Many Coloradohomeowners are experiencing a housing crisis like never before. The instability of our economy has put millions of Americans out of work which in turn has contributed to the housing market crash . About 1 of every 10 homes in the Denver Metro area are under water which means the property is worth less than the mortgage owed. This is causing a foreclosure tsunami like never seen before in history. With so many homeowners facing the lose of their home it is hard to contemplate all the alternatives. Most homeowners choose to do nothing and let the property foreclose. Foreclosure is not an option - here is why:
- Credit impact is around 30 points for a short sale and around 300 points for a foreclosure
- A short sale is typically reported as “settled for less than owed” where a foreclosure is report to the credit bureaus exactly as it is “foreclosed”
- Short sales will not affect your employment status where as a foreclosure can be seen as a negative mark against you and force an employer to re-assign or terminate your employment.
- After a short sale you can typically get refinanced to purchase a home in about 2 to 3 years. After a foreclosure your minimum time to obtain a Fannie Mae loan is close to 7 years.
- A lender typically will waive it’s right to pursue a deficiency judgment against you after completing a short sale. After a foreclosure in Colorado, a lender has the right to pursue you for the deficiency up to 6 years after the foreclosure!!!
- There are seller incentives (up to $3,000) for the successful completion of a short sale under the Home Affordable Foreclosure Alternative (HAFA) program. A foreclosure has zero incentives.
- A short sale is not much different from a traditional real estate sale. As your Colorado short sale specialist, here is everything you need to know about short sales and the short sale process:
What is a Short Sale?
In real estate, a short sale (or short pay or preforeclosure sale) refers to the sale of a property in which the sale price is insufficient to pay off all mortgages and pay the expenses of sale. If the lender is convinced that the owner, for various reasons, is unable to continue making the payments the lender will often agree to take less than the full amount owed to allow the sale to close deficient of what is actually owed. The incentive for the bank to approve a short sale is to have the property sell before the loan becomes a problem account on their books.
When a borrower is in default on a mortgage they not only owe the back payments, but also may owe late fees, accrued interest, and back taxes, etc. This can add up quickly to eat up all the equity (if any) the borrower had in the property. If the borrower is unable to bring the account current the lender will then foreclose on the property. With a foreclosure, the lender can lose up to 40% of the mortgage amount because of the extra costs involved with foreclosing on a property: attorney fees, court costs, lost interest payments, back taxes, eviction costs, property maintenance costs, selling costs, and REO company fees. Foreclosing on a property can also take up to two years in some states. Therefore, it is sometimes in the best interest of the lender to accept the short sale.
It also can be in the best interest of the borrower. They will not have to endure the time and stress of a foreclosure and their credit may not be as adversely affected as it would with a foreclosure. It is quicker and easier and does not subject the borrower to the embarrassment of a foreclosure. This Process may be difficult to believe but it is a definite possibility. As stated below there are hoops to jump through. This is a system that works because the banks do not want to hold the property for one, but they also do not want to pay a fee (at times up to $50,000) in order to send the property through the foreclosure process.
Before a lender approves a short sale they will make two key decisions:
1. Can the owner afford to continue making the payments on the property? If they can, there is no reason for the bank to eat the loss. Banks will not look favorably upon a borrower that they determine lied to get the loan. Does the homeowner truly deserve a short sale?
2. Will approving the short sale leave the bank in relatively the same position as they are likely to be in by going though the foreclosure process and then selling the property? If the bank can do significantly better by foreclosing they are likely to do so, but in today’s market a short sale will save them a lot of money in the amount of $50,000.
Also, the seller must not receive any sale proceeds for themselves. If there is a junior lien holder, (2nd or 3rd mortgage) the discounts can be substantial, sometimes as high as 90% or more. Question two is the primary determinant here. If the senior lender (1st mortgage) forecloses, the junior may get nothing so they may take a deep discount to get something out of the property.
Letting your home go into foreclosure will take $50,000 out of the lender’s pocket on top of the losses they’ve already accrued. It is a good bet they will come after you for the deficiency (by suing you in court) and the statute of limitations is about 6 years in most states. A short sale means you are working with the lender to minimize their losses so they tend to look more favorably towards not pursuing a deficiency judgment.
If a lender issues a 1099 for the deficiency, many homeowners don’t know that The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a short sale, qualifies for the relief. This provision applies to debt forgiven in calendar years 2007 through 2013. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition. To find out more go to http://www.irs.gov/pub/irs-pdf/p4681.pdf
Additionally, if a lender issues the homeowner a 1099 for the deficiency this typically means that the lender gives up their right to pursue the deficiency. Further benefits of a short sale are the guidelines to rebuilding your credit. According to Fannie Mae policies, a foreclosure will require borrowers to wait 5 to 7 years before reestablishing an acceptable credit history. The time period to reestablish new credit after a preforeclosure (or short sale) is 2 years. Can you afford to be without a credit history for 5 to 7 years? The answer is clear. Please contact us today for additional benefits of selling your property as a short sale.
Finally, contrary to popular beliefs, you DO NOT have to be late on payments to get qualified for a short sale. The lenders want to avoid foreclosure at all costs and are willing to help those facing an insurmountable hardship. Before you even think about not making your payments contact us first.
In real estate, a short sale happens when a lender is willing to accept a lower pay off on a loan than what is currently owed. In a short sale, the borrower will owe more on the property than the home is worth at its current state, however, a short sale happens only when a homeowner qualifies through some kind of hardship.
What are some common hardships for a homeowner to short sale their home?
Your lender must be convinced that the owner is unable to continue making the mortgage payments. Some of the common hardships for a homeowner to sell their property as a short sale are:
Divorce ►Illness ►Death of a Spouse ► Excessive Medial Bills not Covered by Insurance ► Job loss or ► Job Relocation ► Loss of Wages ► Length of time in property ► Increase in mortgage payment due to an Adjustable Rate Mortgage increase ► Business failure ► Economy ► You owe more than your home is worth ► Vacant Rental Property
If you have one or several of these hardships then a lender will most likely consider you for approval to sell your property as a short sale.
What is the Short Sale Process?
A real estate short sale is not much different than a traditional real estate sale. If you fall under one of the hardships above, then the next step is to contact a short sale specialist. I am your Longmont and Fort Collins short sale specialist. Here are the steps of the Short Sale Process:
1. Collect all the necessary paperwork from the homeowner that the lender will require for a short sale review and qualification which will include:
Lender(s) phone #’s, fax #’s, email address, or a copy of a monthly statement
- Seller’s hardship letter
- Supporting documentation supporting your hardship (doctor’s note, layoffs/job loss, divorce decree, medical bills, disabilities, property tax bills, HOA bills, ARM increase, death certificate)
- Seller’s Financial Statement
- Two most current month’s of bank statements
- Two most current month’s of pay stubs (or 3 month profit and loss statement if self employed)
- Two years tax returns (1040 portion and all schedules).
- Social Security #
2. List the Property for Sale – just as a traditional sale, the property will be listed on the MLS system, advertised and marketed using multiple internet websites, Visual Tours, staging, and yard signs.
3. Obtain offers and submit offers to your lender(s) along with the required short sale paperwork
4. Check in with your lender on a weekly basis for status updates
5. Receive a short sale approval letter for your lender(s)
6. Close the deal under traditional timelines (about 30 days) after completing inspections,
buyer loan approval, and title commitment.
You can do all the work and take all the risk yourself, or let me handle it for you. As your Colorado short sale specialist I will coordinate everything from the required paperwork, to negotiations, to closing. I have closed short sales in dozens of Front Range cities including Highlands Ranch, Aurora, Denver, Centennial, Westminster, Firestone, Frederick, and Loveland. Any market – Any city – my knowledge and experience will achieve short sale success for you and your family.
Why should I short sale my home?
To settle for a foreclosure means accepting the damage to your credit a foreclosure would bring. It also means accepting the fact that in many states, the lender will seek a deficiency judgment in the amount that is owed. A short sale by itself will typically lower your credit score by 50-120 points, however the hardest hit on your credit will be from missed mortgage payments, not the short sale itself. Your credit will usually recover from a short sale in as little as two years, whereas a foreclosure could dampen your ability to take out any future mortgage loans for at least five years.
Do I get any money back from a short sale?
In many cases, cash back incentives are given to homeowners who complete the short sale successfully. The Home Affordable Foreclosure Alternative program offers homeowners $3,000 cash back to help with relocation expenses. This money is in addition to any other relocation assistance and incentives specific to your lender.
How do I qualify for a short sale?
While lenders have become more lenient in recent times, there are typically three qualifications required for a short sale.
- Financial Insolvency (no other major assets),
- The proceeds from the sale of the property, after all closing costs are paid, are less than the amount currently owed on the property, and
- Financial hardship. Acceptable hardships may vary, but some common ones are; loss of income or employment, divorce or separation, relocation or job transfer, property in need of repairs without resources to make repairs, major illness and medical expenses, death of a family member, vacant rental properties, etc. In most cases, a short sale is not for those who want to sell, but only for those that have to sell.
Who will pay the short sale Realtors® commission?
The lender will customarily take care of all fees associated with the short sale process; this meaning your short sale specialist as well. In most cases, borrowers pay nothing out of pocket to complete a short sale.
What happens with the money that is forgiven by my lender?
Any difference on your mortgage will typically be written off as a loss by your lender. Some lenders may send out a 1099 for the amount that was forgiven. However, the Mortgage Debt Relief Act of 2007 states that you will not be required to pay taxes on the money if you did a short sale on your primary residence before the expiration of the bill. The bill however is not quiet that simple. Consult the appropriate representation in all tax and legal matters.
Can I still do a short sale even If I am going through a foreclosure?
Absolutely. You will not be asked to move out until the closing. If your specialist is actively working with your bank, your lender will typically delay the foreclosure proceedings making it possible for you to stay in your home a little longer.
What should I be aware of when doing a short sale?
There are unfortunately many who crave individuals who are in a financial hardship or facing foreclosure to take advantage of them and profit from their misfortune. These scammers will make deals sound enticing, but are only in it for themselves. Never sign a quit claim deed, power of attorney or an option contract without consulting an experienced short sale Realtor® and an attorney. Remember, nobody can look out for your interests in a transaction while trying to make as much profit from your situation as much as possible at the same time.
Can my current Realtor® handle my short sale?
This is a question that really needs to be researched. Short sales are specifically designed to be handled by experienced short sale specialists who have many short sales completed under their belt and the proof to back it up. There may be Realtors who claim they can take on a short sale, but it’s very important to check out their proof to those claims. It would be devastating to begin a short sale only to see it was rejected due to an incompetent Realtor who claimed to be able to bring you to a successful completion of your short sale. When searching for a short sale specialist, make sure you have a list of questions you would like them to answer and make sure you can feel completely comfortable with them. There are also many who claim to be distressed property experts after taking a weekend training class and earning a certification. While proper training is one factor to consider, experience is everything.
Why are so many homeowner’s being forced into a short sale or foreclosure?
Here is the scenario: Homes were purchased with inflated prices over the past three to four years with 100% financing and adjustable rate mortgages. Now, the interest rate on their Adjustable Rate Mortgage (ARM) is resetting and doubling the mortgage payment. Furthermore, the house has depreciated in value resulting in negative equity. Lenders won’t refinance these loans, and homeowners can’t afford to bring $20,000+ to the closing table to buy themselves out of their homes. It is an epidemic that will be with us for the next few years.
What do I do if my ARM is resetting and my mortgage payment increased dramatically?
The first step is to call KPK Realty where we will negotiate with your lender on your behalf to attempt to modify your ARM and into a fixed rate loan. We will do this for you at no cost to you. Our experience with all the major lenders can get past the minimum wage operators and talking to the negotiators who handle your case. We believe in helping every homeowner with this crucial first step. At no cost to you, what do you have to lose?
What if I can not get refinanced?
You need to call us IMMEDIATELY. We will set up a no cost, no obligation consolation with you, and educate you on your options. We are short sale specialists and we’ve helped many people just like you avoid foreclosure. We know this is a frightening and embarrassing situation, but we are dedicated to giving you a second chance and a clean slate. Our short sales system allows you to get out of your distressed property and regain control over your finances and your life. There are many options and alternatives that a specially trained Realtor at KPK Realty has to offer. We can give you a second chance, but only if you take the first step and call us today.
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