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Worried You Might be Underwater? Review Our Guide to Help You Understand Your Options as a Distressed Property Homeowner


Let's start off by saying, this unfortunate situation is more common that you might think.  Many homeowners such as yourself bought their dream home with the full intention that they would never be late with a mortgage payment or even more unimaginable default on their mortgage with an impending foreclosure date.  But sadly, the economy took a turn for the worst and many individuals simply struggle just to make ends meet.  Or maybe it's the other end of the spectrum for you, maybe income hasn't been an issue but the value in your home isn't close to being that which it was when you purchased the home and now you find yourself in a situation where you are needing to sale and not sure how you can make up the huge difference in what is owned versus what your home is worth?  Regardless of how you found yourself owning a distressed property, we are available to help not only answer questions and offer advice but will help guide you through the process in complete confidence.  Let's start at the beginning...
 

What is a Short Sale?

Home sellers should consider a Short Sale when the value of their home is LESS than the amount of their outstanding loans. For example, if your home is worth $250,000 but you have a loan of $275,000 then a short sale is a consideration. Obviously, if you do not have to sell your home, you could wait out the market and hope for a turnaround in real estate values.
 

However, if you do have to sell your home you basically have three options.

  • First, you can bring cash to the table  upon the sale of your home. In the example above you would sell your home for $250,000 and pay another $25,000 to the lender out of your pocket to pay off the loan on your property plus your closing costs (typically 8-9% of the purchase price).
  • Second, you could let the home go into foreclosure. The lender will go through the foreclosure process, force you out of your home and then auction it off to the highest bidder at a foreclosure or Trustee's auction.
  • The third option is to pursue a short sale. You (or you real estate agent/short sale specialist) contact the lender, explain the circumstances and convince them to take less than full value of their loan.  In this case you may tell them you have a buyer for $250,000 and it's very unlikely there will be a buyer at a higher price. If they will accept $250,000 for their $275,000 loan then you can proceed with a short sale. Sometimes the lender will consider a short sale before you have a buyer and you can market your property and, if you find a buyer, take their offer to the lender for consideration. The lender may or may not accept the offer.

Will a Lender Accept a Short Sale?

While most lenders will not be thrilled at the prospect of a short sale they are acutely aware that a foreclosure is usually a far more time consuming and costly option. In a real estate market where housing values are going down it is in the best interests of the lender to liquidate their problem loans as quickly as possible.

With a short sale a property can be sold and the loan taken off their books fairly quickly. If they pursue a foreclosure they run the risk of the process taking a substantial amount of time during which the value of the property is depreciating. Also, buyers will tend to write low ball offers when they know that a bank or lending institution owns the property. The property will also be left vacant which can result in vandalism and deterioration. Some owners will even gut the house just before the foreclosure sale as a way to 'get back' at the lender. This is illegal but nonetheless happens on occasion. So, you can see why a lender might want to go the short sale route and get the loan off of their books with minimal hassle.

Steps in a Short Sale

Short sales are not necessarily complicated but do require some work on your part and your agent's part.

  • Figure out the true value of your property. We will provide you with a "market analysis" and give you a good idea of what your home might sell for. If the market is moving down keep in mind that your homes value may be moving down as well and estimated valuations may be valid for only a short time.
  • We will also calculate your estimated closing costs. Items such as a title report, escrow, appraisal, agent commissions, unpaid property taxes etc. may add up to a substantial amount of money.  A fair calculation of closing costs is approximately 9% - however, if you have utility liens, HOA liens, this number can change dramatically.
  • You'll need to know how much you owe on your property. Include all loans on the property in your calculation.  Finding your most recent mortgage statements are a good place to find this information.
  • We will need to calculate your equity. Normally the value of your home is more than the total of the loans and closing costs. If your closing cost estimate plus your loan amounts are higher than the value of your property then a short sale is a possibility.
  • We will gladly prepare a "Estimated Seller Net Proceeds" to break down all the costs in an easy to read format -- just contact us to request this document. 
  • We will contact your lender on your behalf to explain your situation. Lenders are under no obligation to accept a short sale but many times it is in their best interests to do so. Some lenders will not consider a short sale until you have missed a payment or two. Some will not accept short sales at all. You'll need to know where your lender stands with regard to short sales so we will want to contact them as soon as possible.
  • Consider your tax obligations! Do not underestimate this! Many times there can be a substantial tax obligation after a short sale has occurred. Be sure to talk with an accountant or tax attorney to figure out how much money you may owe the IRS if you proceed with a short sale  If you do not know of an accountant, please check our KEY Team Referral Desk for a reference. 
  • Then we will work hard to find a buyer and sell your property. The lender will still have to approve the buyer's offer but once they do we can sell your property.
Short Sale Package
 

All of the documentation needed to start a short sale is commonly called a "Short Sale Package" and is usually submitted either by us or yourself directly. The package usually includes the following items:

Sample Short Sale Package (items may vary depending upon the lender):

  • Cover Letter
  • Authorization to Release Information - Click Here to View an Example
  • Sellers Hardship Letter
  • Seller's Financial information
  • 2 years w2's
  • 2 months pay stubs
  • 2 months bank statements
  • Supporting Hardship Info - HOA liens, medical/disability statements etc.
  • Repair Estimate for the property
  • Comparable sales for the property
  • Contract
  • Net Sheet
  • First mortgage holder may ask for a payoff amount from the 2nd
  • Second mortgage holder may ask for a payoff amount from the 1st
  • Lender may ask for an Initial Title Report
  • FHA and VA may have their own forms and special requirements as well

If you are working with WAMU/Chase they have an additional packet that is required. |  For Chase's Packet - Click Here

IRS & Tax Implications

Many homeowners do not realize that they may be in store for a large tax bill from the IRS after the short sale of their home. Every situation is different and you should absolutely contact an accountant or tax advisor before conducting a short sale to determine your potential liability.

As an example assume you purchased your home for $400,000 in 2003. Since that time it has appreciated to $500,000 and you refinanced and now owe $450,000. You need to sell your home now but due to the bad market you can only get $400,000 for it. Your lender accepts a short sale since you owe them $450,000 but they are accepting only $400,000. The IRS considers the $50,000 that was "forgiven" by the lender as "debt relief" income.

Your lender will probably send you a 1099-C in the amount of $50,000 and the IRS will want you to pay taxes on that amount. What are the odds that you have that kind of money laying around after you just went through a short sale on your home? Be very careful regarding your tax obligations BEFORE you consider a short sale, deed-in-lieu-of-foreclosure or foreclosure.

The IRS will use your tax basis on your property to determine your tax obligations so you must be able to figure this amount out.

See the information we have on IRS Form 982. The form is used to request a "reduction in tax attributes" due to insolvency. This may allow you to avoid having to pay taxes on the debt relief you experience with a short sale. We strongly encourage you to talk to a tax attorney or accountant about this! 

Broker's Price Opinion

The Lender will want to see a Broker's Price Opinion (BPO) to get an idea of what the property is worth. The BPO is usually produced by either the agent for the seller or sometimes by an agent or appraiser working for the lender. The BPO will contain comparable sales of similar houses in the neighborhood, with adjustments made for condition and attributes, to determine what the market value of the subject property is.
 

Hardship Letter

The Hardship Letter is usually part of the short sale package and is written by the seller. It is used to explain to the lender the reasons for the borrower's need for a short sale. Reasons such as divorce, job loss, medical issues, etc. can and should be included. Usually just a one page letter with the pertinent information will suffice.

------

Date

Lender Name
Address
Loan Number

Dear Sir/Maam,

{In this section explain your hardship and why you must utilize a short sale - some example hardship reasons are listed below}

  • Unemployment
  • Reduced Income
  • Divorce
  • Separation
  • Medical Bills
  • Too Much Debt
  • Death of my Spouse
  • Death of a family member
  • Payment Increase
  • Business Failure
  • Job Relocation
  • Illness
  • Damage to Property
  • Military Service
  • Incarceration
  • Other (Please Specify)
Borrower's Signature

Date

Co-Borrower's Signature

Date
 
---- 
 
Click Here to View an Example of a Hardship Letter 
 

Credit Consequences

The credit consequences of a short sale and foreclosure vary slightly. The general consensus is that a short sale will show up on your credit report as a 'settlement', 'settlement for less than owed' or a "pre-foreclosure in redemption". Also, since most lenders will not consider allowing a short sale until a few payments have actually been missed you may also have a few 'lates' on your credit report. Neither of these marks is a good thing to have but it's possible to get them off of your credit report within a few years or less. A short sale can drop your credit score by 80-100 points. There is also the possibility that through negotiation with the lender you can avoid having the short sale reported to a credit agency.

foreclosure on your credit report can take 7-10 years to remove and can cost your credit rating (FICO) up to 200-280 points which is a very big hit.

So, if you have no better alternatives, pursue a short sale aggressively and avoid foreclosure.

Loss Mitigation Contacts

Most large lenders have loss mitigation departments that those facing a short sale or foreclosure situation will need to contact. Below is a list of phone numbers for a number of those lenders and servicing companies. If your lender is not listed below, call the number on your mortgage statement and ask to speak with someone in the Loss Mitigation Department.

 

ServicerPhone
ABM AMRO Mortgage800-783-8900
AmTrust Bank (fka Ohio Savings Bank)888-696-4444
Beneficial800-333-5848
Charter One800-234-6002
Chase800-446-8939
CitiFinancial Mortgage800-753-3673
Citimortgage800-283-7918
Countrywide/Bank of America800-262-4218
Deutsche Bank NationalCall Number on Mortgage Statement
Fifth Third Bank800-375-1745, Option 3
First Merit Bank888-728-9931
GMAC Mortgage800-850-4622
HSBC Mortgage800-338-6441
Huntington National Bank800-323-4695
Key Bank800-422-2442
LaSalle National Bank800-783-8900
Mortgage Electronic Registration Systems888-679-6377
National City800-367-9305, Ext. 53221
Ocwen Federal Bank800-746-2936
Option One866-711-1962
Saxon800-665-7367
Select Portfolio Servicing888-818-6032
SkyBank800-290-3359
Third Federal Savings888-844-7333
US Bank800-365-7900
Wachovia Bank of Delaware866-642-8608
Washington Mutual866-926-8937
Wells Fargo877-216-8448

Obama's Loan Modification Program

You've probably heard about President Barack Obama's plan to rescue the housing market. He believes that restructuring distressed mortgages will help to keep struggling home owners in their homes. He also believes that this will help slow or stop the decline in housing prices. To this point $75 billion has been allocated toward modifying distressed loans and the Administration claims that it can help up to 4 million homeowners. Unfortunately, over half of those loans that have been modified have re-defaulted within six months.

Can Obama's plan help you? Well, let's look at it's main components:

First, the Obama administrations loan modification plan focuses on payments, not prices. They assume that home owners will want to stay in their homes as long as they can make the monthly payment regardless of the value of their home. This may or may not be the case. Evidence has shown that some homeowners will walk away from their homes even if they could make the payment only because the value of their home has fallen far below what it was once worth.

Second, Obama's loan modifcation program requires loan servicers to lower the borrower's monthly payments to no more than 38 percent of the borrower's gross monthly income. The federal government would then subsidize a portion of the payment so that the borrower would only be paying 31 percent of their gross monthly income. Obama's plan does not require loan servicers to reduce the pricipal amount of the loan. The servicer can reduce the interest rate to as low as 2 percent, extend the loan to a 40 year amortization, or forbear a part of the pricipal at no interest. So, if these terms would help you stay in your homne then you should take a serious look at the Obama Loan Modification Program.

Why would loan servicers want to participate in this program? Well, for one, they will get $1000 for every modification plus an additional $1000 each year for up to three years if the borrower continues to make the payments on the loan. The borrower too can get up to $1000 knocked off of their loan principal each year for up to five years if they make their payment s on time.

Of course, in the Obama Loan Modification Program only owner-occupied primary residences will be considered and only those with loan balances less than $729,750. Applicants will have to sign an affidavit of financial hardship and verify their income and only loans originated on or before January 1, 2009 will be eligible for the program.

So, does the Obama Loan Modification Program sound like it could help you? If so, then give your lender or loan servicer and call and see if you qualify.

How to Get Started?

After reviewing all of the information above, if you are seriously considering pursing a short sale, then just Contact Us and we will set up a consultation to answer any remaining questions you might have an ensure you have a clear understanding of all of the documentation that will be required to start the process.  We understand this most likely is a difficult decision and will work are hardest to ensure that the process is as pain-free as possible.  We promise to be very sympathetic and patient as we help guide you through the process.  You can trust we have done this successfully for other clients and hopefully assist you as well to start the next chapter of your life.