EVERYONE has heard of someone behind on house payments due to some kind of hardship? Mainly because of our economic downturn, recession and of course Real Estate Values declining. Most of these homeowners at one time were deceived into a bad ARM loan, over extending credit or borrowing too much, using up all the equity possibly to buy another house. Before considering bankruptcy or having the bank foreclose on the property, consider what is known as a short sale.
A short sale happens when an owner is behind on payments and the house is worth less than what is owed. A lender may agree to a short sale, agreeing to accept less than what is owed. In order for a short sale to be agreed upon, the home owner must prove a hardship situation to the lender. Other things the lender will require include 2 years of tax returns, a financial worksheet, bank statements, pay stubs and a few more items and some lender might actually not need any type of documentation to do a short sale, we call a fast track short sale.
What we’re seeing in California and almost nationwide is a trend that we do not like. Foreclosure numbers has doubled since last year. Why is this? Because when we had all that inflated equity in our homes, every bank, mortgage brokers, lenders offered for you to take and use them at a discount. Not realizing the grossly consequences that we are experiencing now. The loosening of lending guidelines that allowed everyone that had a Social Security number to borrow money without scrutinizing their credit and employment history has done us good. We all are suffering the consequences.
Being upside-down simply means owing more than the home is worth. Many people facing foreclosure have adjustable rate mortgages. When interest rates rise, so do payments and it is difficult for many people to make the additional payment. Other loan programs have allowed people to buy putting no money down. Other loans have even offered greater than 100% financing. So if there is a financial hardship and owners get behind on payments, they very well may be upside-down with the lender.
There are distinct advantages for a home owner in doing a short sale versus being foreclosed upon or declaring bankruptcy. A bankruptcy is very bad on a credit report. What most people don’t know also is that a lender can still come in and foreclose on a home even if it is a homestead and the seller has declared bankruptcy. A foreclosure is even worse on a credit report than a bankruptcy. With a short sale, the only penalization on the credit report is for the missed payments. Just make sure to always ask your short sale negotiator to ask for your deficiency waiver from your existing lender prior to signing your closing documents.
How can a home owner recognize if the lender may foreclose on the home? The first thing that usually happens when someone becomes behind on payments is a letter from the lender stating that the seller is in arrears. The big warning signal is getting a letter from a lender stating that unless payments are brought up to date by a certain time period, they will accelerate the loan. This means that they are going to call the entire amount owed due.
If a home owner is facing a financial hardship and falls behind, he should consider calling
a REALTOR to talk about the possibility of a short sale. An owner should make sure the REALTOR has a good understanding of the short sale process before deciding to work with him or her. An experienced REALTOR will have access to all the paperwork, the lender’s short sale contact information and can be ahead of the game in terms of contacting a lender before the lender starts foreclosing. Always ask to apply for HAFA (Home Affordable Foreclosure Alternative) if approved you will get $3,000.00 at closing for relocation approved by the bank. Some lenders are also giving more to close on a short sale.
If you or anyone you know is facing a situation that might lead to a short sale, please contact me immediately at 562-697-7028.
A common question: Can you explain the financial impact as far as foreclosing versus a short sale? Why go through the pain of a short sale when it is simply easier to walk away and foreclose? - Lito, California
A foreclosure and a short sale look about the same on your credit report. It’s devastating.
With a short sale, you sell your home and if you don’t satisfy the mortgage amount the bank may forgive the deficiency. A short-sale is positive for both the lender who doesn’t have to go through the process of foreclosing and the homeowner, who may be able to walk away without a huge amount of debt.
If you simply walk away, your house will be sold at auction, and if the amount it’s sold for doesn’t satisfy the mortgage, you might be on the hook for the deficiency. And lenders can go after you for the money by attaching liens on other property you own.
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