MD Short Sale Real Estate

Recently, Fannie Mae released new guidelines (Announcement 08-16) for borrowers with bankruptcy, foreclosure or pre-foreclosure on their credit report to qualify for a home loan. While the initial announcement did not specifically address short sales, the subsequent FAQ released on August 13, 2008 did in questions 6 and 7, excerpted below.

Is a preforeclosure the same as a short sale?

No, not necessarily, although historically the terms have been used interchangeably. For Fannie Mae's purposes, a preforeclosure assumes that the borrower has been delinquent in paying his or her mortgage and the servicer/investor agrees to accept a lesser amount to avoid the time and expense of a foreclosure action. A short-sale, however, can refer to situations in which the servicer/investor of the mortgage agrees to a payoff of a lesser amount than is actually owed, even on a current mortgage, to facilitate the sale of the property to a third party.

If a borrower has completed a short sale and was never delinquent on that mortgage and is now attempting to purchase a new primary residence, will Fannie Mae purchase the loan?

If the borrower is purchasing a new property and the previous mortgage history complies with our excessive prior mortgage delinquency policy and does not have one or more 60-, 90-, 120-, or 150-day delinquencies reported within the 12 months prior to the credit report date, the loan is eligible for delivery to Fannie Mae, provided the lender or servicer who completed the short sale has not entered into any agreement that obligates the borrower to repay any amounts associated with the short sale, including a deficiency judgment.

In summary, as long as a homeowner has not been more than 30 days late within the last 12 months, and a Waiver of Deficiency Judgment has been negotiated with the lender or servicer, then the short sale homeowner can qualify for a Fannie Mae secured loan immediately.

I found this recent article on MSN. I believe it did a fair job in reporting the pros and cons of a short sale for both the seller and buyer. I have attached the "Turning Lemon into Lemonade" diagram that I routinely use to illustrate how short sale can be a win-win-win solution for all parties involved.

The important thing to remember is that with any real estate transaction, you need a professional to provide objective guidance. As the article states, a short sale is a more complex real estate transaction; thus, both buyer and seller should seek out a specialist that can mitigate the issues addressed in the article. As a Certified Distressed Property Expert (CDPE) and Short Sale Specialist, I have the knowledge and understanding to address these issues and others to successfully conduct the short sale.

Use A Short Sale to Escape Foreclosure
-- written by Tamara E. Holmes for Bankrate.com.

If you owe more than your house is worth and can't afford your payments, you might be able to sell it for less than you owe - without having to pay the lender the difference.

If you can no longer make your mortgage payments and your home is now worth less than you owe on it, foreclosure may not be your only option.

A short sale, in real-estate terms, is a sale of a house in which the sale price is less than what the owner still owes on the mortgage. It is a procedure sometimes agreed to by lenders, who often would rather take a small loss than go through the lengthy and costly foreclosure process, in which the lender allows the sale of a home for less than it is worth and forgives the rest of the note.

While there are some significant negative consequences to a short sale, an ever-increasing number of properties are being advertised with that label.

Short sale: Win-win-win situation

The beauty of short sales is that they can be a win-win-win situation for seller, buyer and lender. Here's how:

%u2022 The seller gets out of the mortgage liability without facing bankruptcy.

%u2022 The buyer gets the home at a reduced price.

%u2022 The lender agrees to a loss it considers minimal without going through a foreclosure and being saddled with an unsalable property.

While it may seem surprising that lenders would agree to accept less than what they are owed, they benefit from the process, too.

"The lender benefits by not having to go through the protracted process of foreclosing on the borrower and then having to put the property on the market and go through the whole marketing process," says Stuart Wilson, a real-estate agent with Paragon Real Estate in San Francisco.

A market saturated with foreclosures can cost lenders billions - and as much as $50,000 per foreclosure - according to a study by the congressional Joint Economic Committee.

A buyer's dream

For a buyer, a short sale is a boon since he or she is getting a property at a reduced price. However, the process of waiting for a lender to decide whether to agree to a short sale can make a lengthy home-buying process longer and more arduous.

Wilson, who has represented both buyers and sellers in short-sale deals, advises working with an agent who's familiar with short sales.

He also suggests that buyers looking to negotiate a short-sale deal come armed with enough documentation to convince the lender that settling for the lower price is the best option.

"You'd better be armed with recent comparables that show unequivocally that the lender's price is out of line," says Wilson. "You can't do this with a cover letter or a conversation. It will need to be done with the kind of documentation that an appraiser would come up with.

"When you go into a short sale, you have an institutional lender, and it is an anonymous entity," Wilson continues. "You don't get a chance to talk to these people, you don't know what their guidelines are, you don't know what their time frames are, and you don't know if your contract will be approved in six weeks or six months. It's a real crapshoot."

Lenders are most concerned with the financial situations of the seller when they ultimately make their decisions. If a seller can handle the mortgage payment, there's no motivation for the lender to let the seller out of the mortgage at a lower price.

"A lot of lenders aren't even going to consider a short sale unless it seems like (the homeowner) is in financial distress," says Natalie Lohrenz, director of counseling for Consumer Credit Counseling Service of Orange County in Santa Ana, Calif.

Also, if the home has a second mortgage with another institution, a short sale is less likely to be approved, since that second institution would have to agree to forfeit all or part of the money it's owed.

Last gasp only

While getting a lender to agree to a short sale may seem like an answer to the prayers of a homeowner who wants to unload a house, it's not a good move if you're merely looking to find a new place. It's generally a last-ditch effort when the only other option is foreclosure.

Should you go for a short sale? It depends on how deep a financial hole you're in and how likely it is you'll be able to overcome those financial difficulties.

"If they're just having a short-term problem - short-term disability or maternity leave or layoffs, but they have good prospects to find something soon and they can weather the storm and hold on to the profit through that - obviously they wouldn't want to think about a short sale," says Lohrenz.

"But if the choice is foreclosure or short sale, generally a short sale is going to be a better idea."

Before you think about asking your lender to consider a short sale, it would be a good idea to get your paperwork lined up.

Be ready to show the lender you are serious about your situation. Get together a hardship letter (an honest explanation of your financial situation and how it occurred), pay stubs, bank statements, tax returns, an appraisal and documentation of your debts.

3 critical safeguards

If you're considering a short sale, experts advise you to take the following steps to meet potential negative consequences head-on.

1. Get it in writing. Make sure the lender agrees in writing that the short sale will absolve all debts.

"If they owe $300,000 on the house and the short sale is for $280,000, is there any possible way that the lender's going to come after them for the $20,000?" Lohrenz says. "Most lenders will put that in the agreement that they're not going to come after the deficiency."

2. Protect your credit rating. Ask the lender how it will report the short sale on your credit report.

"Most of the time, a short sale shows simply that a debt is satisfied," says Lohrenz. "But theoretically, a short sale could reflect on the credit report as 'settled for less than the full balance.'" Such a designation is a negative mark on your credit report, though it wouldn't hurt your credit as much as a foreclosure would.

3. Get professional tax advice. Short sales often have tax repercussions, since lenders can claim the forgiven debt as income that they provided you.

That means if you agreed to a short sale for $50,000 less than what you owed the lender, the lender could issue you a 1099 for $50,000, which you would have to pay taxes on.

But there are two "outs," says Lohrenz. "If you meet the IRS' definition of insolvency at the time the debt was forgiven, then you generally don't have to pay taxes on it."

Or, if your home loan is a nonrecourse loan, you're also likely to escape this tax. With a recourse loan, whoever signed the note is personally liable for the debt, and in a short sale, the debtor would have to pay tax on the difference. A nonrecourse debt is one secured by the loan collateral - such as the house itself - and the debtor would not have to pay tax on the sale shortfall.

The most common case is that mortgages secured by the property - especially for buyers who made a 20% or more down payment - is a nonrecourse loan. But it is absolutely critical you consult a tax attorney before you make such a move to ensure that you don't dig a deeper financial hole as a result of the tax situation.

A homeowner is 'short' when a borrower owns an amount on his property that when combined with closing costs and commission is higher than current market value.

Short sale is a last resort before foreclosure, it is not a 'get out of my mortgage free card'. In order to have a short sale approved, the seller has to either be in or be headed for foreclosure. This means that the seller has to have a valid financial hardship for why they can't pay their mortgage.

A short sale occurs when a negotiation is entered into with the homeowner's mortgage company or companies to accept less than the full balance of the loan at closing. A buyer close on the property and the property is 'sold short'. In a short sale, the homeowner's mortgage company pays the agent's commission and not the homeowner.

This sounds easy enough, however this is an involved process that takes time, patience, and good communication skills on the part of the agent. A typical short sale takes hundreds phone calls and one to four months to complete.

One of the most common misconceptions that a very high percentage of homeowners have is that their lender is lying in wait ready to jump out and take their house. Nothing could be farther from the truth because foreclosure is very costly to the lender compare to other alternatives.

Reality is lenders are in the finance business not in the real estate business and they do not want the homeowner's property. Whether the lender chooses to go through with a foreclosure or agree to a short sale, they are taking a loss either way, but in many cases they would take less of a loss with a short sale and resolve the matter in a comparatively shorter time frame. In nearly every case, a short sale offers a better return on the lender's investment than a foreclosure does.

There are a variety of other options available to a homeowner in foreclosure. It is important for the homeowner in foreclosure to investigate and weigh their options in light of the limited time frame they have to not end up in foreclosure. Below are some potential options to consider:

Reinstatement. If the reason that a homeowner missed payments was temporary and it has been resolved then they have the option to reinstate their mortgage right up to the bank sale. In order to reinstate a mortgage, the homeowner has to pay all missed payments, late fees, and legal fees that are due up to the date that the loan is reinstated.

Forbearance or repayment plan. If the issue that caused the homeowner to miss payments was temporary and the homeowner is not able to make a onetime reinstatement payment, they may be able to negotiate a forbearance or repayment plan. The lender allows the homeowner to pay the missed amount over a period of time or they place the missed payments on the end of the amortization of the loan.

Sell the property. If the homeowner has equity in their property they can sell it and cure the foreclosure.

Rent the property. In some cases a homeowner facing foreclosure will have payments low enough to allow him to rent his property and keep up his mortgage payments.

Refinance. In the homeowner has sufficient equity and income and their credit has not been so badly damaged they may be able to refinance. This might work if the issue that made the homeowner late in the first place has been resolved.

Mortgage modification. In some cases where homeowners do have the means to afford their mortgage payments or very close to their mortgage payments, their mortgage company may qualify them for a mortgage modification. A loan modification is very similar to a lower interest refinance where the lender lowers the interest rate on the existing loan in order to lower the payments. The homeowner will have to qualify for a modification by sending in proof of income, and expense. If this option is available it is an excellent option for homeowners to keep their properties.

Short-refi. This process involves the refinance of a home with a reduction in the principal balance and often the interest rate as well. The borrow will have to qualify for this process, both in showing a hardship as well as showing the ability to pay the new mortgage, often through a fully documented qualification process.

Deed-in-Lieu of Foreclosure. This is sometimes referred to as a friendly foreclosure since the homeowner essentially gives the deed back to the bank. This may prevent the banks from having to go through a lengthy foreclosure process and in exchange they will sometimes forego their rights to a deficiency judgment. The mortgage company agrees to take the deed back in exchange for the property and they typically have no further recourse. This solution only works in cases where there is only one mortgage and there are no liens on the property or in rare cases where a first mortgage lender will negotiate with the second mortgage holder.

Bankruptcy. This may stop a foreclosure and allow a homeowner to reorganize his debt and keep his property. The reality however is that most of the time this is not the case and the bankruptcy only stalls the foreclosure. If the homeowner is not able to make the payments after the bankruptcy the house will foreclose anyway. The other major drawback to bankruptcy is that is makes it very difficult for the homeowner to sell his property once he enters the process.

Short sale. When a homeowner owes more on the property than it is currently worth and one of the above solutions do not apply to their situation, then there is the option to purse a short sale.

A hardship can be defined as a material change in the financial situation of a homeowner that is or will affect their ability to pay their mortgage. Homeowner must have a hardship in order to qualify for a short sale. Examples of acceptable financial hardships are:

Loss of job
Business failure
Damage to property
Death of a spouse
Death of a family member
Severe illness
Inheritance
Divorce
Mandatory job relocation
Medical bills
Military service
Payment increase or mortgage adjustment
Insurance or tax increase
Reduced income
Separation
Too much debt
Incarceration

The homeowner has to be financially insolvent, which means that he has to owe more than he has or he does not have liquid cash assets that could be used to pay down their mortgage balance.

The answer boiled down to impact on the homeowner's credit score, potential deficiency judgements, and potential tax remifications. It is important that the homeowner consult with his account on the following issues.

Credit impact. Foreclosure can remain on the homeowner's credit for up to seven years while a short sale usually gets reported as a "settled debt" and is significantly less damaging. Credit experts say that a foreclosure will typically reduce a borrower's FICO score by 250 to 280 points while a short sale will typically only result in an 80 to 100 points hit depending on the number of late payments.

Deficiency judgement. Regardless of foreclosure of short sale, lender has the right to pursue a deficiency judgment against the borrower and attempt to collect the amount that was short. With a short sale, however, it is possible to negotiate with the lender to eliminate a deficiency judgment.

Tax ramifications. Regardless of foreclosure or short sale, debt cancellation and its related tax consequences are treated the same way. Unless the homeowner qualifies for the exemption under the Mortgage Forgiveness Debt Relief Act of 1007, he will be required to claim the 'canceled' or 'forgiven' debt as income for the year. To qualify for the exemption, the debt must be incurred to acquire a principal residence and be less than $2 million.

A typical short sale package of required documents will consist of:

Executed contract
Buyer-pre-approval letter
Preliminary HUD (closing statement)
Listing agreement
Listing history
Hardship letter
Paycheck stubs
Bank statements
Tax returns
Financial worksheet

Because the current housing crisis is a recent development, the majority of Realtors are unfamiliar or have received little training on working with homeowner on conducting a short sale. Some of the key mistakes they tend to make are:

Listing the property above market value to cover full payoff

Wasting time waiting for lender specific documents

Approaching the lender before a buyer is secured

Submitting an incomplete short sale package

Mistaking the lender as the client

Submit offer that is too low and/or financing that is not strong enough

Submitting multiple offers to the lender

Inadequate follow up

Title search not completed early on

Buyer's deposit not in escrow before package submission

Expecting the process to be much shorter than is realistic

These mistakes are extremely costly to the homeowner facing foreclosure. When the foreclosure clock is ticking, these mistakes are the different between a successful short sale or losing the property at the foreclosure auction. Please choose your agent with care.