Understanding Short Sales & Forclosure

 

What is a Short Sale?

 

A short sale can be an excellent solution for homeowners who need to sell, and who owe more on their homes than they are worth. In the past, it was rare for a bank or lender to accept a short sale. Today, however, due to overwhelming market changes, banks and lenders have become much more negotiable when it comes to these transactions. Recent changes in corporate policy and the Obama administration have also improved the chances of getting a short sale approved.

But to be technical, here's a more official definition:

• A homeowner is 'short' when the amount owed on his/her property is higher than current market value.

• 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 closes on the property, and the property is then 'sold short' of the total value of the mortgage.

For homeowners to qualify for a short sale, they must fall into all of the following circumstances:

• Financial Hardship – There is a situation causing you to have trouble affording your mortgage.

• Monthly Income Shortfall – In other words: "You have more month than money." A lender will want to see that you cannot afford, or soon will not be able to afford your mortgage.

• Insolvency – The lender will want to see that you do not have significant liquid assets that would allow you to pay down your mortgage.

This seems simple enough, but it is a complicated process that takes the expertise of experienced professionals. Together, we can identify all possible options and, when possible, I may be able to assist you in the quick execution of a short sale transaction. The key is to locate a Real Estate Professional with experience in listing short sales AND working with banks to get the sale approved.

 

Forclosure Process

Foreclosure timeline differs from state to state and varies widely depending on whether a foreclosure is judicial or non-judicial. Judicial foreclosure generally takes much longer than non-judicial, because a suit must be filed and court appearances must be made.* In states that allow non-judicial foreclosure, banks will generally follow some form of the following three-step process, when a homeowner falls behind on payments:

1. Default Period

2. Acceleration or Redemption Period

3. Foreclosure Period

A homeowner is considered to have truly missed a payment 30 days after the expiration of the “grace period” after the first missed payment. The “grace period” is typically the 15-day period that a homeowner has to make a payment after it’s due without the payment being considered late. So if a homeowner’s payment is due on the first of the month, he or she would be considered officially in default 45 days after the after the missed payment was actually due. This period between when a homeowner officially falls into default and the bank takes action is considered the default period.

1. The Default period can be anywhere from 45 days to 12 months (in some rare cases) depending on how aggressive that homeowner’s mortgage lender is. Some will begin acceleration and foreclosure proceedings after the first missed payment, but others will wait much longer.  In some cases (as in FHA loans in Colorado), the lender is not allowed to file a Default Notice until as many as three payments are officially late.  In general, however, because there is no way to determine how aggressive the lender is going to be on a particular property, it is important for homeowners to contact America’s Home Rescue or a Pre-foreclosure Specialist (which could be you!) as soon as they miss a payment.  The best time to work out a solution like a Short Sale is just after the homeowner misses a payment. 

During this period, the homeowner will probably be receiving calls from their lender trying to collect the debt or work out a payment plan. If a homeowner can truly afford a payment plan to make up late or missed payments (i.e. the situation that was causing financial hardship has been resolved), we always recommend this option. However, what some homeowners don’t realize is that when they begin a payment or workout plan with their lender, depending on the plan provided, they are still responsible for their regular mortgage payments. This means that their monthly payments to the bank will dramatically increase, which will only exacerbate the situation if they were having difficulty affording their house in the first place. We recommend that homeowners do their homework before signing up for a payment plan or “forbearance agreement.” 

Many attorneys may also advise the homeowner to file bankruptcy, which will prevent the lender from foreclosing on the house...temporarily.  In certain situations, bankruptcy may very well be the best option, but if, for example, the house is the only debt prompting the homeowner to pursue bankruptcy, they may want to reconsider.  If the trustee payments associated with the bankruptcy become overwhelming and the homeowner falls behind, the bank can lift the property out of bankruptcy and foreclose on it, and the homeowner will have both a bankruptcy and a foreclosure on their credit report.  We find that in most cases, Short Sales have no effect on a homeowner's credit aside from the missed mortgage payments that got them there.

 

Once the homeowner is officially in default and the bank decides to pursue a foreclosure, the lender will have to file (in most states) a Default Notice, which begins what is known in some states as the Acceleration or Redemption Period.

2. The Acceleration Period. Basically, this notice notifies the homeowner and the public that the homeowner has a certain amount of time (as little as 20 days in some states, as many as 90 in others) to find a way to pay off the remaining balance on the mortgage before the bank schedules an auction date.  During this period, it is still possible to negotiate a solution like a Short Sale, but the homeowner needs to be aware that the clock is ticking.  The notice will be sent from the lender’s debt collection department, or in some cases, from the lender’s attorney.  In many states, a Notice of Default will also be filed with the county and published in a public place like a newspaper.  Because the homeowner's default has now been made public, investors, lenders, attorneys, and real estate agents, many of whom may not have the homeowner's best interests in mind, offering to bail them out.  It is crucial that homeowners in this situation become educated about their best options, which may not include staying in their current home, in order to avoid being ripped off.  Foreclosure hotlines and knowledgeable Short Sale Specialists can often be their best resources for this type of information when their ultimate goal is to save the homeowner.  If a potential client tells you that an "angel" has already offered to help them stay in their home for a fee, make sure they know consequences of signing a quitclaim deed and "renting back" their property.

If the note is not paid off in full by the end of the acceleration or redemption period and the homeowner has not worked out a payment plan, the lender will send the homeowner written notice—which usually comes from the lender’s attorney—that they are beginning the Foreclosure Period, and the homeowner’s property will be sold at auction on a certain date.

3. Foreclosure Period At this point, a workout program or a Short Sale may be very difficult to negotiate because the homeowner's file is already on a foreclosure attorney's desk, and the bank is already out most of the costs of initiating the process.  The foreclosure process differs from state to state. Therefore, the timeline may be drastically different.  In the state of Texas, the foreclosure period is 21 days, which is one of the most aggressive foreclosure processes in the nation. Many homeowners make the mistake of not taking any action to avoid a foreclosure until they receive their Foreclosure Notice, and at this point, it may already be too late. The faster a homeowner takes control of their situation and calls America’s Home Rescue or their local Short Sale Specialist for help, the more likely it is that a foreclosure can be avoided.

*In states like Florida, where all foreclosures are judicial foreclosures, the homeowner and their agent will want to keep records of when all court filings and appearances are made and scheduled, as this will help them determine the earliest possible date that a foreclosure auction may occur.  Because judicial foreclosure is such a complicated process, the average time to foreclosure in Florida is 6 months, and in this particular case, the homeowner (according to state law) is still allowed up until the actual day of the auction to redeem the property from foreclosure by paying the note in full.  For those reasons, a judicial foreclosure, while more haphazard and irregular than a non-judicial foreclosure, can often be more forgiving when it comes to negotiating a deal with the lender.  The homeowner, however, is still advised to take action at the earliest sign of trouble.

 

 

Some Options When Dealing with a Forclosure

 

A loss of a job, medical expenses and other life-altering occurrences can happen to anyone, causing us to fall behind in our loan payments. If we neglect paying our credit cards it hurts our credit rating, but if we stop paying our home loan the situation is even worse, because the lender can foreclose, taking ownership the home.

Don't Be Embarrassed

You must put your pride on hold if you're truly serious about stopping the foreclosure process. Lenders do not want to foreclose, and will usually work with you to get you back on track.

Rule #1: Contact your lender as soon as you know your payments will be late.

Rule #2: Never ignore the lender's letters or phone calls. Ignoring the problem won't make it go away.

Rule #3: Never assume your situation is hopeless.

Solutions for Temporary Problems

Reinstatement
Reinstatement might be possible when you are behind in your payments but can promise a lump sum to bring payments current by a specific date.

Forbearance
In forbearance, you are allowed to delay payments for a short period, with the understanding that another option will be used afterwards to bring the account current.  Lenders sometimes combine Forbearance with Reinstatement if you know you'll have the funds to bring your account current by a specific date.

A Repayment Plan
If your account is past due, but you can now make payments, the lender might agree to let you catch up by adding a portion of the past due amount to a certain number of monthly payments until your account is current.

Solutions for Longer-Term Problems

Mortgage Modification

If you can make your regular payment now, but cannot catch-up the past due amount, the lender might agree to modify your mortgage. One solution is to add the past due amount into your existing loan, financing it over a long term.

Modification might also be possible if you no longer have the ability to make payments at the former level. The lender can modify your mortgage to extend the length of your loan (or take other steps to reduce your payments).

Selling Your Home (Short Sale)

If catching up is not a possibility, the lender might agree to put foreclosure on hold to give you some time to attempt to sell your home, even if this is for less than you owe on your mortgage. This is refered to a “Short Sale”.

Deed in Lieu of Foreclosure

When the lender allows you to give-back your property--and forgives the debt. It does have a negative impact on your credit record, but not as much as a foreclosure.

The lender might require that you attempt to sell the house for a specific time period before agreeing to this option, and it might not be possible if there are other liens against the home.

For FHA Loans

The lender might be able to help you receive a one-time payment from the FHA Insurance fund. Your loan must be at least 4 months but no more than 12 months past due and you must show you are able to begin making full mortgage payments.

You must sign a promissory note which allows HUD to place a lien on your property for the amount received from the fund.

The note is interest free, but must eventually be repaid.

The note becomes due when you pay off the loan or when you sell the property.

For VA Loans

VA Regional Loan Centers offer financial counseling that's designed to help you avoid foreclosure. Call 1-800-827-1000 and ask for the phone number of the Loan Service Representative in your area.

Contact a HUD-Approved Counselor

If you don't want to talk with your lender first, contact a HUD-approved counseling agency. A counselor can help you determine which options might be available to you and negotiate with your lender to work out a repayment program. You can find an approved agency on the Web.

Call Dan @ 813-545-7372 for a free confidential interview.