What is a Short Sale

In a Short Sale, a lender agrees to let a homeowner facing financial hardship sell a home for less than the amount of the mortgage owed. A Short Sale is an attractive alternative to foreclosure, and typically not pursued until after other efforts to keep the owner in the home have been exhausted. There are potential tax consequences that should be discussed with a tax professional.

Why is a Short Sale better than foreclosure?

A Short Sale can be less damaging to the borrower’s credit. The former owner can qualify for a mortgage backed by Fannie Mae or Freddie Mac to buy another home in as few as two to three years – far sooner than if there had been a foreclosure. Short Sales also help protect other property values in the community by keeping the home out of potential disrepair.                                                                    

Why has the U.S. Treasury issued new Short Sale guidelines?

Because of the challenges many homeowners have faced in their attempts at Short Sales, RE/MAX has worked closely with major lenders, the U.S. Treasury and other federal agencies to streamline and standardize the process. The new guidelines are in response to this advocacy by RE/MAX and others in the industry. Short Sales are seen as a critical component in stemming the increasing number of foreclosures and stabilizing the housing market.

What’s been improved in the Short Sale process?

Under the Treasury’s Foreclosure Alternatives Program, mortgage servicers have 10 business days to respond to a Short Sale offer. In the past, a lack of timely response has been one of the main reasons for delayed or derailed Short Sales. Also, paperwork and documentation are now standardized. Previously, such procedures varied widely between lenders. Various deadlines in the Short Sale process also have been standardized.

What’s improved for the homeowner?

Under the Treasury program, a successful Short Sale will release the borrower fully from the primary mortgage obligation. This lender may not pursue a deficiency judgment. Additionally, homeowners who complete Short Sales are eligible to receive $3,000 to offset the expense of moving from the home.

What’s the incentive for a primary lender to approve a Short Sale?

Using program guidelines, lenders will determine a minimum acceptable offer for the property. Typically a lender’s loss on a Short Sale is less than the loss it faces should the property go into foreclosure. Through the Treasury program, mortgage servicers receive $1,500 for every Short Sale successfully closed.

How does the program work?

If the owner of a principal residence does not qualify for refinancing and has exhausted Making Home Affordable loan-modification options – or if they make a direct Short Sale request to a lender in the program – the lender determines if a Short Sale is possible. If it is, the borrower is given at least 120 days (up to a year, depending on local market conditions) to sell the home using a real estate agent experienced in the local market. Meanwhile, the foreclosure process can move forward, but it cannot be finalized until after the marketing period has expired. During the marketing period, lenders must respond to a fully completed “request for approval of a Short Sale offer” within 10 business days.

Does the borrower continue to make primary loan payments during the Short Sale marketing period?

Yes, in some cases. The amount is determined by the loan servicer in accordance with terms of the Treasury guidelines. If there is a payment, it cannot exceed 31 percent of the borrower’s gross monthly income.

What if there’s a second mortgage, home equity line of credit or other junior lien?

The borrower is responsible for either paying off such debt or negotiating release from the debt and any potential for deficiency judgment. An experienced RE/MAX Short Sale expert can help you with this process. The Treasury program provides some financial incentive for junior lenders and investors who hold such loans to participate in the Short Sale and release the liens.

Are there restrictions on who can make a Short Sale offer?

Yes. Among the program’s many restrictions are requirements that the property not be sold to a relative and not be occupied or repurchased by the former owner. The buyer may not receive any funds from the transaction and cannot sell the property for at least 90 days after closing.

Is a Short Sale the only alternative to imminent foreclosure?

If a Short Sale is not successful, the lender can opt to accept a “deed in lieu of foreclosure.” In this process, the homeowner gives clear title to the property to the lender. Under terms of the Treasury program, the borrower is released from the remaining mortgage obligation and can still receive the $3,000 for relocation expenses. The borrower then has 30 days to vacate the property. In some cases, it’s possible to pursue a “deed in lieu of foreclosure” without first pursuing a Short Sale.

Is there an expiration date for the Treasury program?

Borrowers have until Dec. 31, 2012, to enter into a Short Sale or deed-in-lieu agreement with their lender under terms of the Treasury program.

Are Short Sales still possible for borrowers and lenders not covered by the Making Home Affordable Program?

Yes. Short Sales remain possible for borrowers with mortgages not covered by the Treasury program’s incentives and guidelines. RE/MAX agents with Short Sale expertise can help such homeowners pursue a Short Sale with their mortgage servicer or investigate other possible options.

Fannie Mae and Freddie Mac have issued their own Short Sale guidelines, which are similar to the Treasury plan, but different in some respects.

Read more about the Fannie Mae and Freddie Mac plans.

For homeowners to qualify for a short sale, they must fall into all of the following circumstances:
  • Financial Hardship – There is a situation causing you to have trouble affording your mortgage.
  • Monthly Income Shortfall – In other words: “You have more month than money.” A lender will want to see that you cannot afford, or soon will not be able to afford your mortgage.
  • Insolvency – The lender will want to see that you do not have significant liquid assets that would allow you to pay down your mortgage.

This seems simple enough, but a Short Sale is a complicated process that takes the expertise of experienced professionals.

IMPORTANT NOTICE: The Bosley Team and RE/MAX Alliance Group is not associated with the government, and our service is not approved by the government or your lender. Even if you accept this offer and use our service, your lender may not agree to change your loan. “If you stop paying your mortgage, you could lose your home and damage your credit rating”

Example Table of possible Time Frames for obtaining a new mortgage, after default or Derogatory Event.

Years to Qualify    Conventional FHA VA USDA Rural
BankruptcyChapter 7 or 11 4 years from discharge date 2 years from discharge date 2 years from discharge date 3 years from discharge date
Bankruptcy Chapter 13 2 years from discharge date 1 year of the payout must elapse & payment performance must be satisfactory – buyer must receive permission from the court to enter into a mortgage 1 year of the payout must elapse & payment performance must be satisfactory – buyer must receive permission from the court to enter into a mortgage 3 years from discharge date
Foreclosure 7 years from completion date 3 years from completion date 2 years from completion date 3 years from discharge date
Deed-in-Lieu 2 years from completion date 20% down No specific information on this yet, assume foreclosure rule of 2 years No specific information on this yet, assume foreclosure rule of 2 years No specific information on this yet, assume foreclosure rule of 3 years
Short Sale 2 years from completion date 1 year from completion date if the borrower was current at the time of the short sale and all installment payments for a 12 month period  or3 years from completion date if in default at time of short sale No specific information on this yet, assume foreclosure rule of 2 years No specific information on this yet, assume foreclosure rule of 3 year

* The rules for mortgage loans are subject to change without prior notice.

Please contact our Preferred Lender for further details and explanation!!!

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