Sellers Making the Short Sale Decision for Sellers
by Karina Gafford
MilitaryByOwner staff writer
While the word "analyze" probably elicits a shudder and slightly horrified recoil from most readers, bringing back unpleasant memories of English class essays and standardized tests, the term is appropriate for those considering the possibility of either buying or selling a home through the short sale process. Keeping in mind that your home is likely your largest financial investment, the decision should not be made lightly. Over the course of this article, we will analyze short sales for prospective sellers, both civilian and military. To analyze means to break something down in order to inspect all of the parts before having an opinion on the subject; in this case, the resulting opinion should help you determine whether buying or selling a home as a short sale is the best fit for your family.
What is a Short Sale?
Short sales, a thriving aspect of the American real estate market in the wake of the financial collapse of 2008, involve the sale of a property for less than the amount owing to the lender. Short sales permit the homeowner debt forgiveness on the remaining owing balance in the event of a hardship situation, as defined by the individual lender. Core Logic
, a research company that provides statistical and analytical data to both financial and real estate professionals, recently conducted a study in which they found that over a three year period short sales have more than tripled, they are expected to rise by 25-percent, and almost one-quarter of all homes on the market in America are underwater, meaning that they owe more than the value of their home (2011). When a homeowner faces a situation in which he owes more than the value of his home and either cannot or does not wish to stay in the property, he has a number of options:
1) Remain in the home and continue to pay the mortgage
2) Stop paying the mortgage and eventually go into a foreclosure situation
3) Stop paying the mortgage and return the keys to the lender in a deed-in-lieu of foreclosure situation
4) Appeal to the lender for debt forgiveness in the form of principle reduction
5) Appeal to the lender for debt forgiveness in the form of a short sale.
Options Available to Military Families
For military families, option one does not always exist; when the military says go, you go. For servicemembers reliant on maintaining a security clearance, options two and three do not exist as a realistic choice either. In light of the Great Recession, a single mortgage blip on an otherwise perfect credit score no longer represents a minority; assuming that the default is fully disclosed to the servicemember’s chain of command, the impact on a security clearance will at least be mitigated if not fully forgiven. Option four remains a limited, rare option that typically does not apply to military families who PCS as such loan modification programs require families to remain in the home. Therefore, option five presents itself as a viable option to help military families who PCS away from homes in which the mortgage amount vastly exceeds the value, making it impossible to sell without taking a huge, and often unaffordable, loss. To qualify for a short sale, however, a borrower must have experienced a hardship in the form of a life-changing event that would prevent the borrower from continuing to remit monthly payments for the home. Such hardships included job loss, disability, bankruptcy, divorce, or long-term illness; disliking a neighborhood or needing a home with a nursery did not qualify. A PCS was not considered a hardship also.
Improved Options for Military Families
Until 2012, however, individuals with otherwise perfect credit scores and a responsible, unblemished record of timely payments to the mortgage lender could not qualify for a short sale simply because the lender did not see these individuals as a risk. Unfortunately, this encouraged those who wished to pursue short sales as an option to skip a payment or two in order to meet the lowered expectation requirements of mortgage lenders. Skipping payments, however, simply adds to the problem, making the servicemember look less responsible, even when he took the initiative to try to work with the mortgage lender in advance of a default. In 2012, the Making Home Affordable program recognized the problem for military families: They could neither remain in their homes as a result of a PCS nor could they sell homes for what they were worth. To help discourage servicemembers from defaulting on mortgages, they added a hardship contingency for short sales, permitting those who PCS-d away from their home to short sell without a need to default.
To further support military families, the Federal Housing Finance Agency waived the tax discrepancy obligation of servicemembers who owned homes with mortgages backed by either Fannie Mae or Freddie Mac. This meant, for example, that if the home sold for $50,000, but the mortgage was for $100,000, the IRS would typically hold the seller liable for a gain on the $50,000 discrepancy; however, since no gain technically exists in this situation, once sold, the servicemember does not have a tax liability. This is of considerable assistance to those who suffered huge losses during the recession, because in the event that a seller was relieved of $50,000 in mortgage debt without any tax relief, he would likely owe 15 to 25-percent in taxes on the $50,000, amounting to somewhere in the realm of $7,500 to $12,500, depending on his income tax bracket. The Mortgage Forgiveness Debt Relief Act
extended this tax relief to civilians completing a short sale or foreclosure on a primary home in which the loss amounted to less than $1 million for a single individual or $2 million for a married couple. These programs have been successfully operating now for almost two years, though they remain up for renewal on an annual basis. The Mortgage Forgiveness Debt Relief Act will end on December 31st
, and as of November 2013, Congress has not made any information regarding its renewal available.
Advantages of a Short Sale
Aside from simply helping a family get a fresh start, short sales have many other advantages, including mitigating negative credit implications that might otherwise occur as a result of selecting one of the other options above, including foreclosure or deed-in-lieu.
While a short sale is not an ideal solution, given the circumstances, choosing to reduce the negative impact on a credit score presents itself as the better option by going the route of a short sale instead of a foreclosure or deed-in-lieu. In the event of a foreclosure, credit scores are likely to drop somewhere in the realm of 200-400 points. The reported foreclosure will remain on the credit score for approximately seven years, making recovery from the foreclosure a challenging and lengthy process. In the event of a short sale, however, credit scores are likely to drop somewhere in the realm of 60-200 points, depending on the credit bureau and the individual’s credit rating prior to the sale. Further, though the short sale will remain on credit reports, indicating that the owner did not pay the entire amount initially agreed upon, those who completed a short sale are usually eligible for a new home mortgage within two years.
The short sale also benefits the lender. Though the lender would prefer to continue receiving the agreed upon mortgage payment each month, the lender would far prefer a reasonable short sale than a foreclosure. In the event of a foreclosure, or even a deed-in-lieu, the lender is stuck with the property; most lenders manage money, not houses, and they do not wish to find themselves saddled with abandoned homes. Once abandoned, a house quickly falls into disrepair through simple neglect—the air conditioning will not receive regular servicing, a leaky tap will quick bear mold, and let us not even mention pest control or yard maintenance. In a short sale situation, however, the seller generally remains in the home until the closing date, and this should help to keep the house in better shape than an abandoned property.
Disadvantages of a Short Sale
The term short sale is misleading. For one, as of mid-2013, the average short sale took approximately six months to close; in areas where a greater number of homes in default or negative equity exist, the time to close can take one to two years. For anyone hoping for a quick solution, the short sale is anything but short. The process requires patience, strict adherence to submitting every piece of requested information on time, and regular follow-up with the lenders to ensure that the process is still in effect. Frustrating is a good word to describe slow internet speeds or a traffic jam on the way to an appointment; heart-wrenchingly anguishing seems a more appropriate term to describe the short sale process.
Though previously mentioned that a short sale has less negative credit implications than a foreclosure, this only applies in the event that the seller did not default on any payments for a period greater than 30 days. As of late 2013, FICO estimates that those who are more than two months late with a payment experience a credit score reduction akin to that of a foreclosure, making the hassle of the entire short sale meaningless.
Further, despite a successful short sale, sellers will find it challenging to find a lender willing to extend a mortgage within the two years following the sale. Even after the two year period, sellers will generally pay both higher interest rates and down payments, reflecting their higher credit risk rating.
Steps in the Process of a Short Sale for the Seller
Before even beginning the process of a short sale, it is a good idea to find a real estate agent with experience dealing in distressed properties. As the lender pays the fee of the real estate agent, it is in the interest of the seller to ensure that he is receiving expert advice on how to navigate the process. An experienced real estate agent can help make sure that documents are completed correctly, negotiate with the lender in the event of a dispute over the appraisal value, and both market and show the property in its best possible light. You find a real estate agent near your home through MilitarybyOwner’s business directory
. When interviewing each agent, make sure to ask about his or her experience with short sales.
Prospective sellers must then contact the lender to acquire the requisite short sale documents package. These will generally require a large number of documents: Recent pay stubs, recent tax returns, completed financial statements (often completed at the request of the lender with the assistance of a debt negotiator or financial consultant available through HUD), an Agreement of Sale, a copy of the Settlement Statement (HUD-1), approval for the lender to communicate with the real estate agent, and a hardship letter. The latter is what permits otherwise financially solid military families the option to short sale without defaulting on any payments. This letter must state that the sale is owing to a PCS. The lender will likely request a copy of the orders showing the move date, too. These documents can be submitted directly by the seller. Most mortgage companies, however, prefer to receive them directly from the real estate agent with whom the seller is working, as the agent is likely to have access to upload documents into the lender’s system, particularly in the case of a large banking lender.
When completing the paperwork, a seller must prove that he has no additional assets to show, such as a home with considerable equity, investments, or a large retirement account. While Fannie Mae and Freddie Mac owned homes have considerable leverage in terms of approving short sales for PCS situations, smaller lenders do not; instead, the smaller lenders require that the individual qualifies on the basis of need, too. This means that you cannot have $500,000 in retirement funds and then request a short sale for a $200,000 house. You can find out if your home is owned by Fannie or Freddie through either their website or by asking your lender directly.
The lender, in conjunction with their hired appraiser, also determines the value of the home. The seller does not have any input in this part of process unless he severely disagrees with the amount. It is in the interest of the lender to keep losses at the lowest possible value. In the event that the appraisal comes in much higher than anticipated, the real estate professional who is working on behalf of the seller will need produce a series of comparables, or equivalent properties in the neighborhood, that have sold for far lower than the lender’s appraisal.
Once offers begin to come in, the seller may choose to either accept or reject the offer. It is in the interest of the seller to select the buyer with the most promise of closing the sale; therefore, the more liquid assets that the buyer has on hand, the more likely it is that the bank will agree to the terms of the sale. If the buyer’s assets seem questionable, for instance if the buyer is receiving a private party loan for a down payment, then the lender may reject the offer, causing the entire sale to terminate. The lender can take in excess of two months to review and then either confirm or deny an offer, so any rejected offer by the lender can prolong the short sale process extensively.
Finally, once the lender does approve the offer, the process moves quickly. In most cases, the seller does not need to attend the closing, which is of great benefit to military families who may no longer live anywhere near the property. Instead, the final closing paperwork can be completed upon request by mail. As a notary signature is required on several pages, including the title document, military families can either choose to request an appointment from JAG, or in a rush situation, most UPS stores offer notary services for as little as $5 per signature. Once the escrow company receives the returned signatures, the closing is complete.
On the other hand, if the lender did not approve the offer, then the house goes back onto the market, and so the vicious short sale process begins again. If you think you can stomach the process to make it through to a successful short sale closing, as many before you have done, then you can begin by finding a real estate agent
with short sale experience today!