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 Should I Short Sale My House?

Considering a short sale on your home is not an easy decision and should not be taken lightly. My first suggestion to you is “Forget about the why me and the how did this happen to me!” It’s not your fault. You’re just as much of a victim of the nationwide real estate collapse as our family, friends, and neighbors. The major delimiter between each individual situation is circumstances. Are you able to hang in there through the long haul until property values get back up to where your total loan balance is? Or do you fit into one of the following categories: job relocation,job loss, divorce, reduced income, etc. This list goes on and on for reasons why people decide to short sale their home, especially when the possibilities for getting to that breakeven point is unforeseeable in the future. There are many factors to consider and your hardship must make sense to the bank. Fortunately, with our economy and real estate market on the fritz for the past 3 years, proving your hardship to your lien holder(s) is not difficult to do.

You likely fit into one of 3 categories...

• House Poor - If your house is your only problem, then you’re in that category of people that have had 700+ credit scores ever since you were 21 years old and you’ve never been late on a payment in your life. The credit cards are not the problem; the vehicles are not the problem; you’re just not making what you were when the market was thriving a couple years ago. Now you find yourself sitting trapped with a house that could be worth half of what you owe on it today. You’ve tried to work it out with your bank and they just can’t seem to give you terms that make sense. Whether you bought in the peak or refinanced in the peak, you’re completely upside down and you can’t see light at the end of the tunnel. You recognize that your home is a sinking ship and it's wearing you down more and more each day. If this sounds like you, then a short sale is right up your alley. A short sale could lead you to your fresh start.
• Oh No, My Assets - If you feel like you’ve been knocked around like a punching bag for the past few of years with depreciating real estate investments and you have other assets that you’re worried about losing when looking at the bankruptcy option, then you need a good asset protection attorney and a good realtor (with proven experience in short sales) to help you short sale your property(s). With the combined effort of the attorney and the short sale expert, you can stop your wounds from bleeding further and get back on track with business and life.
• Flat Broke - You’re completely tapped out, your credit cards are maxed to the hilt, you’re upside down on your car, your house, your boat, etc…and you just can’t do it anymore. This makes you a good candidate for bankruptcy. Although your recovery time for credit worthiness will take several years longer than the short sale option, it is most likely in your best interest to start with a clean slate. How you got there doesn’t matter. The unfortunate part is, most people filing bankruptcy today is because they pulled from every single money source they could to pay on a sinking ship (their home). The end result and the inevitable happens, the home took everything down with it! In this scenario, bankruptcy is probably your best option.

The ramifications of a short sale to your credit score...

In most cases, your credit will suffer a hefty dent due to the late payments on your record. If you are more than 60 days behind on your mortgage(s), then your credit score will be affected the same as if it were a foreclosure. The major difference and advantage to accomplishing a short sale is “You will be eligible to purchase another home within 24 months” verses 4 to 5 years with a foreclosure. A good analogy is, “The effect on your credit report between a foreclosure vs. a short sale is the difference between being hit by train or a bus!”

Can I short sale my home without missing payments...

Unfortunately, most lenders will not consider a short sale unless the borrower is behind on payments. I’ve had many clients approach me asking, “Why can’t we short sale my home without me having to miss payments? I don’t want to ruin my credit.” In a perfect world, this would be the case. However, this is not a perfect world and that short sale negotiator at the bank has three hundred files piled high on their desk. If you look at the situation in their perspective, why would they consider short selling your home if you are still paying on it? That one negotiator has 298 files to process, all of people who are not paying. What is their motivation to process your file?

I’m not saying it isn’t possible. I’m saying that the chances of success become minimized. It really boils down to who your lender is and who the bank negotiator is. As much as I hate to say it, it’s the luck of the draw. If you fit into that category of wanting to short sale your home without facing the late payments on your record, it is possible. The chances of success are just less. One strategy is to arrange for forbearance while the short sale is being negotiated. That can buy some time while the short sale is being negotiated.

Will my deficiency be forgiven by my lender(s)?

In most cases, you’re deficiencies can be released by all lien holders upon the short sale of your home. This is not true in all cases though. There are many variables that determine whether a full release will be given or not. To gain a very basic understanding of how the lending structure works, consider this chain of events:

• Buyer purchases a home and obtains a mortgage note from a retail lender (GMAC, Wells Fargo, Bank of America, Chase, Suntrust, etc.)
• Retail lender then sells the note to Fannie Mae or Freddie Mac in the form of a mortgage-backed security.
• Retail lender then sells the mortgage-backed security to investors on the secondary market.

As you can see, a lot of paper and a lot of money gets sliced and diced and passed around. Without going into too much detail, when performing a short sale, there are several different entities involved (Retail Lender, Fannie Mae or Freddie Mac, and the investor on the secondary market). All of the entities have their own set of regulations and guidelines. Ultimately, it’s all going to boil down to your individual hardship and the guidelines set forth by your lenders / investors.

What do I need to perform a short sale?

It is recommended that a realtor with proven short sale experience is used when considering a short sale. Some expert realtors have a good working relationship with an independent “Mitigation Company” who handles the negotiations with the bank while the realtor focuses on selling the home. This is usually the case when realtors have a good number of short sale listings. Once you’ve selected your realtor, be prepared to supply the following items to them, as they will need it in order to submit a short sale package to the bank.

• Hardship Letter - Usually no more than one page in length, describe your reason for hardship and your inability to continue paying on the home.
• Letter of Authorization - This gives the realtor and mitigation company authorization to negotiate with the bank on your behalf. The realtor will provide this form.
• Last 2 Years Tax Returns - Copies of your most recent tax returns going two years back.
• Last 2 Months Bank Statements - Last two months bank statements (both front and back pages).
• Last 2 Payckeck Statements - Last two pay stubs from your employer. If self employed, a most recent quarterly profit and loss statement (Realtor to provide form).
• Current 401k, IRA, Investment Accounts - If any are applicable, copies of 401k, IRA, or any other investment accounts.
• Financial Statement - This is a breakdown of your monthly expenses, your assets, and your liabilities. (Realtor to provide form).
• Listing Papers - Listing paperwork between you and the real estate brokerage.

It may seem like a lot of paperwork, but after a couple hours of getting everything together and signed, you’ll be well on your way to freedom from that sinking ship.

Do you have more questions OR are you ready to get started?

Contact realtor Christopher Johnson today for a free telephone consultation if you are considering a short sale on your property(s).

Disclaimer – As a licensed real estate agent in the State of Florida, I have handled dozens and dozens of short sales for my clients. I have abundant knowledge related to the subject of short sales, however I am not an attorney or a Certified Public Accountant (CPA). It is always advised to seek the council of an attorney and CPA.