In this challenging economy, many homeowners are finding it more and more difficult to pay their mortgage on time or in full. Every day we hear stories of homeowners all over the country walking away from their mortgages (which could damage your credit rating for 8-12 years). Other homeowners feel they have no other choice but to sit back and wait for the lender to foreclose. If you find yourself in this situation, remember: you still have options!
You may be able to avoid foreclosure through some of the new federal programs like HAMP or HAFA, or you could try to sell your home as a Short Sale. A Short Sale is when your lender agrees to accept less money to pay-off the mortgage than what the current pay-off amount is.
We've put together this guide of important information to help you learn about the process of selling your home as a Short Sale.
Connect with a Short Sale Certified ZipRealty Agent today
If the value of your home has declined below the total amount you owe on your mortgage then you are considered to be "underwater." Homeowners who are underwater may want to consider applying for Short Sale approval from their lender.
In general, there are 5 steps to apply for a Short Sale approval.
Step 1: Contact the lender's Loss Mitigation Department
Contact your lender's Loss Mitigation Department to determine your lender's particular Short Sale process and procedure. In general, the lender will start the process by requiring that you complete a Short Sale "package." You must find out your lender's process for Short Sales. Some lenders won't even consider your application for Short Sale unless you have an actual buyer in hand. In those instances, the entire Short Sale review process doesn't even begin until after the property has been listed for sale and an offer has been received; this process typically takes longer. If you have already received a Notice of Default you should consult with an attorney prior to proceeding with a Short Sale.
Step 2: Completing the Short Sale Package
Remember that you are asking the lender to take a loss on this sale. Your Short Sale package is the only chance you have to explain in detail why this is necessary. If you do not provide complete, accurate information you could be denied.
You should also keep in mind that if you have other assets (recreational vehicles, 401k, investments, etc.) that can be tapped to pay your mortgage or to pay the loan in full your Short Sale application may be denied or the lender may require that you exhaust those assets prior to applying for a Short Sale. The lender will expect you to consider every income source available before agreeing to a Short Sale.
A Short Sale Package will likely require the following information from you:
- Your financial statement including information about your financial background, assets, debts, etc.
- Mortgage statements from all lien holders
- At least 2 or 3 months of pay stubs
- Tax returns from the previous 2 years, including W2s
- All bank statements from at least the past 2 months
- Property tax bills
- A hardship letter
Step 3: Formulating the Hardship Letter
Generally speaking, the letter should be succinct and straightforward. It should identify the property address and loan number, and speak directly to the reasons why you can no longer make the mortgage payments.
- Financial hardship: Financial hardships are factors that negatively impact your income or exacerbate the problems associated with a reduction or loss of income.
- Job loss
- Change of life circumstance (death, divorce)
- Illness and/or medical emergency
- Interest rate change that causes the mortgage payment to increase
Release of full debt obligation: Another important purpose of the Hardship Letter is to request full resolution of the debt. After stating your reasons for hardship, you should specifically request the lender approve your Short Sale request, accept less than what is currently owed on the mortgage, and extinguish the mortgage note.
You should also ask the lender to accept the proceeds from the sale as payment in full of the loan obligation, and to forego any rights to a deficiency judgment to collect any unpaid mortgage debt amount (see "Deficiency Judgments" below). Many lenders may not agree to release its rights to seek a deficiency judgment so you should discuss your options with a tax advisor or attorney prior to proceeding with the Short Sale.
Step 4: Obtain Lender Approval to Sell
Once your hardship is determined to be genuine, the lender's loss mitigation department will:
- Assess the value of the home to determine what the likely proceeds will be from the sale.
- Determine the minimum it is willing to accept from the sale, though this won't necessarily be the list price. It's also likely that it won't tell you what its "minimum" is.
With the approval process underway, it's time for you to connect with a Short Sale Certified ZipRealty Agent. They'll work with you to help determine the home's potential sales price and anticipated list price for market. From this, they will be able to present further information to the lender as to what the expected lender proceeds will be after costs, commissions, etc.
Step 5: Selling the Home
Once the lender approves the Short Sale, you and your ZipRealty Agent should immediately begin the process of selling your home.
As the offers come in, your ZipRealty Agent will work with you to decide which offers are acceptable, generally based upon price and terms of the contract.
Keep in mind that the lender has the final say as to whether an offer is accepted, so you can (and probably should) accept more than one offer, and submit more than one to the lender.
Submitting the Offer for Acceptance
Your ZipRealty Agent will present the offer (or offers) that you're willing to accept to the lender, along with:
- Offer contract paperwork
- Net Sheet: a calculation of all the costs, expenses, concessions, repair requests, etc., demonstrating to the lender what the lender will receive as an actual payout when the property is sold and settled
- Any other documents required by your lender
This process could take weeks or months, so be patient.
While Short Selling your home isn't a desirable situation, it offers a strong solution for responsibly handling mortgage debt, as well as a viable alternative to foreclosure. Short Sales, however, are not without consequences. You should be aware of some of the issues associated with Short Sales.
Let's say the amount owed on your property is $360,000 and the Short Sale netted $320,000 to the lender. This means that in theory, you still owe $40,000 to the lender. This amount is known as the "deficiency."
The lender may waive this deficiency so you won't be personally liable to the lender for this unpaid amount. However, if a lender is unwilling to waive their right to a deficiency judgment, they can claim a personal judgment against you for the unpaid amount (in our example, $40,000).
If the judgment is granted the lender then becomes a regular, unsecured creditor, and has all the remedies other unsecured creditors have, such as wage garnishment.
Before proceeding with a Short Sale, you should clearly understand your options and seek legal advice from an attorney as to, whether or not your Short Sale eliminates the mortgage debt obligation in full, or whether the lender will try to collect the deficiency. ZipRealty Agents cannot provide legal advice.
If the lender does agree to waive their rights to a Deficiency Judgment, you are now free and clear of the mortgage debt.
However, in some states, a cancelled debt (in the example above, $40,000) may be treated as taxable income.
Subject to certain limitations, The Mortgage Debt Relief Act of 2007, in effect through 2012, allows taxpayers to exclude income from the discharge of debt on their principal residence if the debt relief was related to home value decline and the taxpayer's financial condition. The amount of debt forgiven is capped at $1 million for single persons and $2 million for married persons.
Before proceeding with a Short Sale, you should consult your tax advisor to understand your personal tax liability should you engage in a Short Sale. ZipRealty Agents cannot provide tax advice.
While a Short Sale is generally less damaging to your credit history than a foreclosure, it will impact your credit rating. A short sale will generally be reported as a debt that has been settled for less than full balance.
A short sale will NOT automatically halt any foreclosure proceedings, so you should be in contact with the lender's foreclosure administrators (usually the loss mitigation department) to be fully aware of:
- The lender's timeline for foreclosure.
- Whether or not the lender will halt or delay foreclosure proceedings while you are attempting to Short Sell the home.
Of course, the surest way to avoid foreclosure is to sell the home before the date of sale under foreclosure proceedings. HAFA may also help with this process.
Delays, Delays, Delays
Given the number of parties involved, and the increasing number of foreclosures and Short Sales (creating a backlog of paperwork at lenders), it's no surprise that the process can be a long one with many delays.
You may be able to use a Short Sale Expeditor ("SSE") to help relieve some of the stress of paperwork.
An SSE will:
- Help you efficiently navigate through the complicated short sale process.
- Offer assistance ranging from filling in all the paperwork, to assisting with negotiating the short sale approval from the lender.
- Charge a fee which MAY impact the net proceeds, so its services will need to be considered by all parties in approving a transaction and its financial results.
In general, SSE's are not Realtors, and will not handle the actual sale of the home. Additionally, most SSEs charge a fee for their services and your lender may or may not agree to cover that cost. You should discuss with any SSE what fees they charge prior to agreeing to work with them and discuss with your lender who is responsible for paying those fees, if any.
Given the complexities involved with the Short Sale process, you should work with a knowledgeable, experienced ZipRealty Agent who is Short Sale Certified and can guide you through every facet of the Short Sale procedure.
Your knowledgeable, Short Sale Certified ZipRealty Agent fully understands the complexities of the Short Sale Process and knows how to work through them on your behalf, including how to:
- Qualify sellers for Short Sales
- Negotiate with lenders
- Protect buyers
- Limit risk
Additionally, if you find your lender will require an offer in hand prior to its Short Sale review, you can rely on your ZipRealty Agent to know exactly how to present the offer, and what to present with it, to expedite a favorable lender decision as much as possible.
A Short Sale Certified ZipRealty Agent has completed one of the following courses:
"SFR gives [Real Estate Professionals] a framework for understanding how to direct distressed sellers to finance, tax, and legal professionals, qualify sellers for short sales, negotiate with lenders, protect buyers and more"
"A Certified Distressed Property Expert® is a real estate professional with specific understanding of the complex issues confronting the real estate industry, and the foreclosure avoidance options available to homeowners."
"Five Star Short Sale Certification is a signal...that [ your Real Estate Professional] is prepared to walk both homeowners and lenders through the short sale process."
Remember that while a Short Sale is less damaging to your credit history than a foreclosure, it still will impact your credit rating.
Lenders have been known to negotiate how they will report the Short Sale.
There is a possibility that the reporting of the Short Sale and how it appears could be negotiated to alleviate the negative impact on your credit history. While this is rare, some lenders have agreed to report the debt as paid-in-full. It's worth asking your lender if it will do the same thing.
Click on any of the links below to learn more about credit impact. By clicking on the links below you will be redirected to websites not affiliated with ZipRealty.
Click on any of the links below to learn more about loan modification. Please note that by clicking on the links below you will be redirected to websites not affiliated with ZipRealty.Bank of America Loan Modification
Loan Modification for Dummies
HAMP (Home Affordability Modification Program) program and is designed to give homeowners additional alternatives to foreclosure in the form of a Short Sale or Deed-In-Lieu of Foreclosure (DIL). This program ends on December 31, 2012.
The idea behind HAMP was to encourage lenders and homeowners to engage in loan modification, enabling homeowners to remain in their homes under affordable mortgage conditions and avoid foreclosure.
HAMP applies only to participating lenders. A current list of lenders is available here.
Am I eligible for HAMP?
You must first meet the following basic eligibility requirements under HAMP:
- You are the owner / occupier of the property (up to four units). If the property has more than one unit, you must occupy one unit.
- Unpaid principal balance equal to or less than $729,750 (The principal amount increases with multiple units).
- Hold a first lien mortgage that originated before January 1, 2009.
- Total monthly mortgage payment exceeds 31% of monthly gross income.
- Mortgage delinquent or default reasonably foreseeable.
If you meet these initial eligibility requirements, you will then need to work with your lender to determine whether you qualify under your lender's guidelines.
Once application is made, what happens?
Upon receipt of your application, your lender will determine whether to modify the loan.
Assuming modification is an option, you'll be offered a modification program on a trial basis. If you accept the plan and are successful in the trial period, a permanent modification is arranged.
Examples of modification plans:
- Reductions in interest rates to as low as 2% to achieve the 31% threshold. If this isn't viable, other options include, in order of priority:
- Extension of payment terms to up to 40 years.
- Forbearance: deferring a portion of the principal, interest free, until the maturity of the loan. At maturity (end of term, sale or refinance), a balloon payment would be required to pay the deferred principal.
- Forgiveness of part of the principal.
If a HAMP loan modification is unsuccessful or unavailable to you, you still may be able to participate in HAFA.
HAFA is an expansion to HAMP and centers on offering you a Short Sale or Deed-In-Lieu of Foreclosure (DIL) alternative to foreclosure, and streamlines the process in order to provide timely solutions to consumers who are unable to keep their homes.
This program ends on December 31, 2012 at which time all HAFA eligible Short Sale Agreements must be executed between the consumer and the lender.
Like HAMP, HAFA applies only to participating lenders. A current list of lenders is available online here.
The benefits of HAFA for homeowners:
- Offers incentive based options to foreclosure.
- Up to $3000 borrower relocation assistance.
- Provides for Short Sale and DIL options to avoid foreclosure when loan modification is unsuccessful.
- Total debt relief: proceeds through a HAFA short sale must be deemed to satisfy the homeowner's debt obligation in its entirety with no investor recourse for deficiency.
- Provides homeowners with time to successfully sell their homes and avoid foreclosure. The minimum 120 day sales window and 45 day close of escrow timeframes allow consumers to adequately market their properties and obtain viable offers to purchase, thus minimizing the chances of foreclosure.
Am I eligible for HAFA?
Eligibility criteria for HAFA is the same as HAMP:
- Principal residence (non-investment or secondary/vacation home)
- First lien before 1/1/09
- Default or documented imminent default
- Monthly payments in excess of 31% of gross income
- Principal balance equal to or less than $729,750 (incremental increases for multiple units)
- Didn't qualify for a HAMP trial period plan OR
- Didn't successfully complete the trial period (missed 3 payments during the trial) OR
- Was delinquent under a modification (missed two payments in a row) OR
- Requests a short sale or DIL
The components of HAFA:
Stays Foreclosure Process
Once you're being evaluated for HAFA eligibility or participating in the HAFA sales process, all foreclosure proceedings must be stayed, that is the lender must put all foreclosure proceedings on hold. While foreclosure may be initiated, no proceedings may continue to complete the sale while the HAFA process is underway.
A Standardized Short Sale Process
HAFA uses the standardized processes, documents, timeframes and deadlines as described below.
Waivers of Deficiency
Lenders participating in HAFA must accept the sale proceeds from a short sale as full payment of the outstanding loan. The lender must waive all deficiencies and judgments to collect the difference between the sales proceeds and the principal balance of the loan.
The government offers financial incentives to homeowners, lenders, and investors for participation in HAFA.
- Up to $3000 borrower relocation assistance
- $1500 for lenders to cover administrative and processing costs
- Investors are offered up to $2000 match for investors for allowing a total of up to $6000 in short sale proceeds to be distributed to subordinate lien holders
What are the HAFA Short Sale procedure guidelines?
HAFA requires that lenders and consumers abide by strict timelines regarding all phases of the Short Sale process, from HAFA eligibility through close of escrow. The following summarizes the timeline and marketing requirements that participants must adhere to:
- A lender must consider a consumer for HAFA eligibility within 30 days if the consumer is ineligible under HAMP or if the homeowner (you) proactively requests to be considered for a Short Sale or DIL.
- Homeowners have 14 days to respond to a notification of eligibility in order to allow the lender to meet its 30 day response deadline.
- The lender determines whether to issue a Short Sale Agreement (SSA) to the consumer based upon its evaluation of the investment, including appraisal.
- Once a Short Sale Agreement (SSA) is signed, the consumer must be given at least 120 days to sell the home, during which time any foreclosure proceedings continue to be stayed.
- Once a purchase offer is executed, the consumer has 3 business days to submit a Request for Approval of Short Sale (RASS) to the lender.
- The lender has 10 days from receipt of the RASS to approve or deny the request and notify the consumer.
- The lender must allow for at least a 45 day close of escrow period from the date of contract execution, unless the consumer agrees to a reduced time frame.
- Upon closing, a lender must follow state law in determining when to release the first mortgage lien following receipt of the sales proceeds or receipt of the DIL. Again, investors must waive all rights to any deficiencies between the proceeds and the loan amount.
Before proceeding with any of the programs available to homeowners, please consult an attorney and a tax professional in order to understand the legal and tax implications of proceeding with a Short Sale or DIL. ZipRealty Agents cannot provide any legal and tax analysis and advice.