Today’s real estate markets are adjusting all over the country. Home prices are trending downward in more than half the major markets. Add the popularity of minimum-down and no-down loans, interest only loan programs and the many ‘optional-payment’ ARM’s with potential negative amortization and you end up with mortgage balances greater then the values of the homes being sold or refinanced.
This phenomenon has caused the rise of what is called ‘Short Sale’ transactions. A short sale occurs when the debt secured by the property offered for sale exceeds the net sales price. Under that scenario, one or more of the lenders who have a note secured by the property may accept less than the amount actually owed in the payoff of the loan amount. For more................
Now, typically the seller has to prove that remaining in the home rather then selling, will create a financial hardship and were they to remain in their position there would ultimately result, default and foreclosure. The reason many lenders will entertain a short sale is that they will recoup much more money in a short sale than they would if the property went all the way into foreclosure and they incurred the legal costs of foreclosure and ended up with the property as an “REO” or real-estate-owned” anyway.
Here is an example: A homeowner loses his or her job. They find that they need to sell their home and do so before too many late payments would show on their credit report. The borrower/homeowner originally borrowed $250,000 with no-down payment (100% financing) with an 80-20% combo-loan (piggyback) back in December 2005. The comps now show a market value of just $210,000.
If the seller’s agent could get an offer for $210,000, the seller could get out of the property and have a fresh start. The bank(s) are owed $200,000 and $50,000 respectively (both were interest-only loans). If the seller goes a month or two behind, then the balance would be even greater than the original loan amount.
Although the $210,000 0ffer would not even cover the $200,000 first mortgage balance (after selling costs), the first lien holder would most likely accept the offer. There will remain the issue of the second mortgage and any unpaid property taxes. The property taxes could be paid out of the proceeds from the short sale, or paid by the new buyer. It is the second that is the issue now.
The agent for the seller (with the seller’s permission) would also contact the second lien holder. Now, there are occasions where the first lien holder may take a bit less to give the second lien holder a piece of the proceeds from the short sale but it is rare. Typically, the first lien holder will get the majority if not all the proceeds after costs of sale and taxes, and the second lien holder is left with little to no monies at all.
The second lien holder is not in a position to argue much, unfortunately as the foreclosure by the first lien holder would wipe the second lien holder out anyway. The only way they could protect their interest would be to buy out the first lien holder position so that they move into the first position. Knowing the reduced value of the property and by moving into the first position, they would still most likely end up with little or nothing, they will probably settle for pennies on the dollar if anything at all. Their legal costs can easily exceed anything they may recover by pursuing it any further. Thus is why the rates are always greater on a second mortgage than a first. The risks of loss are much greater.
The lenders would want a substantial amount of information to consider a short sale. They would require the completion of their own in-house short sale package; financial documents and tax return and income information from the seller; and a hardship letter from the seller. The negotiations ands consideration for a short sale can take weeks to complete. They would also most likely require an appraisal on the property regardless of the information from the real estate agents involved. The entire short sale process can take as little as three weeks but can also take a few months depending upon the lenders, their position and the market conditions as well.
Remember, the lenders do not want the house back anymore than you want to lose the house. Try and negotiate a win-win transaction before it hits your credit too hard. Good luck!
I did a short sale on my home last November. I have some money in the bank, no debt and a very high credit score. A mortgage broker told me that I can't get a mortgage for at least two years, because of the short sale-banks, FHA wont do it. Is this true? Must I rent for another year and a half? Any suggestions?
Posted by: Victoria | June 29, 2009 at 05:40 AM