Short Sale FAQs

What is a short sale?

A short sale is a transaction in which the owner sells a property for an amount that is less than what is owed on the mortgage loan and other liens. In other words, the total proceeds of the sale fall short of being able to pay the entire outstanding balance of the liens. The lender(s) may choose to accept a reduced amount and forgive the remaining debt. Some lenders may reserve the right to pursue the owner for some or all of the remaining balance after the sale. In most cases, a seller cannot receive proceeds from a short sale transaction.

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What are the alternatives to a short sale?

A short sale may have legal, credit, and/or tax consequences. There are several alternatives to a short sale. These other options include:
1.Borrow money and make payments to reinstate the loan.
2.Rent the property and move to a more affordable residence.
3.Sell the property and bring cash to close escrow.
4.Attempt a loan modification with the lender.
5.Attempt a transaction where the buyer assumes the mortgage.
6.Offer the bank a deed in lieu of foreclosure.
7.Allow the property to go into foreclosure.
8.Declare bankruptcy.

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The bank won’t stop calling me. Should I talk with them?

We believe you should communicate with your bank on a periodic basis. If you are behind on your mortgage payment, expect up to four phone calls a day. You will also receive a lot of mail.

It is unwise to completely ignore the bank. If you do not communicate at all with your lender, they will probably put you in the category of the people who refuse to pay. That is the worst category for you, as that means they will move the foreclosure process along as fast as possible.

You do not have to answer the phone every single time the bank calls, but it is good to communicate with your lender at least twice a month. If you are considering a short sale, tell the representative. Ask them to send you the bank’s short sale paperwork package.

If you are already attempting to sell your property, then tell the person on the phone about it. Reiterate your hardship each time you talk with your lender. If you are still occupying the property, tell the lender so they do not send someone over to verify occupancy.

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What is HARP 2.0?

The Home Affordable Refinance Program (HARP) is a federal government program for people who are current on their mortgage payments but have been unable to refinance their mortgage. To be eligible, the mortgage must be owned or guaranteed by Fannie Mae or Freddie Mac, and the sale to Fannie or Freddie must have occurred before June 1, 2009. The mortgage cannot have been refinanced under HARP unless it was a Fannie Mae loan that was refinanced via HARP from March to May of 2009.

The loan-to-value (LTV) ratio must be greater than 80 percent. That means that there must be at least 20 percent equity in the property. The borrower must be current on the mortgage, with an on-time payment history for the previous year.

HARP 2.0 ends on December 31, 2013. Not all mortgage servicers participate in the program. People looking to refinance through HARP will need to complete a loan application and go through the underwriting process. Refinance fees will be charged.

HARP 2.0 is designed to help borrowers who could not refinance to a more affordable interest rate but still paid their mortgage on time.

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What is HAFA?

The Home Affordable Foreclosure Alternatives (HAFA) program is a federal government program for eligible borrowers who cannot afford their mortgage and wish to conduct a short sale or deed-in-lieu of foreclosure. HAFA offers benefits such as free advice from HUD-approved counselors, a waiver of the deficiency if the short sale occurs, a pre-approved price that the lender will accept, and $3,000 paid to the seller at settlement or upon post-settlement move-out. HAFA also advertises that it provides a less negative effect on your credit score than conventional short sales, but we have yet to verify the validity of this statement.

To be eligible for HAFA, you must meet all of the following criteria:
You currently reside in the home or lived there in the past 12 months.
You can prove a financial hardship.
You have not purchased a new home in the last 12 months.
You borrowed less than $729,751 on your first mortgage.
You obtained your loan on or before January 1, 2009.
You have not been convicted within the past 10 years of felony larceny, theft, fraud, forgery, money laundering, or tax evasion in connection with a mortgage or real estate transaction.

HAFA is available for mortgages that are owned or financed by Fannie Mae or Freddie Mac. It is also available for loans granted or serviced by those on the list of HAMP (Home Affordable Modification Program) participating mortgage servicers. If your lender or servicer is not on the list, then they do not have to abide by the HAFA guidelines.

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What is HAMP?

The Home Affordable Modification Program (HAMP) is a federal government program to help struggling borrowers modify their monthly mortgage payments to make them more affordable and sustainable in the long-term. Originally intended for those who occupy the home as their primary residence, the program was expanded on June 1, 2012 to include rental properties.

To be eligible for HAMP, you must meet all of the following criteria:
You obtained your loan on or before January 1, 2009.
You owe less than $729,751 on your primary residence or single-unit rental property.
You owe less than $934,201 on a 2-unit rental property, less than $1,129,251 on a 3-unit rental property, or less than $1,403,401 on a 4-unit rental property.
The property has not been condemned.
You have a financial hardship and are either delinquent or in danger of falling behind on your mortgage.
You have sufficient, documented income to support a modified mortgage payment.
You have not been convicted within the past 10 years of felony larceny, theft, fraud, forgery, money laundering, or tax evasion in connection with a mortgage or real estate transaction.

Not all mortgage lenders and servicers participate in the program. HAMP expires on December 31, 2013.

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I stopped making mortgage payments. Does the bank now own the house?

If the bank has not completed the foreclosure process, and if you have not sold the house to anyone, then you still are the owner. As the owner, you are responsible for the property and liable for what happens on the premises.

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I am selling my house via a short sale. Will I have to pay tax on the forgiven debt?

Under the Mortgage Forgiveness Debt Relief Act of 2007, enacted December 20, 2007, taxpayers may exclude debt forgiven on their principal residence. This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). Details are on Internal Revenue Service (IRS) Form 982 and its instructions, available on www.irs.gov. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, may qualify for this relief. In most cases, eligible homeowners only need to fill out a few lines on IRS Form 982 (specifically, lines 1e, 2 and 10b).
The debt must have been used to buy, build, or substantially improve the taxpayer’s principal residence and must have been secured by that residence. Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing.  Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for this tax-relief provision.
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Are short sales allowed on commercial and investment properties?

Yes. A short sale can be conducted on any type of property. If you owe more than the property is worth, and the mortgage lender is willing to take less than what is owed, then a short sale can occur. Short sales can occur with one’s primary residence, a vacation home, a commercial property, a multi-unit property, or vacant land.

In any short sale, if your mortgage lender forgives the remaining debt, then you can expect to receive a 1099C form the following January. The forgiven debt will be reported to the Internal Revenue Service. If the property was an investment property, second home, vacant land, or a commercial property, then you will likely have to pay some tax on the forgiven debt. The IRS has historically treated forgiven debt as ordinary income. Consult with your tax advisor to see if there will be any tax consequences in your particular case.

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Can a landlord facing foreclosure still collect rent from the tenant?

Yes, a landlord who has not paid the mortgage may continue to collect rent from the tenant. Many mortgage lenders have an Assignment of Rents clause in the note, whereby the mortgage company has the right to receive the rent when the loan is in default. In actual practice, we have not seen the Assignment of Rents clause exercised on residential properties.

The lease will lay out the duties and expectations of the landlord and the tenant. If the landlord fulfills their duties, such as keeping the property maintained, the tenant has to pay rent. If the landlord breaches the lease, the tenant can take the landlord to court to resolve the problem or obtain some relief for the breach.

We have seen several cases where the tenant stopped paying the rent when they realized the landlord was not paying the mortgage. The landlord took the tenant to court for non-payment of rent. We have seen the judge rule that the tenant must be evicted since they failed to pay the rent. However, the judge also ruled that the landlord would not receive a judgment against the tenant for the unpaid rent.

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I want to do a short sale and the bank says I need to display a hardship. What counts as a hardship?

A hardship is a situation that renders a borrower unable to continue making monthly mortgage payments and/or unable to sell their property and cover the entire mortgage balance.

Legitimate hardships include:

The death of a breadwinner.
Serious illness of a breadwinner.
Serious illness of a family member, whereby the income earner(s) in a family take time off work to care for the person.
Serious damage to or a material defect with the property that will not be covered by insurance.
Loss of a job.
Reduced hours at work, which lowers a person’s take-home pay.
Loss of a job by one of the two people in a dual-income household.
A mandatory job relocation, typically more than 100 miles away.
A divorce, typically one that involves a sharp decline in income and/or significant reduction in liquid assets.

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I’m facing foreclosure and received a letter about a status conference. What is a status conference, and should I go?

Many counties across the country now schedule what is known as a status conference to help some homeowners facing foreclosure. The status conference is like a timeout in sports. It involves the judge who presides over the lender’s foreclosure lawsuit against the borrower.

A brief meeting is scheduled between you and the mortgage lender’s attorney in the judge’s chambers. The judge wants to see if you are working toward a loan modification, short sale, deed-in-lieu of foreclosure, or other solution to prevent the foreclosure. The judge is also evaluating you to see if you are a responsible person trying to do the right thing or if you are taking advantage of the system. The judge also wants to see if the mortgage lender’s attorney understands the case and is willing to entertain your proposed solution.

If you or the lawyer for the bank fail to show up to the status conference, that will annoy the judge. There are instances where the attorney does not show up, and the judge grants an extension in the foreclosure process for the homeowner. If you do not show up, the judge will likely allow the foreclosure lawsuit to continue unabated.

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If I’m current on my mortgage loan, can I still do a short sale?

In an increasing number of situations, many banks may consider a short sale on a property where the borrower is current with their payments. If you are current on your mortgage, then you must prove that you have a legitimate hardship. You typically have to be at risk of an imminent mortgage default. In other words, you must demonstrate that you are struggling to pay all of your bills, so sooner or later one could expect you to fall behind on your mortgage.

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Can the bank lock me out of the house?

If the mortgage lender has not foreclosed on a house and it is still occupied, then the lender is not allowed to change the locks. Many homeowners have an unfounded fear that they will come home one night to find they are locked out and their possessions are seized. Many people move out of their house prematurely due to this fear.

When a person falls behind on their mortgage payments, the bank will eventually send someone to the property to determine if it is still occupied. If the property is deemed to be vacant or abandoned, then the bank may change the locks and secure the property even though the bank does not yet own it. That may entail boarding up broken windows or winterizing the house. The mortgage lender does this to prevent further loss of value that may result from vandalism, burglary, or frozen pipes in the winter.

If the bank secures the property before they take it via the foreclosure process, upon request they must release the keys to the homeowner or the real estate agent for the owner. Sometimes the keys are mailed to the owner or agent. In other cases, the keys are placed in a lockbox on the premises, and the bank simply provides the code to open the lockbox.

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My property is not listed. Do I need it listed with an agent to do a short sale?

Yes. In every case we have seen, the mortgage lender has required that you hire a licensed agent to market the property for sale. The banks presume that an agent would be able to sell the property for as much as possible on the open market.

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My property has been listed for months but it is not selling. What do I do?

It is apparent that the property is priced too high for the buyers in the local marketplace. Discuss the pricing with your real estate agent. Direct your agent to lower the price.

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What documentation will I need to submit to have a short sale processed?

Your mortgage lender needs proof of your hardship and financial difficulty, along with evidence that the property is worth less than what is owed. Most lenders ask for:

Bank statements for the last two months
Tax returns for the last two years
Paystubs from the last two pay periods (or a profit and loss statement if you’re self-employed)
Hardship letter
Financial worksheet showing monthly income and expenses
Authorization form allowing your representative to speak with the lender
Listing contract with a real estate agent
Agreement of sale

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How long does a short sale take?

We have seen short sales approved in as little as 13 days and as long as five years. A typical short sale takes three to six months. There are numerous reasons why short sales can be delayed, and there are certain techniques that can speed up the process.

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Do property taxes need to be paid while my short sale is being negotiated?

It is the owner’s responsibility to pay real estate taxes. However, if someone is in financial distress, it is likely they will not have the means to pay the taxes. Many borrowers who are behind on their mortgage payments are also behind on their property tax payments.

If you are facing foreclosure, it is a judgment call whether they should pay the property taxes. Assuming you have the funds to pay the property taxes, it is often wise to pay the delinquent taxes if you still have equity in the property. That will eliminate the tax sale and buy you time to sell the property or find another solution to the foreclosure action. It protects your equity.

If you are attempting to sell your property via a short sale, the property taxes are often paid out of the lender’s proceeds at the sale provided that the back taxes were included on the preliminary HUD-1 Settlement Statement submitted to the lender. It may not be as prudent for you to pay the property taxes in a short sale, as every dollar you spend on the property is a dollar that you will not recover.

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If my house is sold at tax sale, am I still on the hook to pay the mortgage?

If a mortgaged property is sold at tax sale, the mortgage obligation may still exist. Depending on the type of tax sale, the original borrower will still be on the hook to pay the mortgage loan while the new owner will have the mortgage clouding the property’s title. Until that mortgage is paid, the lender can pursue the borrower for the balance while continuing with the foreclosure action.

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How will a short sale affect my credit?

A short sale will lower your credit score, but it depends on how many mortgage loans you have and the length of time the loans are delinquent. Generally speaking, if you have one mortgage loan and you are more than 30 days behind, you can expect your credit score to fall 100 to 150 points. However, a major factor is how much debt you’re carrying on other items, such as credit cards, auto loans, and installment agreements. If you are behind on those payments too, then your credit score will fall even more.

The major advantage of a short sale versus a foreclosure is that a short sale is a temporary setback to your credit, whereas a foreclosure is a long-term stain on your record. If you are foreclosed, the foreclosure is permanent in the county records for all to see. On many loan applications, there is a question asking if you were ever foreclosed. If you were foreclosed upon, then you jeopardize your ability to obtain a loan in the future. Even if you are granted a loan, you will pay more in interest which could cost you tens of thousands of dollars over time. Some employment applications ask if you have been foreclosed in the past, so a foreclosure could affect your ability to land a job, particularly if it is a sensitive position.

A short sale is marked on your credit report as “Loan paid in full but not as agreed” or “Paid as negotiated.” That is equivalent to making a settlement with a credit card company. A short sale will not show up in the judgments section of your credit report. On future loan applications, when asked if you were ever foreclosed upon, you can truthfully answer “no.” In many cases, if you are paying all your other bills on time, then you could obtain a new mortgage loan about two years after the short sale of your house. If you value your credit and hope to obtain a mortgage loan, car loan, or college loan in the future, then a short sale is typically a much better alternative than a foreclosure.

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Do I have to be behind on my mortgage payments to be considered for a short sale?

In some cases, no. Most mortgage lenders these days will consider a short sale if someone is current on their mortgage but default is reasonably foreseeable. If someone is not delinquent, they need to demonstrate a hardship that prevents them from being able to make payments in the near future.

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I have two loans. Can I still be considered for a short sale?

Yes. If there is not enough money in the sale to pay off both lenders in full, then both lenders will have to approve the short sale separately. In many cases, the first mortgage will only allow the second mortgage to receive a certain amount. If there is enough money to pay off the first mortgage in full but not the second mortgage, then only the second mortgage lender has to approve a short sale.

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My property is a rental. Can I still be considered for a short sale?

Yes. If you meet all other criteria for a short sale, such as owing more than what the property is worth and having a hardship, then your lender is likely to consider a short sale. If the property is rented, the lender will factor the rental income into your total income when making a decision.

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I filed bankruptcy. Can I still be considered for a short sale?

Yes. Consult with your bankruptcy attorney first. Typically, the bankruptcy trustee will release the house from the bankruptcy once they realize that there is no equity. At that point, the lender can proceed with the foreclosure action, and a short sale is one of your options.

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I want to just give my property to the bank. Can I do that?

Yes, but only if your lender is willing to permit a deed-in-lieu of foreclosure. Also known as a friendly foreclosure, a deed-in-lieu of foreclosure occurs when the lender agrees to take ownership of the house from the borrower without going through with the full foreclosure process. In some cases, the lender may still reserve the right to pursue the borrower for money after the property is conveyed. Keep in mind that banks are in the business of lending money, not owning houses. Most banks would prefer a short sale because they would not have to take back the house.

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Is a short sale right for me?

Do you owe more on your house than what it is worth? Do you have a compelling reason to sell, such as a financial inability to pay or job relocation more than 100 miles away? Have you explored other options before realizing that you must sell? Did you discuss a short sale with your mortgage lender, and are they open to it?

Feel free to contact us to discuss your particular situation and the options that are available to you. Our office number is 610-681-8247 and we can be reached at info@significashortsales.com.

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If I do a short sale, how much do I have to pay to sell my property?

In many short sales, the mortgage lender does not expect the seller to contribute any money. The lender typically allows the real estate commission, the closing costs, and property taxes to be paid out of the seller’s proceeds. If there is a property inspection by your municipality or a resale certificate from a homeowner’s association, then you probably will be expected to pay that cost. Once in a while, there may be a slight shortfall at settlement, and you may have to contribute toward it. It would be wise to set aside several hundred dollars just in case.

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Why would a mortgage lender agree to accept a short sale?

Mortgage lenders are in the business of lending money, not owning houses. A 2012 Zillow.com study indicated that short sales nationwide tend to sell for 20 percent less than fair market value, while bank-owned properties tend to sell for 40 percent less. In many cases, the lender receives more money from a short sale than if they were to foreclose. Furthermore, many banks face pressure from their shareholders to rid their books of non-performing assets. There is also political and public pressure on banks to help homeowners avoid foreclosure.

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Do banks approve all short sales?

No. A bank does not have to approve a short sale. There are situations where the bank is willing to allow a short sale, but the buyer’s offer price is too low. There are situations where the bank would prefer to foreclose on the property. Sometimes a bank approves a short sale, but the buyer defaults on their agreement to buy the property.

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My property needs a lot of repairs. Can I still do a short sale?

Yes. While a property in need of work would sell for less money, at the same time the condition of the property presents a compelling reason why the lender should take less money.

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What is a forbearance agreement?

A mortgage forbearance agreement is between a lender and a delinquent borrower. The lender agrees not to move forward on its legal right to foreclose, and the borrower agrees to make payments that will eventually bring the loan current. A forbearance agreement is beneficial for a borrower who wants to keep their home and who faced only a temporary financial setback. A borrower who cannot afford the property in the long term should consider other options.

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Should I stop making mortgage payments?

This is a tough decision that has to be carefully considered. If you stop making your payments, then it is a matter of time before your lender must initiate foreclosure proceedings. Once you are more than 30 days late on your mortgage, your credit score will drop and it will be difficult to obtain a loan for at least two years. If you know you cannot afford to keep the house and you are upside-down with the mortgage, then every dollar you spend on the property is a dollar you will not get back. A question is whether it is wise for you to conserve your money while taking the risk of marketing the house with an agent as a short sale. Not all attempted short sales are approved, and not all approved short sales actually sell. It is wise to consult with an attorney and tax advisor. Feel free to contact us. We have worked with hundreds of people who faced a similar situation.

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Will the bank come after me for the remaining balance?

In most short sales, the mortgage lender agrees to forgive the remaining debt. That makes sense, as it is not cost-effective for the banks to pursue people who do not have much money. However, in some situations the lender does not waive their right to pursue a deficiency judgment. That allows them to sue the seller after the sale for some or all of the remaining balance, plus collection costs. It is important for you to review the short sale approval letter from the lender, as that should state the lender’s intentions.

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Do I need a lawyer for a short sale?

It depends. In some states, a seller of real estate needs an attorney to assist with the sale. If you are considering bankruptcy, then you should consult with a bankruptcy attorney. If you expect your lender to sue you for the remaining balance or you face a major tax liability, then you should consult your attorney and/or tax advisor.

If you participate in our short sale program, you will be provided with a real estate attorney at no charge to you.

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What is a strategic short sale?

A strategic short sale, also known as a strategic default, occurs when a borrower chooses to stop paying their mortgage even though they still have the ability to make payments. An increasing number of borrowers are walking away from their mortgages. They do so because from a financial perspective, it does not make sense to keep the property. Perhaps they do not see the need to pay for a loan that is far greater than the house’s value. Perhaps they realize that they can live in the house for free for well over a year before the bank forecloses. Maybe they choose to default because certain tax breaks for short sale sellers are about to expire, and they want to take advantage of those tax breaks.

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Why would a bank not allow a short sale?

There are many reasons why a mortgage lender would reject a short sale:

The buyer’s offer price is far below the lender’s appraisal value, and the lender believes that they would lose less money by selling the property after they foreclose.
The seller does not submit all the required paperwork in time, and the lender closes the file due to that missing paperwork.
A foreclosure sale is imminent, and the lender decides to simply move forward with the foreclosure.
The property appraises for more than the outstanding loan balance, so it is not necessary for the lender to take a loss.
If the lender is a small bank or credit union, their Board of Directors may elect not to permit a short sale as a matter of policy.
If the seller is belligerent or the lender believes they are manipulating the system, the bank may choose to foreclose.
A bank with a subordinate lien might refuse to permit a short sale because the first mortgage lender is not allowing them to receive what they are demanding.
If the buyer and seller are related or are business associates, then the lender will not permit a sale because it is not an arm’s length transaction.

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If I don’t pay my mortgage, can my bank garnish my wages?

In some states under some circumstances, a mortgage lender could eventually garnish your wages. First, the state must allow wage garnishment. A mortgage lender that is foreclosing cannot garnish your wages, as their legal remedy is to take back the house through the foreclosure process. If the lender does foreclose, and they receive less money than what is owed, then in some states they are allowed to pursue a deficiency judgment. If the deficiency judgment is granted in their favor, then to exercise that judgment they may be able to garnish wages. Consult with your attorney, as each state has specific laws on this matter.

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Doesn’t the bank choose the list price of my property?

In conventional short sales, which comprise the vast majority of short sale transactions, the seller chooses the list price after consulting with their real estate agent. The lender is not the seller, and therefore does not dictate the list price. In a cooperative short sale, however, the lender is granted permission by the seller to determine the pre-approved list price. Many short sales with loans insured by the Department of Housing and Urban Development (HUD) will involve a pre-approved list price as noted in HUD’s Approval To Participate (ATP) form.

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How does a homeowner benefit from a short sale?

Closure. People facing foreclosure are inundated with collection calls, threatening letters, and visits from the county sheriff’s deputies. They no longer want to answer the phone or doorbell, and they dread walking to the mailbox to check the mail. Selling a property before a final foreclosure action brings the unpleasant calls, letters, and visits to an end. The seller can move on with their life.

Dignity. Imagine the shame of having sheriff’s deputies forcibly move you out of what was once your home. Imagine the awkward looks of the neighbors as you hurriedly throw a handful of possessions into a waiting car or truck. Imagine seeing the lender’s locksmith changing the locks as you leave the property for the final time. A short sale allows the seller to have a normal closing and a move on their own schedule. In most cases, the neighbors won’t know that a person sold their property via a short sale.

Credit. A short sale, while damaging to a person’s credit, is less damaging than allowing the property to go to foreclosure. Settling the debt and ending the delinquent payments allows a person to stop the damage and start rebuilding their credit sooner. A short sale may affect a borrower’s credit for two years because lenders might report that a loan was settled for less than its balance. However, a short sale is not a permanent stain on one’s credit. A foreclosure, by contrast, is permanent in the records of the county and the borrower will have to disclose their foreclosure on loan applications for perhaps the rest of their life. People who work in sensitive positions, such as those with security clearances, may jeopardize their future employment by allowing their house to be foreclosed.

Avoid Bankruptcy. A mortgage loan is typically the largest debt instrument a person must service. By selling the property via a short sale, a person might avoid bankruptcy altogether. A bankruptcy would affect all of the seller’s creditors and be more damaging to the seller’s credit rating.

The best time we’ve seen to conduct a short sale is right now. The federal government has a program available for certain homeowners who qualify. The banks have new systems and staff in place to process short sales. Some banks now have a cooperative short sale system, where the bank makes it much easier for someone to sell their house. The tax laws allow for a person to not pay any income tax on their forgiven debt from a short sale of their principal residence as long as the sale occurs by the end of 2012.

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Does it matter what kind of loan I have?

Generally, no. As long as the lender is open to considering a short sale, and the situation meets other short sale eligibility criteria, then it does not matter what type of loan you have. Even loans insured by the Department of Housing and Urban Development (HUD), the Veterans Administration (VA), Fannie Mae, and Freddie Mac can qualify for a short sale.

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My property is already listed with an agent, but if we lower the price any more we’ll need a short sale. What should I do?

If the asking price is too high, then buyers will look at other houses. To procure a buyer, it is important to market your property at a competitive price. It may be time for you to speak with your agent about lowering the price and starting the short sale process. If your agent is not skilled with short sales, it is worthwhile to hire a short sale consultant who will work with you and your agent to convince your bank to approve a short sale. Feel free to contact us to be connected with a short sale consultant in your area.

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Who pays the real estate commission on a short sale?

The real estate commission is paid out of the seller’s proceeds as permitted by the mortgage lender(s). Typically the seller does not contribute funds for the commission. The money from the buyer is divided up by the settlement officer, with some going to pay the commission, some going to the mortgage lender(s), and some going to other seller costs.

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Other people are on the deed with me, but they do not want to sell. Can I still do a short sale?

No. A property cannot be sold without the cooperation of all the owners. To convey a property, each owner would have to sign the deed and other closing documents. To convince a mortgage lender to permit a short sale, each borrower would have to submit financial paperwork as part of the negotiation. If someone does not cooperate, then the sale cannot occur.

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I have other liens on my property. Can I still do a short sale?

Yes, as long as the other lienholders are willing to take less than the outstanding balance. That would entail a separate negotiation with each creditor, and the short sale could only occur if each one agrees to take less.

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What is a BPO?

A Broker’s Price Opinion (BPO) is an opinion of value provided by a real estate broker. It carries less weight and accuracy than an appraisal, which is conducted by a certified appraiser. A BPO costs the lender less money than an appraisal. Understand that the lender will not make a decision on whether to approve a short sale offer unless the sale price is close to the appraisal or BPO value. Technically, a BPO should be conducted only by a broker, but there are many licensed agents providing BPOs for lenders even though they are not brokers. If you are attempting to sell your property via a short sale, it is critical that the valuation be close to the contract price.

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If I sold my house at fair market value, there would be enough money to pay off the first mortgage completely, but not the second mortgage. Can I still do a short sale?

Yes, in that case only the second mortgage would have to accept a short sale. In some respects, that makes the short sale a little easier. Only one lender would have to take a loss.

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I have enough money to pay my mortgage or my credit cards, but not both. Which should I stop paying?

This is a complex decision that involves a variety of factors. Hundreds of thousands of Americans are faced with a similar quandary. More and more Americans are choosing to continue paying their credit cards and auto loan, while defaulting on their mortgage.

Ask yourself if you truly want to keep the home and whether you can afford to make the mortgage payments. If you cannot keep the home, then you have to look ahead at what’s best for you. Perhaps it would be the lesser of two evils to default on the mortgage while staying current with all your other financial obligations. That limits the damage to just your mortgage and not your other lines of credit, which can benefit you in the next chapter of your life.

A hidden benefit of a short sale is that many people live in the house for free for several months while they wait for bank approval, so they save money until the day they have to move out. Feel free to contact us. And definitely talk to your attorney and tax advisor.

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If I’m facing foreclosure, should I still pay for homeowner’s insurance?

If a person owns a house, they are responsible for maintenance and they are liable for what happens on the premises. The cost of paying for insurance coverage is much smaller than the cost of catastrophic loss. It is important to avoid owning a house that is uninsured.

If your house is not insured and it burns to the ground, you are still responsible for removal of the debris and payment of the mortgage loan. If someone is injured on the premises and you are at fault but do not have insurance coverage, you face a costly challenge.

In wintertime, you are responsible for preventing damage from frozen pipes. If you are unable or unwilling to pay for heat, then the house should be winterized. If you are unable to pay for the cost of winterization, you should notify your mortgage lender immediately. In many cases the mortgage lender will pay to winterize a house and add the cost to the principal balance.

If you cannot pay for insurance to cover their house, then you should notify your bank immediately. Many banks will pay for what is known as forced placed insurance. That insurance is generally more expensive than insurance that you could obtain through a normal provider. The bank will add the cost of the insurance to the principal balance.

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I’m falling behind on my mortgage and I’m considering my options. How about bankruptcy?

Bankruptcy is the financial inability to pay one’s debts when they are due. Bankruptcy is a federal court procedure for individuals who are unable to pay their debts to settle those debts under a judge’s supervision. Bankruptcy is not the same as insolvency. The filing of a bankruptcy case temporarily stops foreclosure proceedings.

There are essentially two types of bankruptcy filings: Chapter 7 and Chapter 13.

Chapter 13 Bankruptcy allows for debt reorganization. The debtor has enough disposable income to submit a reasonable debt payment plan to the court. The plan describes how the creditors will be repaid over a three to five year period. During Chapter 13 Bankruptcy, the creditors are not allowed to collect on the debtor’s previously incurred debt except via the court. In general, the person is permitted to keep their property and the creditors end up with less money than the full balance of what is owed.

Chapter 7 Bankruptcy allows for a debtor to keep certain exempt property. Some liens, including mortgages, survive the bankruptcy. Other assets are sold to pay the creditors. If the mortgage lender’s interests are not adequately protected, the court may allow the foreclosure proceedings to continue.

A bankruptcy will not stop a foreclosure action; it will only delay it. When a person declares bankruptcy, their mortgage lender (as well as other creditors) must stop collection activities for the moment. If a house is worth less than the total mortgage balance, the bankruptcy trustee assigned to oversee the distribution of assets will eventually realize that there is no equity in the property. In many cases, they will release the real estate from the bankruptcy, and at that time the mortgage lender can continue with a foreclosure action.

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I’m behind on my mortgage. Should I move out or stay in the house?

In most cases, it is wiser for a homeowner to stay in their house. Many people who are behind on their mortgage payments have an unfounded fear that they will come home one night to find their belongings removed and their door padlocked.

Banks prefer to have someone, particularly the homeowner, stay in the house. Mortgage lenders do not like vacant houses, as they lose value due to break-ins, ice damage in the winter, or lack of upkeep.

A homeowner behind on their payments can save money by staying in their house. Rather than paying for rent somewhere else, you can live rent-free in your house until the property is sold. The money that is saved during this period can be allocated for moving costs, a security deposit, and rent when you eventually move elsewhere.

Unless there is a compelling reason to move now, such as a job relocation or a contentious divorce, it is wise for you to stay in the home while the foreclosure process unfolds.

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Who are the players in a short sale?

It is important to understand who is involved in a typical short sale.

Seller(s). They are also referred to as the Borrower or Homeowner.

Lender(s). These are the banks or investors with liens against the property. In many cases, the loan may have been sold from one lender to another. In other cases, a loan servicer may be handling the collection of payments for the lender.

Loss Mitigation Officers. The loss mitigation specialists of a lender or servicer help determine what constitutes an acceptable payoff.

Real Estate Agent(s). Typically the property will be listed with a real estate licensee. Another agent may represent the prospective buyer.

Short Sale Consultant or Negotiator. There are many legitimate and experienced short sale consultants who act as a third party negotiator to help sellers and agents. There are also many illegitimate or inexperienced people claiming to be short sale consultants. Having a professional consultant work the short sale is what can make or break a deal.

Contractor(s) and Inspector(s). Many distressed properties face deferred maintenance or neglect. An estimate from a licensed contractor and a report from a certified inspector may be powerful negotiating tools in convincing a lender to accept less money.

Appraiser or BPO Agent. In the latter stages of a short sale, the lender or servicer will likely pay for an appraisal or a Broker’s Price Opinion (BPO) from an agent. The lender will determine a payoff based upon the valuation established by the appraiser or BPO agent. It is imperative that the listing agent and/or short sale consultant meet the appraiser or BPO agent when they visit the property.

Attorney(s). The lender or servicer will hire a law firm to represent them in the foreclosure action. The seller is strongly encouraged to have legal representation too.

Accountant(s). The seller is strongly encouraged to consult with their accountant in any short sale or potential short sale transaction.

Credit Restoration Specialist or Counselor. The seller is strongly encouraged to speak with a credit counselor prior to a short sale transaction. After a short sale, it may be a good idea for the seller to hire a credit restoration service to help clean up their damaged credit record.

Private Mortgage Insurer. If the seller was required to pay for mortgage insurance, that company may pay some or all of the deficiency to the lender, which can influence the lender’s decision to permit the short sale.

Federal Government Agencies. Some loans may have been guaranteed or insured under a federal program. The Department of Housing and Urban Development (HUD), the Federal Housing Administration (FHA), the Veterans Administration (VA), and the United States Department of Agriculture (USDA) are agencies that may have some approval authority on a loan they guaranteed or insured. Fannie Mae and Freddie Mac may also have approval authority on certain loans.

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What is the difference between a judicial foreclosure and a non-judicial foreclosure?

Foreclosure is a legal process in which a mortgage lender claims real estate from a borrower who has failed to pay or who may have breached the loan agreement in some other way. When the owner borrowed money, they gave the lender a mortgage against the property as security for the loan. The owner is the mortgagor, and the lender is the mortgagee.

Judicial Foreclosure
In some states, foreclosure is a judicial process. Judicial states require that a foreclosure go through the court system. The bank must file a court action, typically a lawsuit, against the borrower. The process takes time, and it involves a sequence of events that takes months, even years, before the foreclosure process is complete. A judicial foreclosure process typically benefits the borrower, as it buys them time to find a solution or a new residence.

The judicial process involves the filing of a Complaint by the lender along with a Lis Pendens notice, which is a notice of pending legal action. The borrower is served notice of the Complaint, and they have an opportunity to be heard before the court if they wish. If the court finds that the debt is valid, a Default Judgment will be issued in favor of the lender, and it will list the entire unpaid balance plus late fees, legal fees, and court costs. After the Default Judgment is entered, a writ will be issued by the court authorizing a Sheriff’s Sale. The Sheriff’s Sale is a public auction open to anyone. The bank’s attorney or representative may attend the sale, and the bank may either take the property back if the bids are not high enough, or the bank may allow the property to be sold to the highest bidder.

Non-Judicial Foreclosure
Other states, typically western states, utilize a non-judicial foreclosure process. A document called a deed of trust is created when the mortgage loan is granted. When a borrower fails to pay, the default starts the foreclosure process right away without having to go through the courts. The borrower has a certain period of time, which varies by state, to sell the property, pay the delinquent amount, or negotiate another solution.

In the case of a deed of trust, the deed to the property is held by a third party, or trustee. If the entire loan balance is paid, the trustee then transfers ownership interest via a trustee’s deed or a reconveyance to the borrower.

If a borrower fails to pay, the lender instructs the trustee to sell the property. The trustee may be another bank, an escrow agent, or a title company. The third party orders a sale, which is open to the public and advertised in local newspapers. Typically a trustee’s sale involves sealed bids. Even the mortgage lender submits a sealed bid. If their bid is highest, they become the new owner of the property.

The average time to foreclose on a property has increased across the country. Banks, courts, foreclosure attorneys, and Sheriff’s Departments have become inundated. Borrowers are attempting loan modifications, short sales, and other programs which typically delay the foreclosure process. Banks have sometimes delayed sales to maintain good public relations. For example, many banks choose to suspend foreclosure sales around Christmas. Other banks have placed a temporary moratorium on foreclosures due to complaints by borrowers, state governments, or others. In addition, an increasing number of borrowers choose to contest the foreclosure action against them, which delays the foreclosure sale.

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We received multiple offers for our short sale listing. Should we send all the offers to our bank to decide which one to accept?

In a short sale, the bank is not the owner and therefore does not have the right to decide which offer to accept. An Agreement of Sale is a contract between the seller and the buyer, not between the bank and the buyer. The seller decides which offer to accept. Once that offer is accepted, the seller and buyer are committed to each other per the terms of the Agreement of Sale. The fully signed contract is then submitted to the seller’s bank to see if they will be willing to accept the net proceeds of the sale. The seller is responsible for deciding which offer has the best chance of being approved for a short sale by their lender.

If the bank has taken the property back via foreclosure, then the property is owned by the bank. The situation is no longer a short sale. The bank sells the property and therefore has the right to decide which offer to accept.

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When should home inspections be done in a short sale transaction?

A matter of debate is whether a buyer should conduct their home inspection right after going under contract with a short sale seller, or if the buyer should wait until a written short sale approval is provided. In typical non-distressed sales, the buyer opts to conduct their home inspection within 10 to 20 days after all parties have signed the Agreement of Sale. However, when a short sale is involved, there are pros and cons of conducting a home inspection right away. What is advantageous for the buyer may not be advantageous for the seller, and vice-versa.

Why a buyer should want to conduct inspections right away
If the buyer decides from the inspection results that they do not want the property, the buyer saves valuable time by terminating the contract. They can then focus their search for a better home.
If the buyer decides that they need a repair credit or price reduction, they have a much greater chance of having the seller’s mortgage lender approve the concession. The information from the inspection report can help with convincing the seller’s bank that the property needs to sell for less due to projected repairs. Once a short sale is approved, it is extremely difficult to negotiate a concession with the seller’s mortgage lender.
In many Agreements of Sale, the buyer may forfeit their deposit if they attempt to back out of the transaction only days before a closing is set to occur.

Why a buyer should wait until they have short sale approval before conducting inspections
If the buyer’s offer price is not approved by the seller’s mortgage lender, then the buyer does not spend money on an inspection for a home they cannot buy.
The condition of the property may deteriorate from deferred maintenance while waiting for the seller’s mortgage lender to respond. The buyer’s inspection report may more accurately represent the condition of the property as of the proposed settlement date.

Why a seller should want the buyer to conduct inspections right away
If the seller takes the property off the market for months while waiting for short sale approval, the seller takes a huge risk. If the buyer terminates the Agreement of Sale due to inspection results, the seller will have wasted valuable marketing time. Once a short sale approval is granted and the lender expects a closing in 30 days, the likelihood of finding another buyer who can purchase the property in that time frame is slim.
If the buyer walks away only a few days after signing the Agreement of Sale, the seller now has valuable information about the property thanks to that former buyer. That knowledge can help with the short sale negotiation with the bank. Furthermore, the listing agent may be better able to price the property in line with its condition.

Why the seller should not want the buyer to wait until they have short sale approval before conducting inspections
If the buyer needs a mortgage loan, they may run out of time. If the seller’s lender demands that the settlement occur within 30 days, and the buyer spends 15 days on inspections, it leaves only 15 days for them to obtain the mortgage loan. If there is a delay with the buyer’s appraisal or their bank’s underwriters, then the transaction is in jeopardy. The seller’s lender may not extend the short sale approval, or if they do they’ll demand extra money for every extra day. In such situations, an argument can ensue over who will pay the per diem to the seller’s lender.
The seller may have made preparations to move out, only to find that the buyer walks away just days before the projected settlement. The seller has to move out, and many people need about four weeks’ notice to plan a move. If the seller’s lender demands a closing in 30 days after the short sale approval is granted, and the buyer decides 15 days later to walk away, then the seller is stuck in limbo. The seller may have already begun the move-out process when they find that the buyer decides to terminate the Agreement of Sale just days before the planned closing date. Then the house will sit vacant for weeks, even months, as the listing agent works to procure a new buyer.

If either buyer or seller is not fully committed to the other party, there is a high probability that the transaction will fail. When a buyer conducts their inspections right away, it demonstrates the buyer’s commitment since the buyer is willing to spend money up front. The seller in turn should feel assured that they can take the property off the market to commit to that buyer.

It may be best for all parties to have the home inspections conducted right after signing of the Agreement of Sale. While the buyer has to spend several hundred dollars on inspections, that is the cost of doing business. Typically a buyer can purchase a short sale at a discount to fair market value, and that discount justifies the expenditure of money up front. In fact, the inspection results may benefit the buyer in that the report and any repair estimates can influence the seller’s lender to allow the house to be sold at a discount.

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We are selling our property via a short sale and we just received a low offer. Should we make a counteroffer, or will the bank do that?

The seller of a short sale listing has the right to make counteroffers or even reject an offer outright. If a seller receives an offer that they believe is too low for their mortgage lender to approve, then the seller may negotiate with the buyer to increase the offer price.

Some buyers will be puzzled as to why they receive a counteroffer from the seller. These buyers prefer to have the seller sign off on their low offer, take the property off the market, and submit the low offer to the bank in the hopes of a short sale approval. By accepting a low offer, the seller might be missing out on a higher, better offer from another potential buyer. Yet it is also possible that the bank might issue a short sale approval on a low offer some of the time.

If an offer price is a little low but still close to fair market value, it is advisable for the seller to accept the offer and submit it to their bank. If the bank issues a counteroffer to the buyer, the buyer will perceive that the bank is the bad guy in the negotiation process. That way the seller preserves some goodwill in the negotiation. The seller may be more likely to receive a late-stage concession from a buyer who appreciates that the seller did not issue any counteroffers themselves.

If an offer price is ridiculously low, it may be best for the seller to issue a counteroffer to the buyer. If the buyer is truly interested in the property, they may come up in price.

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I’m selling my house via a short sale and we are under contract with a buyer. If we receive a higher, better offer, can we send that to the bank?

The terms of the Agreement of Sale must be followed. Most standard contracts commit the buyer and seller to each other, so the seller cannot arbitrarily terminate an agreement with one buyer to go with another buyer.

Generally speaking in a real estate Agreement of Sale, the seller has to sell and the buyer does not necessarily have to buy. If a buyer defaults, the remedy for the seller is that they keep the buyer’s deposit. If the seller defaults, the buyer could sue for performance. In other words, the buyer could sue to compel the seller to sell the property per the terms and conditions outlined in the contract.

Typically, a seller of a short sale commits to the buyer via the signed Agreement of Sale. In most situations, the listing agent should mark the listing as Pending or Under Contract. The property is not actively marketed to other buyers while the buyer and seller await a short sale approval, or denial, from the seller’s mortgage lender.

Think about it this way: The buyer stops searching for another property to purchase. The buyer pays for inspections and perhaps for a loan rate lock. The buyer may sell their property or terminate their lease based upon the representations of the seller. Therefore, the buyer is committed to the deal. The seller should recognize the buyer’s commitment and allow the short sale approval process to play out, without planning to remove the buyer from the deal if a more enticing offer comes along.

Some people erroneously believe that all buyer offers, whenever they come in, should be presented to the seller’s bank. The seller, as the owner of the property, chooses the one offer that they will accept. Once signed, that contract is the only one submitted to the seller’s bank for a short sale approval. The bank is not the owner and does not have the authority to pick and choose among offers.

In a short sale, the buyer and seller should commit to each other. Once the seller’s mortgage lender makes a decision about the short sale, then the buyer and seller can either proceed to closing or go their separate ways.

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I’m selling my house via a short sale. Will I receive any money for selling it?

In the vast majority of short sales, the seller does not receive any money. The bank and perhaps some other creditors lose thousands of dollars, and so they will not permit the seller to receive any proceeds from the sale.

In some cases, the seller may be expected to pay some money at closing. In most cases where the seller has to contribute something, the amount the seller pays is just to make up the difference on pro-rated taxes, a higher-than-expected water/sewer bill, or some other shortfall that appears at the last minute. For example, if the mortgage lender agrees to take a minimum of $132,655.17 and the closing costs are a little higher than expected, the lender will likely be unwilling to take less than the precise amount they stated. Therefore, the buyer, seller, real estate agents, or other parties must contribute in some way to make up the shortfall. In some cases, the buyer will refuse to pay more, stating that they will not pay for the seller’s costs. In such situations, the seller may have to bring some money to closing to cover extra closing costs. Typically that amount would be fairly low, ranging from a few dollars to a couple thousand dollars.

In some short sales, the mortgage lender may stipulate that the seller must contribute some amount of money or the lender may ask the seller to sign a promissory note to pay back some of the remaining debt. The mortgage company must declare any such stipulations in their short sale approval letter, so the seller would know well in advance. In most short sales these days, the mortgage company does not expect the seller to contribute any money as it may be apparent that the seller does not have any funds to give.

In some short sales, the seller may be given some money at closing or upon post-settlement move-out. The federal government’s Home Affordable Foreclosure Alternatives (HAFA) program provides $3,000.00 for eligible sellers. Loans insured by the Federal Housing Administration (FHA) may grant $750.00 to $1,000.00 to the seller as a moving incentive. Some mortgage lenders, like Bank of America and Chase Home Finance, offer to pay $3,000.00 up to $25,000.00 to sellers at closing if they cooperate with the short sale of their property.

Sellers in a short sale should expect to receive no money at closing. If they do qualify for a special short sale program, then they should be grateful to receive what little money they do. The greater financial benefit to the seller is that they will no longer have to maintain a property they cannot afford.

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I need a short sale on one property of mine. Can the bank go after my other house?

The mortgage given by the owner to the bank gives the bank the right to take ownership of the house via the foreclosure process if the owner does not pay. The mortgage lender’s remedy is to take ownership of the house so it can be sold to recoup some or all of the defaulted loan.

The bank cannot seize other real estate owned by the borrower unless the borrower has some type of blanket mortgage loan that applies to more than one property. Most mortgage loans are not blanket loans but simply a loan secured by one property.

In some cases and in some states, the mortgage lender can foreclose on the borrower and may sue the borrower after the sale if the lender did not recoup the balance of the loan. In other words, if the bank foreclosed and found that the value of the property is far below what they are owed, they can pursue the former owner for some or all of the remaining balance. If the bank sues and is granted a deficiency judgment, then the former owner has to pay off that judgment somehow. The payment of that judgment may come when the person sells another one of their properties.

Although some states restrict the collection of deficiency balances, most states have laws that permit deficiencies to be treated like other unsecured debts. In states that allow deficiency judgments, the lender may be able to garnish the borrower’s wages, levy their bank accounts, and/or place a lien on other real estate they own.

In some short sales, the bank desires to retain the right to pursue a deficiency judgment after the sale of the property. The mortgage lender should declare that intention on their short sale approval letter. The borrower has the right to reject that condition of the short sale, and the parties may re-negotiate. The borrower may propose that the bank forgive the remaining debt instead of pursuing the deficiency judgment.

States with anti-deficiency laws are Alaska, Arizona, California, Iowa, Minnesota, Montana, North Carolina, North Dakota, Oregon, and Washington. It should be noted that some of these states allow deficiency lawsuits in certain situations. These anti-deficiency laws are rarely straightforward.

In rare cases, the bank may be willing to release its lien on one property to allow a short sale to occur, but the bank will add a lien to another property as long as the owner consents. This tactic is more prevalent with local banks instead of national banks. The parties negotiate a deal whereby the seller allows the bank to place a mortgage against another property for the amount of the loan that remains unpaid by the short sale. This may be a wise tactic for the seller if they have equity in one property but no equity in another.

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I’m planning to buy a short sale. Can I expect the seller or the bank to repair the home?

Many short sale properties have deferred maintenance, as the seller typically stops paying for maintenance as money becomes tight. By the time the sale occurs, many short sale sellers are either unable or unwilling to pay for repairs. They realize that every dollar they spend on the property is a dollar they will not receive back.

If you want to purchase a short sale and the property requires repairs before your bank will lend money, you should find a way to make the repairs yourself or perhaps find a different property to buy. There is a risk to you when repairing a house before you purchase it or obtain a short sale approval to purchase it. If you improve the house and the short sale fails, then you wasted time and money on a home you cannot buy. Note that most contractors will not work on a property and wait to be paid at closing.

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