Are you having difficulty making your mortgage payments every month? If so, then maybe you should seriously consider a short sale. The more frequently you default on your loan payments, the more this will convince your mortgage lender that you are not capable of paying your fees in a timely manner. When you do find yourself in a situation like this, it's possible for your lender to take a lower payment than the total amount that you owe.
Your lender may give his permission for you to sell the property at a price that is lower than its current mortgage. This is known as a short sale. Through this article, you will learn more about the process and its advantages. Read on to know the answers to the 8 most common questions on short sales.
1What Is The Short Sale Process?
If you are considering a short sale, the first thing that you have to do is to convince your creditors that you are no longer capable of paying your loan in a timely manner because of some financial drawbacks. Afterward, the negotiation process between you and your lenders ensues. At this time, you can benefit from the assistance of a loss mitigation expert who can help ensure that you'll pay lower than the total amount of your mortgage.
The process is called the pre-foreclosure or short sale. Then a homeowner should get a buyer who is amenable to this type of agreement. This is where you play a crucial role.
2Do Lenders Work With Qualified Buyers?
If you are the qualified buyer, you can discuss your options with the lender before you both come up with a good decision. Consider everything, such as the property's current condition and the present real estate market situation, and not just the financial issues at hand. To explain, in case some work needs to be done on a certain property before it can be sold, then it will likely be more advantageous to have a short sale.
Selling a house or property will also take a while, especially when the housing market is at a lull. But this will also mean that the bank will seriously consider a reduced loan balance. In case these conditions exist, you need to discuss your options with the bank.
3Who Should Attend The Negotiations?
Several people or groups are involved during short sale negotiations. You and the homeowner should be present. The investor (the lender or the owner of the loan) must also be in attendance.
More often than not, these negotiations also require the help of a third party who will act as an intermediary between the mortgagee and the mortgagor. Just remember that the best person to talk to once you have decided to do a short sale on the property that you've mortgaged is someone from the loss mitigation department of your lending company. This is the department that manages cases concerning those who default on their mortgage loan payments.
4What Does A Loss Mitigation Agent Do?
Lenders call loss mitigation departments many different names. These divisions are also known as loan workout, default management, special loans, and others. Although there are different labels for it, the primary duty of a loss mitigation department is to consider ways to collect the amount lent to borrowers at the lowest possible cost. The name really is not a huge deal because these departments have the same functions.
If you are planning to arrange a short sale, you'll need to discuss your options with an agent from this department. Loss mitigation programs were created by government agencies and mortgage industry players to give people alternative solutions in case of possible property foreclosure. One option is a short sale, but a homeowner who is currently facing financial hardship can also check out other possible strategies. All in all, a loss mitigation department assists lenders and borrowers in finding the best solution that will reduce their losses.
5Will Property Value Be Considered?
The property value can be better assessed once the needed repairs are completed. This is a factor that is also carefully considered by loss mitigation departments when they are deciding whether or not to accept an offer for a short payoff. In case the bank believes that the necessary repairs can be quickly done and that the property can be readily sold for more than the amount that you are offering, they will refuse the short sale.
So your offer must be backed by a strong case, and it is a must to itemize all the needed repairs and how much these will cost. Try to be as accurate as possible when doing the cost estimate because the bank will likely send its own representative to check out the place and make an appraisal as well. More often than not, a short sale is the last resort that a lender can do before his property is foreclosed.
6Will It Work During A Tough Market?
Yes; you will likely have more success when the market is not doing that well since the lender also knows that he'll have a harder time selling the property especially if he obtains the property after its foreclosure. Let's say that the house was bought or refinanced when the sellers' market was at its height. More or less, the price was inflated, and it was probably refinanced at 125% of its value, which was based on the inflated appraisal.
Now the economic conditions caused the property's value to decrease significantly. Thus, it's highly likely for the value of the property to drop lower than the total loan balance. In case the property's "as is" condition is quite poor, the lender will likely have a harder time selling it after foreclosure. As for short sale, it can pertain to payoffs that are lower than the current balance due plus the interest payments, legal fees, principal cost, and administrative cost.
7Will The Lender's Finances Matter?
The current financial position of a lender will likely have a lot of bearing on whether or not he will accept the short sale offer. There are other crucial factors that also influence the approval process, such as recorded nonperforming loans. There are times when a lender may be in a weaker financial position. In case a third-party investor appears and offers to help in lowering the riskier loans, this could disclose which party is having an issue with regards to selling the properties for foreclosure or who requires help in carrying costs for a specific length of time after the property is sold.
8Should Borrowers Pass A Hardship Test?
Yes; in order for a borrower to be eligible for a short sale, he must pass a hardship test. Each lender will have specific guidelines regarding this test. Other factors also focus on borrower characteristics as well as the current condition of the property. Indeed, several elements are exhaustively evaluated, including the current financial standing of the lender or the mortgage's third-party investor as well as other loss mitigation policies set by the investors or lender.
In case it applies, the policies of the government agency that is backing the loan and the amount of under-performing loans that a lender possesses are carefully considered as well. Private insurance companies or PMIs are also involved because one of their duties is to cover any shortfall; thus, it's also possible for PMIs to make the approval process more complicated, particularly for privately-held mortgage insurance. A PMI is also necessary especially if the buyer can only come up with a down payment that is less than 20% of the normal mortgage loan amount.
Hopefully, the information above can help you in assessing if a short sale will be a wise move for you. In case you are still a little bit unsure about all this, perhaps it's high time for you to schedule a consultation with a real estate expert or an attorney who can provide you with great tips and advice. It is possible to get out of a sticky financial situation by doing a short sale, which will free you from the monthly mortgage payments that you can no longer afford. Good luck in your future endeavors!
Jackie Wing is an Alaska native who enjoys snowboarding more than is probably socially acceptable. She lives in Anchorage with her two dogs Reese and Peanut or as she likes to call them Thing 1 and Thing 2.