Part 1: Should I Consider a Short Sale? Avoiding Foreclosure: Steps You Can Take To Save Your Home and/or Credit
Part 2: A Seller's Guide to Short Sales.
Part 1
Should I Consider a Short Sale?
Avoiding Foreclosure: Steps You Can Take To Save Your Home and/or Your Credit
If you've missed payments on your mortgage or are worried about future payments, it is important that you face problems quickly and directly in order to avoid foreclosure. Remember that foreclosure is also an undesirable endgame for lenders. Mortgage companies would rather attempt to work with a delinquent borrower before resorting to the expense and hassle of foreclosure.
Generally speaking, mortgage service companies provide one set of solutions for borrowers with short-term troubles and another set for those with long-term problems. Before you begin negotiating with the mortgage company, you should know which category your situation falls into.
For example, if you've been recently confronted by a costly auto repair, you may be in a crunch trying to meet a mortgage payment or two. Because the repair bill is a one-time expense, the mortgage issue is short-term. On the other hand, a change in employment or earning ability can be a longer-term problem, especially if your financial outlook is unknown.
: Ignoring a problem rarely makes it go away. Unfortunately, in far too many cases borrowers fail to respond to their mortgage service company (the firm that collects payments and sends notices when payments have not been received). The first step in showing good faith is responding to the calls or letters regarding your delinquency. Many service companies have a foreclosure prevention department that is trained to empathize with troubled borrowers. So make initial contact, but be careful not to agree to any new terms hastily.
The mortgage company may offer up several different solutions initially, but the last thing you want to do is to agree to something new that may put you into even more of a bind down the road. Before agreeing to any new terms, you should describe your situation to an outside expert. Seek outside help in the form of a real estate attorney, credit counselor or a housing counseling agency.
The most caring mortgage lender in the world still sees things largely in black and white, so it's important to gather as much information as possible. Begin by collecting all correspondence from the mortgage service company. Keep envelopes when possible, as sometimes the postmark of critical notices can affect a borrower's eligibility for relief. You will want to document the following:
Income: Collect as much documentation displaying your income as possible. Lenders typically want to see at least one month of income, but get together as many consecutive recent pay stubs as possible. Find your last two to three tax returns and W2 forms. Also include three to six months of bank statements.
Expenses: Assemble all bills, paid or unpaid, from the time you began to fall behind in payments until now. Include utilities, credit card bills, auto payments. It's very important to show why you may have fallen behind in the first place (i.e., unexpected repair or medical bills).
The documents will likely help tell the story of why you fell behind on your mortgage payments. Now it's up to you to fill in the blanks with the human element. Write down all of the circumstances that lead to your current situation, and you'll be better prepared to explain yourself to your lender.
Depending on the number of payments missed, the size of the loan and the financial outlook of the borrower, the mortgage company has a variety of potential solutions that it may offer:
Repayment Plans - If you haven't missed many payments, the mortgage provider may work with you to form a repayment plan that allows you to pay off the past-due amount bit by bit (in addition to your regular mortgage payments).
Reinstatement - Should you be experiencing a temporary shortfall of cash, your lender may provide an extended period of time to pay off the past-due amount. In most cases, you will still be responsible for any late fees or penalties you've already incurred.
Forbearance - If you need temporary relief, the lender may offer a forbearance plan, which suspends or reduces your payments for a set period of time, with the unpaid balance to be paid later in either pieces or one lump sum.
Loan Modification – Longer-term financial problems that affect overall income are sometimes solved by loan modification. Any term of a mortgage may be modified by a lender: the rate, the payoff date, and even the total amount owed. A lender may modify the terms of the mortgage if you cannot make payments under the current agreement, but the lender is reasonably sure that you will be able to consistently make future payments under new terms. A modification is a good option for a lender who concludes that foreclosure would be more costly.
Most mortgage-service companies are essentially broken into two branches: The collections department, whose job is to track down delinquent borrowers and recover back payments; and the foreclosure-prevention department (sometimes called loss mitigation, delinquency customer service or loan resolution). This second tier is responsible for making the tough decisions.
Getting past the collections agents and to the loss-mitigation department is critical. The help of an attorney can be crucial in gaining you such access. When you do get through to a loss-mitigation agent, tell your story and answer all questions about your income and expenses, and request an application for forbearance or modification.
While the hope is that the lender will offer mitigation, you should be prepared for the worst-case scenario: that you will have to move out. However, if the lender does offer loan resolution, they likely will push you to make a quick decision. Instead, take the time to consider your options with an advisor before agreeing to anything.
Is Short Sale The Answer? If, after attempting to work with your lender, you cannot agree on a mutually-workable solution, you can request the lender to work with you on a short sale. Because it is time consuming and expensive to foreclose on a property, most lenders prefer you try to sell the home rather than force them to go through the foreclosure process. Many foreclosure properties end up vacant and neglected before the legalities are finished, thereby reducing the value of the property even further. If your lender agrees to this option, you need to speak with a reputable Realtor, preferably someone experienced in the short-sale process, who can walk you through every step of the sale from start to finish. Once you find your Realtor and sign a listing agreement, the agent will begin the process of marketing and selling your home, negotiating with your lender, and closing the deal.
Deed In Lieu of Foreclosure: If, in spite of your best efforts, you are unsuccessful in selling your home in a short sale, your final option is to offer to sign the property over to the lender to avoid foreclosure. Lenders prefer that you sell the property yourself, so don’t expect this option to be considered by a lender until you are able to prove that you have attempted to sell your home at fair market value for a number of months. The credit reporting for a deed-in-lieu is the same as for a foreclosure, so you will enjoy no relief on your credit report if you choose this option.
Part 2
A Seller's Guide to Short Sales
Short sales can be lengthy, upsetting, and frustrating. It is crucial that you stay in touch with your bank(s). As a Realtor, I believe the single most important decision a person facing a short sale can make is their choice of agent to represent them. That agent will do a great deal of work behind the scenes, most of which you will not be aware. The following lists what generally happens in a short sale, and what you can expect from your agent.
1. At the listing appointment: Give me, your Realtor, all pertinent information about the home, including appliances, upgrades and repairs. Keep all related paperwork in a Ziploc bag for easy reference. I may ask questions about your home, loan and personal situation. These are not meant to embarrass you, but rather to give me a full understanding of what I need to do in order to accomplish a successful short sale. This is the time you will sign all paperwork with me. You will be given a list of financials to be provided, preferably at the listing appointment. I will go over financials with you to ensure that you qualify for a short sale. We will discuss pricing and marketing strategy. You will also provide keys to the home (2 sets); one for the lockbox on the front door; the other for my file in case of emergency. I will take photographs and measurements at the listing appointment, so try to have the home ready for photographing. You can save time by measuring each room for me in advance.
2. Entry into MLS, sign placement: This will occur within 2 business days.
3. Receipt of offer: The offer will be presented to you for discussion. The financials that you provided at the listing appointment may need to be updated so that we have the most recent copies. These documents will be sent to the bank with the offer to purchase. The bank will not consider any purchase offer without these documents being provided simultaneously with the offer. Once paperwork goes to the bank, I will begin the hardest part of the job: Staying in constant touch with the bank to monitor the file’s progress.
The file goes through several phases while in review at the bank:
1. The initial receipt of documents: It takes 48-72 hours before the paperwork your agent faxed is registered in the system.
2. Appraisal ordered by bank: This process can take up to 30 days. I will notify you when the appraiser has called for an appointment.
3. Negotiator assigned: After appraisal is received, the bank will assign a workout agent (negotiator). The negotiator’s file-review process requires a minimum of 30 days (or longer). I will follow up often as the negotiator processes the file. At this point, you may have been waiting 60 or more days (which is where the frustration comes into play). You must be patient and allow the process to move at its own pace.
4. If there is a 2nd mortgage: You and I need to stay in touch with the second lender also, who will have been supplied all the same information as was provided to the first lender. The second lender will follow the same process as the first lender. It is very important that you respond to each lender’s calls and requests for information.
5. If PMI (private mortgage insurance) is a part of the loan, there can be delay due to the bank’s negotiations with the PMI company. A PMI company may be responsible for a portion of the unpaid mortgage balance, so their approval of the sale is mandatory. It is possible your PMI company will contact you directly asking for financial information. Please provide what is requested.
6. Finally, the bank(s) will respond with either be a yes, a no, or a counteroffer. Sometimes the counteroffer is more than the home was listed for. I will continue to negotiate with the bank(s) and buyer’s agent to attempt to arrive at a settlement. If no agreement can be reached, the sellers will have to start over. Sometimes buyers walk away in frustration after having waited longer than expected. If you are lucky, you will have a backup offer in place, so if one buyer walks away, there may be another offer available.
