average, they lose tens of thousands of dollars less on a short sale versus a full foreclosure. When faced with the situation of a failing loan, lenders opt for the lesser of the two evils and choose to accept a short sale.

What is a Short Sale Packet and What Needs to be in it?

A short sale package it used to determine whether a homeowner can afford the property. Our team will work with you and your realtor to gather the information needed to meet the bank guidelines and streamline the process as efficiently as possible. Below are some of the standard items needed to complete a short sale proposal:

  1. The Listing Agreement
  2. Authorization to Release form (to allow agent to discuss with bank)
  3. Mortgage Coupon of First loan (and Second loan if applicable)
  4. Hardship Letter (see “How to Qualify” above)
  5. Financial Statement
  6. Two months of current Bank Statements
  7. Tax returns and or W2’s or 1099’s
  8. Seller Net Sheet (a copy of the HUD form with offer)
  9. Contract (when offer is accepted)
  10. Buyer’s Proof of Funds (with offer)

One very simple way to look at this entire process, which will also help to understand the lender’s perspective: You applied to get the mortgage and you will have to apply to get out of it. Just like with the original application, you will have to supply ample documentation explaining why they should accept your reasons to do a short sale.

Lenders lean favorably toward those applications that fulfill all documentation requirements. Pricing your property competitively, your undivided cooperation during the proceedings and transaction plus working with a quality, experienced short sale specialist are all excellent ways to achieve success in your quest to save your home from foreclosure.

Final Thoughts about a Short Sale

Your bank is not in the real estate business and does not want to own your property. However, you originally applied to get a mortgage and you must also apply to get out of one--the process requires you to submit documentation just like you did when you bought the property. Failure to comply with your lender's guidelines is a recipe for prolonging the process or getting your short sale application rejected and being foreclosed on. The best way to speed your path to the finish line is to fulfill all document requirements quickly and completely, price your property competitively, work with experienced people and cooperate with everyone involved in the transaction.