Homeowners that have fallen behind in their mortgage payments find little comfort in knowing they are not alone. RealtyTrac reports that foreclosure activity was up 32 percent in April when compared to a year ago, increasing the foreclosure activity rate to 1 for every 374 homes. Not wanting to become another statistic, many homeowners are seeking an explanation of a short sale to determine its feasibility as an alternative to foreclosure.
Brief Explanation of a Short Sale
In simple terms, a short sale is when the lender for a home agrees to sell a property for less money than the assessed market value for the home. Real estate professional George Kiefer, GRI points out that “many times the owner may owe $200,000 on a home valued at the same amount, but when you add in the cost of selling the home, say $10,000, then you have a possible short sale situation.” The cost of selling the home is often overlooked by distressed homeowners, but the expenses are never overlooked by a lender.
Qualifying for a Short Sale
A homeowner needs the lending bank’s approval to complete a short sale and not everyone will qualify. “A bank wants proof of your insolvency before agreeing to a short sale,” George explains. “The lender is going to want to look at your bank statements, paychecks, 401(k) – everything – to determine your financial situation. If they see that you’re not exactly solvent, but diminished, then they will usually look for other options.”
Not All Short Sales Are Created Equal
Should a homeowner be able to prove an economic hardship that diminishes her ability to pay her mortgage on time, but is determined by the lending bank to be “somewhat solvent”, the bank might offer a short sale with a side loan to mitigate its loss as a possible solution. Returning to the previous example, if the amount owed on a home is equal to the market value, but the extra $10,000 cannot be covered by the borrower, the bank might short sale the home for the market value and open a $10,000 loan to the homeowner to cover the selling expenses. This is just one of a myriad of ways a creative lender might help the borrower out of a bad situation while still covering their own costs.
Banking Institutions Have a Long Memory
Some homeowners are under the misconception that if their house is foreclosed upon, they can avoid paying the bank the difference between their note and the home’s selling price (plus selling costs) by filing for bankruptcy. This is not always the case. “Banks want their money and they are very patient,” George explains, “so they will wait to see if a homeowner files for bankruptcy, or if they have filed, will wait for the homeowner to come out of bankruptcy, knowing they cannot file for bankruptcy again for seven years, and then they will come after them for the money they lost.” George is quick to note that this method is not the rule, but the actions are hardly the exception, either.
Seek Advice From Experts
Anyone that is facing the harsh reality of falling behind in his or her mortgage payments should seek a short sale explanation from professionals. George recommends that the first question a person or family in this situation needs to do is “ask themselves one question: do I want this house off my back or do I want to stay in my home?” The answer to this question will dictate the next steps the homeowner should take. If the answer is stay in the home, the person should open discussions with the bank to see if they will work with them in fixing the problem. If the bank is not compliant or refuses to halt the foreclosure proceedings, the next step is to talk to a real estate agent. “Many times I have been contacted by clients that have told me they talked to the bank seven or eight different times and the bank would not budge,” George relates, “but once we started the short sale process, guess what? The bank suddenly started negotiating. This is a very common occurrence.”
Not All Experts Are Created Equal, Either
It’s important for a homeowner to do their research and find an agent that can provide an educated explanation of a short sale. “Many agents,” George admits, “avoid short sales because of all the things that can go wrong [from a buyer’s viewpoint] and because of that, they are not as educated about the process as they should be.” George, whose background is in accounting, points to a common misconception held by some experts that the monies lost in a short sale are taxable against the seller. “IRS form 544 states, in no uncertain terms, if you have a loan forgiven and are insolvent or bankrupt, you do not have to pay taxes” on the difference. Since a bank, under most circumstances, will not agree to a short sale unless they have determined a borrower is insolvent, a tax cannot be levied. A Certified Public Accountant is another expert whose advice should be sought and will be able to answer any tax related questions involved in the process.
Avoid Foreclosure at All Costs
George mentions that any time an application for credit is submitted, one of the questions is “Have you ever been foreclosed upon?” There is no time frame set in the question, suggesting that if a credit seeker is to answer this question honestly, then there is no time limit to the damage foreclosure can cause to a person’s credit. When a short sale is agreed to by the bank, the lender will have paperwork stating the loan was ‘paid as agreed’. This does not mean the borrower is free and clear immediately following this procedure – quite the opposite. The initial damage to one’s credit is about equal to the damage done by foreclosure, but the time frame in returning to future home ownership is significantly lessened. A person having to short sale her property can reasonably be expected to return to the home buying market in as little as four years from the credit blemish. Four years may seem a long time to some, but everyone can agree it’s much sooner than never.
RealtyTrac Staff, “Foreclosure Activity Remains At Record Levels In April.” RealtyTrac