Millions of homeowners are faced with monthly mortgage payments that they can no longer afford. The reasons vary and may include, mortgage payment adjustment shock, a reduction in or loss of income, unforeseen medical expenses, etc. Each situation and degree of hardship is different. After not paying the mortgage payment for a period of time, the end result will be foreclosure. But, there is an alternative to foreclosure…a short sale.
What is a Short Sale?
A short sale occurs when your home is sold for less than the balance of your mortgage or mortgages. A short sale transaction is an alternative solution to a foreclosure and benefits both you and your mortgage lender.
Mortgage Lender Loss Mitigation
From a mortgage lenders perspective, the losses associated with a foreclosure are typically greater than the losses associated with a short sale. Thus, the goal of the lender is to reduce the loss as much as possible. Not only is there a loss of principal value in a foreclosure, but there is a tremendous amount of added expense in marketing the property, not to mention potential vandalism to a vacant home.
Your Loss Mitigation
Acknowledging that you will eventually no longer own your home, your goal is to cut losses as well. Your original cash down payment, when buying your home, is gone as well as any appreciation that you may have enjoyed at one time. Essentially, there is no equity to cash out.
Option 1: Foreclosure
Foreclosure is a very methodical and rough process. The lender files a Notice of Default with the Intent to Foreclose against your property. After a period of time, the lender then files a Notice of Sale. A company is hired by the lender to hold an auction of your home. The highest bidder wins. If the minimum required bid is not achieved, then your home is taken back by the lender. At that point, you’ve got to pack your belongings and move quickly. If you refuse to move, a Sheriff is hired to remove you and your family from your home. The process can be very ugly. Avoid foreclosure at all costs.
Option 2: Short Sale
The more desirable alternative to a foreclosure is a short sale. The process is similar to a normal real estate sales transaction. The buyer qualifies for a mortgage or pays cash just the same as in a normal transaction. There’s an escrow that processes the transaction. The only difference between a short sale transaction and a traditional sale/purchase transaction is that Short Payoff Services, Inc. negotiates the terms of the short sale with your mortgage lender on your behalf.
Benefits of a Short Sale Transaction
- Professional Representation
Your real estate professional will market and sell your home to a qualified buyer. They will earn a commission, which is paid by your lender. There is no out-of-pocket expense to you.
- Damage To Your Credit Is Reduced
A number of sources suggest that a short sale, shown on your credit report, is not as severe as a foreclosure. Although your credit score is vitally important, your creditworthiness and ability to obtain credit is more than just your credit score. This is an important point. For instance, you will be eligible for Fannie Mae & Freddie Mac home financing after two years if you short sale your home. You will not be eligible for Fannie Mae & Freddie Mac financing for a minimum of five years if your home is foreclosed upon. That’s a difference of three years.
- No Out Of Pocket Expenses
Virtually all short sales are sold “as-is”. If your home is need of repair, you will not be required to pay those expenses. Plus, your mortgage lender pays all escrow, title, real estate commissions and Short Payoff Services, Inc. negotiation fees.
- Get A Fresh Start
A short sale provides a clean break from your mortgage hardship and enables you to start a new beginning.
- Maintain Your Dignity
A short sale allows you to stay in your home during the escrow transaction. You then move to a new place after the close just like in a traditional escrow. If you allow your home to go to foreclosure, the process involves lender representatives making periodic property inspections and the formal posting of a trustee sale notice right on your front door. Finally, the local Sheriff is contacted to have you forcibly evicted if you refuse to move.
- Foreclosure Sale Date May Be Delayed
If you have received an offer to purchase your home, most lenders will delay the foreclosure sale date, giving you time to complete the short sale escrow transaction.
- No Deficient Judgment or Promissory Note
California passed Senate Bill 458 became law on July 18, 2011. This new law makes it illegal for mortgage lenders to require you to sign a promissory note or allow lenders to obtain a deficiency judgment against you for the difference between what you owe and the new sales price. This is one more benefit of getting a fresh start and not having to worry about the lenders coming after you in the future.
- You Will Have An Easier Time Renting
A foreclosure and/or eviction are red flags to potential landlords who may decide not to accept you as a renter or may be a reason for them to increase the security deposit. While a short sale is being negotiated you can take your time to select a new place to live and landlords generally apply more lenient requirements on short sellers versus those who have been foreclosed upon. Landlords are creditors too.
Its common sense… they can see that you made every effort to do the right thing with your previous lender by short selling your property versus allowing the lender to foreclosure upon you.
$3,000 to Help You with Moving
There is a government sponsored program that may assist you with moving expenses. The program is called Home Affordable Foreclosure Alternatives Program (HAFA), which offers benefits not available in a foreclosure. Sponsored by the US Treasury Dept., the HAFA program is designed to streamline the short sale process and offers financial incentives to both homeowners and lenders to encourage this type of resolution versus foreclosure. The purpose of the HAFA program is to help reduce the rate of foreclosures, as short sales have been shown to reduce the financial loss to the banks. And, short sale properties are rarely left vacant and neglected, thus reducing the chance of vandalism and deterioration that often becomes foreclosure properties. Lenders are required to release the homeowner from current and future mortgage debt liability and cannot seek a deficiency judgment or require homeowner to sign a promissory note for any unpaid balance. Note: FHA/VA loans do not qualify for HAFA and not all conventional lenders or servicers participate in the HAFA program.
The Benefits of a HAFA Short Sale
- No deficiency judgment against the seller.
- No promissory notes from the seller.
- No cash contributions required at closing.
- $3,000 to seller for relocation assistance.
- Up to $6,000 to 2nd mortgage lenders, if any.
- Eligibility Requirements for a HAFA Short Sale
- Seller must have a legitimate hardship.
- Mortgage originated on or before January 1st, 2009.
- Mortgage is delinquent or default is foreseeable.
- Current unpaid principle balance is $729,500 or less.
- Higher balances for 2 – 4 units.
The Short Sale Process
- List Your Home For Sale
Your real estate professional knows the value of your property and the asking price. You will sign a listing agreement stating that your property is being offered as a short sale.
- Your Home is Sold
An offer to purchase your home, under the terms of a short sale, is accepted by you. You sign the sale/purchase agreement and escrow is opened. The formal escrow and short sale negotiation process begins.
- Lender Approved
A number of documents are submitted to your lender or lenders for their short sale approval. As part of their process, your eligibility for HAFA is determined. If the short sale transaction and application are approved, the lender will send the short sale agreement to the escrow officer.
- Escrow Closed
Upon execution and recording of all escrow related documents, escrow is closed. If you qualified for the HAFA program, the escrow officer will issue you a check for $3,000.
Complete Our Short Sale Application
Your real estate professional will provide you with the LA City Short Sales application. This is a very simple application that requires very little information. That application is then sent to LACSS for analysis and processing.
Understand that hundreds of thousands of homeowners across our nation have faced incredible hardships that have forced them into a situation that they neither expected or planned for nor experienced in the past. In the end, friends and family are really all that matters. Losing a home due to circumstances beyond your control will not keep you from moving forward in life. To be sure, short selling your home is by far a much better and smarter way to control your future.
Note: Do not rely upon the information in this document when making decisions relative to any real property that you may own as it is probably inaccurate. Contact a competent attorney or accountant to learn more and to assist with making informed decisions.