FAQ’s

From my experience, here are the Frequently Asked Questions about short sales.

Hope it helps…

1. What is the Mortgage Forgiveness Debt Relief Act and Debt Cancellation of 2007?
2. What is the government’s “Making Home Affordable” program all about? (Revised June 8, 2010.)
3. NAR’S (national association of Realtors) frequently asked questions about HAFA (home affordable foreclosure alternative program)
4. How do I know If I’m eligible for the “Making Home Affordable” program?
5. What is a short sale?
6. What is the difference between a short sale and a foreclosure?
7. After a successful short sale, can lenders still pursue me for the deficiency?
8. What is the worst case scenario in a deficiency?
9. What is the impact of a short sale in my credit?
10. What are the tax consequence of a short sale?
11. Who qualifies for a short sale?
12. My home’s price has drastically gone down.
13. My home is in or near default.
14. Homeowner is experiencing hardship.
15. What are the advantages of a short sale?
16. Who pays for the real estate agent’s commissions?
17. How do you come up with the selling price for a short sale?
18. If I pay mortgage insurance and default on my loan, why wouldn’t that cover the deficiency amount?
19. I want to do a short sale and have a 2nd mortgage, does this make me ineligible?
20. What are the requirements for a short sale?
21. Warnings and tips
22. What are the effects of short sale on the luxury home market?
23. How does the Bay Area market affect Lake Tahoe home values?

Answers

1. FAQ’S from IRS.gov

1. FAQ’S from makinghomeaffordable.gov

1. HAFA FAQ’S

1. Click here to see if you’re eligible

1. a short sale is a form of “arrangement” between the current homeowner and the lien holder(s) / bank. The bank lent them the money to buy their home but through a variety of reasons (loss of job, divorce, etc..) the homeowner is asking the bank to accept an offer for less than the total amount owed to pay off the home. The “deficiency” is the difference between the amount owed and what the bank gets at the short sale.If your mortgage is $100,000, but your home is worth, say, $90,000, you are $10,000 short, not including costs to close the sale such as real estate commissions, recording fees or title and escrow charges.Note: majority of these charges will be billed and paid by the banks/lenders, but in my experience home owners may also fork out some cash to close the deal (ex: unpaid hoa fees). This is usually the last test of the homeowner’s commitment in making the short sale deal work.
2. In foreclosure, the homeowner misses their mortgage payments and the bank takes back ownership of the house and tries to sell it, usually at a loss. In almost all cases, THE BANK PURSUES THE HOMEOWNER FOR THE DEFICIENCY. Once this happens, most of these homeowners realize that the only way out is to file bankruptcy.In short sale, the banks has the right (depending on the approval terms of a short sale and if its a 1^st or 2^nd Lien holder) up to six months–six years to run after you.
3. Yes. There is no absolute guarantee that a lender who accepts a short sale will not legally pursue a borrower for the difference between the amount owed and the amount paid. This amount is known as “deficiency”.
   Contrary to what people think, deficiency judgments happens because the borrower defaulted on a promissory note, not the mortgage. A promissory note is a promise to pay. It can also provide for personal liability, depending on state laws. Personal liability means the lender can come after your assets if you do not make your payments. Whether the bank can pursue a deficiency judgment after a foreclosure or short sale depends in part on whether the promissory note makes the seller personally liable for the debt.Some hard-money lenders sell the promissory note to an investor after a foreclosure for pennies on the dollar. (The trend I’ve been seeing is 2^nd lien holders are being sold to lawyers.) Then the “investor” will attempt to collect the debt.

   Even though a lender may have accepted, say, $1,000 for a $100,000 second mortgage through a short sale, the security for that hard-money second is released but the promissory note may not be. A short sale seller such as our reader might believe the ordeal is over, until one day he receives a phone call, asking for repayment.

4. Your wages can be garnished.It is also worth mentioning that banks, for the most, are unwilling to negotiate deficiency judgments with the homeowner after a foreclosure.
5. you’ll hear the myth over and over: “Short sales protect credit.” That’s only partially true. Your credit will tank if you fall behind on your payments.It might not happen right away, but sooner or later, unless the bank has specifically agreed not to report the shortage, the bank may report it as a Score Factor Code 22. That score factor relates to delinquencies, derogatory records and collections. While the damage to your credit report may not seem as significantly bad as a foreclosure to you, creditors may not make the distinction.But majority of people (experts, agents in other states), including myself, still believe that a short sale on your credit is much better than a foreclosure.There are also reports that a short sale is not a derogatory mark on your credit because credit bureaus do not show the word “short sale” on your credit report. It may say “pay as agreed” or “paid as less than agreed,” among other categories. Some clients have reported negative FICO scores drops from 50 points to 130 points.The point drop is typically due to being in default, that is being behind/missing on your mortgage payments.

   They also said that a number of sources have reported FICO score drops from 200 to 400 points after a foreclosure. Generally this credit score will remain on your credit report as a public record for 10 years.

   Note: all lenders report short sales differently and some do not report them to the credit bureaus at all.

6. If the lender agrees to do the short sale (issues you an approval letter), the lender may possess the right to issue you a 1099 for the shorted difference, due to a provision in the IRS code about debt forgiveness. Many situations are exempt from debt forgiveness, according to the Mortgage Forgiveness Debt Relief Act of 2007.You should also speak to a tax accountant and/or a real estate lawyer to help you understand the full amount of short sale tax consequences you incurred, and whether you can afford to pay those taxes, if any.A personal home (primary) falls under the mortgage debt relief until the end of 2012 on a federal level. Some states will still tax you unless you qualify for an exemption. An investor is not exempt from mortgage buying relief, subject to certain conditions. Please read Mortgage Forgiveness Debt Relief Act of 2007.
7. Before you eagerly climb aboard the short sale bandwagon, consider the following to determine whether you may qualify for a short sale.

1. This should be supported by CMA’s (Comparative Market Analysis). In effect the evidence should point to the fact that the home is worth less than the unpaid balance that is due to the lender/banks.

1. It used to be that lenders would not consider a short sale if the payments were current, but that recently changed. I think the banks are taking a more active approach in avoiding their assets to foreclose (they fork out a LOT more cash when this happens).

1. The hardship letter is part of the short sale package that we agents send to the banks. The letter explains why the seller has or will stop making the monthly payments.Examples of hardship are:
   1. Bankruptcy
   2. Divorce
   3. Payment adjustment. If the loan has an adjustable rate and has gone up.
   4. Medical emergency / sudden illness
   5. Unemployment
   6. Death

1. –No mortgage payments to make, unless you choose to make them.– You may be eligible, under Fannie Mae guidelines, to buy another home in 2 years instead of 5 to 7 years.–If your credit report does not reflect a 60-day plus late pay, under Fannie Mae guidelines, you may be eligible to buy another home. Unfortunately, this is not the case for most homeowners.—For many sellers the chance to buy another home in as little as two years is the real motivation to do a short sale. Good credit behavior can greatly help bad credit after two years, even though the derogatory credit marks will remain. (“derogatory marks” that are left in your credit are different for every bank. If you’re lucky the banks may even “forget” to do this. Although, don’t count on it.)–You are in control of the sale (at least initially), not the bank. But ultimately, the banks choose if they will accept,counter or reject the offer.

   –You will save yourself from having the “F” word, foreclosure attached to you. Many people fear that this word will haunt them for the rest of their lives.

   —Your home sale will be handled like any other home sale.

   —As I write this, loan applications do not ask questions about a short sale. You may report that you just sold your house. If you pit it against a foreclosure, you are required to answer the question: “Have you ever had a house foreclosed upon or given a deed-in-lieu thereof in the past 7 years.” If the bank sees you have had a foreclosure, your loan will most likely get rejected. Now if you lie, that’s not good either, you may be subject for mortgage fraud.

   Note: if you take part in a short sale, it’s crucial you assume nothing until you have the bank’s policies in writing.

2. Banks/lenders. Many homeowners thinking of doing a short sale still fear that they might be liable for our commission. Home owners do not pay commissions to agents.

1. Lenders/banks order a “BPO” (bank price opinion) from other Realtors / Appraisers, independent of the listing agent (to prevent bias). But this only happens AFTER submitting an offer to the lender. When I first put the house in the market, I try to position the house at the top of its “comparables” by virtue of location and type, but I keep a close eye on the possible BPO so as not to go too low from the banks price threshold.

1. In some cases it will and in some cases it won’t. It depends on the amount of the deficiency. Usually the mortgage insurance only covers a certain amount. Moreover, the lender will try to collect from you before they file a claim with the mortgage insurance company. The mortgage insurance is not there for your protection, just the lender’s.

1. No. Both of your lenders will have agree in some way to complete the short sale. If your first lender will be paid off by the sale, then you just need to negotiate the terms with the second lender. In almost all my short sales, the first lien holder gave the 2^nd lien holder $3,000. In majority of cases the 2^nd accepted.

1. You need to submit the following—application, hardship letter, financial/bank statements (the last two months), tax returns (last two years), pay stubs,.

1. NEVER ASSUME THAT A DEBT THAT YOU OWE A LENDER IS FULLY FORGIVEN UNLESS YOU HAVE THE DETAILS OF THE RELEASE OF THAT DEBT IN WRITING COMMUNICATED THROUGH THE APPROVAL LETTER. For instance, someone who had done a short sale had a first and a second loan. The bank agreed to the short sale, which ended up being enough to pay off the first loan, but not the second.The seller had mistakenly assumed that because the bank approved the short sale that they wouldn’t have to worry about the deficiency from the 2nd mortgage. Now they are surprised that they are being pursued for the deficiency.REMEMBER, it only makes sense that the lenders will always aim to get ALL the money they can get. NEVER assume something is written off unless you have a formal, signed, written, unconditional release of lien and/or judgment from the 1^st and 2^nd lien holder specifically stating that no further action to collect this debt will be taken.—There is no such thing as a magic pill. This is not a too-good-to-be-true way out of a foreclosure where the money you owe instantly disappears. The deficiency will be accounted for. The deficiency can be 100% loaned to the seller in the form of a promissory note, which they then must repay.–It is a meticulous process. If you want to buy or sell a short sale, don’t expect it to go as quickly as a regular sale. There’s a lot of “back and forth”. It takes time, I’m sure you’ve been reading that a lot by now

   –You are not being paranoid if you assume that the employees of the banks negotiating the short sale ARE NOT there for your benefit. It’s safe to assume that their only goal is to collect as much money for the banks and they will use whatever means necessary. In many instances they will and have misrepresented their own rules and regulations and deliberately deceived the seller in order to intimidate and scare them into giving them more cash.

   –Despite popular belief, A BANKTUPCY, FORECLOSURE, OR REPOSSESSION DO NOT HURT YOUR CREDIT AS MUCH AS THE STRING OF LATE PAYMENTS THAT HAVE STACKED UP. It’s the clients with twenty-plus late payments that are truly damaging their credit.

2. You are not alone. Similar luxury markets like Lake Tahoe–homeowners with mortgages of more than $1 million (yes, as far as Oahu Real Estate) are defaulting at almost twice the U.S.–Payments on about 12 percent of mortgages above $1 million were ninety days or more overdue in September, compared with 6.3 percent on loans less than $250,000 and 7.4 percent on all U.S. mortgages, according to data from First American CoreLogic Inc., a Santa Ana, California-based research firm. The rate for mortgages above $1 million was 4.7 percent a year earlier. —And not just in Lake Tahoe. One expert said “It’s not uncommon to see this situation on the high end of the market–homes selling for less than it would cost to build them,”—For example, in Arizona high end market…–“You are just starting to see the tip of the iceberg with luxury short sales,” said Adrian Heyman, owner of Property Advisors, a real estate broker in Scottsdale, Arizona. “A lot of wealthy people are upside down in their mortgages and they just can’t afford the second or third vacation home anymore.”

   –Holzknecht, 53, last month cut the asking price for his 7,280-square-foot home in Kirkland, Washington, by $550,000 to $1.25 million, lower than the balances of his two mortgages. Holzknecht, the former owner of Four Suns Inc., a Seattle luxury homebuilder that went out of business two months ago, constructed the Craftsman-style home in 2000. He declined to identify his lenders or the amount he owes.

   –There are 114,000 home loans of more than $1 million, according to First American. About a quarter of all mortgaged homes in the U.S. have loan balances bigger than their current value, known as being upside down or underwater, the data company said.

   –The number of U.S. households with a net worth of more than $1 million, not counting primary residences, fell to a five-year low of 6.7 million last year from a record 9.2 million in 2007, according to Spectrem Group, a Chicago-based consulting firm.

   —“There is no refinance market for you if you are underwater and outside the Fannie and Freddie framework,” Gumbinger said. “High-end neighborhoods are all suffering from the same problems of diminished income at a time when there is little equity to work with.”

   —Masoud Bokaie, co-founder of engineering firm BORM Associates Inc. in Irvine, California, owes $2.6 million on a 3,664-square-foot house with marble floors and granite counters about 10 miles (16 kilometers) away in Newport Beach. He’s waiting to hear whether lenders Luther Burbank Savings and Wells Fargo & Co. will approve a short sale.

   –The National Association of Realtors reported that the share of home sales above $750,000 has fallen from 4.4% of total home sales in 2007 to a projected 2.3% of total sales in 2009 (NAR Projection based on partial year statistics).

   –-Luxury home prices probably will drop another 5 percent before reaching a bottom in September 2010, according to Sam Khater, senior economist at First American.

   –Limited loan availability, higher than usual interest rates for jumbo loans (from 150 to 200 basis points higher than conforming loan rates), and stringent loan qualifying requirements have slowed sales of luxury properties. This has caused the national inventory level of homes priced above $750,000 to rise from 18 months worth in 2007 to more than 40 months worth as of the second quarter of 2009.

   –The lack of refinancing opportunities, fewer qualified buyers for luxury homes, a growing inventory of unsold luxury homes, and an economy in recession are all creating the “perfect storm” for luxury homeowners who need to sell and can’t. NAR also reported that as of October 2008, the foreclosure rate on jumbo loans was more than double the rate on conforming loans.

   –Foreclosures of homes worth more than $1 million began increasing at the end of 2009, according to data provided to CNBC.com by foreclosure tracking website RealtyTrac.

   –Foreclosures reached a high in February 2010, the last month data were available, when 4,169 high-end homes were somewhere in the foreclosure process; having received a foreclosure notice, had an auction scheduled or had ownership taken over by the lender. That’s a 121 percent increase from a year ago.

   –“We have seen an increase, in the million-plus range, of the number of foreclosures and short sales in the greater Chicago area,” says Jim Kinney, vice president of luxury home sales at Baird & Warner.

   He says that of the 295 million-dollar, single-family properties sold in the first quarter this year, 37 were either a foreclosure or short sale, when a bank and homeowner agree to sell the home for less than the loan is worth. During the same period a year ago, 10 of 231 fell into those categories.

   –Data show that may be the case around the country. The 90-day delinquency rate on home loans worth more than a million dollars hit a high in February at 13.3 percent, above the overall rate of 8.6 percent, according to real estate data firm First American CoreLogic. Foreclosure proceedings generally start after a homeowner has been at least 90 days late on a mortgage payment.

3. Low to Medium. Bay Area has a strong influence on Northern NV real estate market more than we would care to admit. Although, it is worth mentioning, that home values has gotten to a point where a lot more locals can afford buying a home. Click for more information: Berkeley Realtors