In parts 1 and 2 of our short sale blog, we discussed the initials steps in preparing your file for a short sale. Because of the state of the mortgage industry today, many individuals have opted for this route in trying to alleviate themselves of the financial responsibility of a home mortgage. As was noted, this route is usually a great scenario for the homeowner, but the lender is usually less responsive to your requests for a short sale. This is primarily due to several factors: (1) There is an abundance of short sale requests because of the state of the economy, the crater of the subprime market, and the rate adjustment of Adjustable Rate Mortgages; (2) Many loss mitigation specialists are not bonused on short sales rather on loan modifications. Many times these individuals will not assist you from start to finish on a short sale. Rather, your file is held in “suspension” until a foreclosure takes place; (3) The ease of a foreclosure is the path of least resistance many lenders prefer to take rather than allow you to sell your home through a short sale.
When we finished the last blog, we had presented your full file to the lender and they had in turn packaged your offer and HUD-1, your current financial package, and the BPO from a third party. As we discussed, the presentation of a FULL FILE to a lender is imperative. Because of the influx of so many short sales in the market, lenders will often put aside partial files and present full files to the investor. The presentation of a full package to the investor is critical because many times you are racing against the foreclosure clock. In many states it take 6 to 8 months for a home to fall into foreclosure. However, I have seen lenders foreclose on properties in as little as 4 months from the first missed payment. Each state has its own laws governing the steps of a home foreclosure, so it would be in your best interest to research the timeline to eleviate a certain missed opportunity for a short sale.
Once the investor has researched your file, he will more than likely accept the offer. Many times lenders don’t present offers that are off the mark of the third party BPO. This saves everyone time and allows all parties to follow through with the sale of the home. Once the investor has accepted the offer, the lender will then prepare an acceptance letter of the offer. The acceptance letter will be based on the offer that was outlined on the HUD-1 that was submitted with the offer. It is imperative to note that the investor approves the offer based on the information in the HUD-1. Always double check the title officer’s work on the HUD-1. You want to make sure of this because contracts vary from state to state, but the HUD-1 is the universal tool all of them use to approve, deny, or counter a contract.
Generally, the buyer has 30 days from the acceptance of the offer to close the transaction. The items that will need to be collected during the review of the contract are: (1) A current title run by the title office. Because there can be multiple liens (mechanics liens, federal tax liens, HOA liens, etc) placed on a property, it is imperative to have a run sheet detailing a clean chain of title; (2) HOA resale certificate (if applicable). If the HOA has had to mow your lawn or fax a fallen fence, etc., they will many times not issue a resale certificate because of these infractions. These items will of course need to be paid and brought current to sell the home; (3) Communcation of the buyers lender. Because of the current mortgage market, you do not want to jump through so many hoops in the preparation of sale only to find out that the buyer can no longer qualify for the home because he/she has had credit problems in the interim or did not sell their previous home. Remember, the squeaky wheel will always transition yourself into a smooth sale of your home.
I will finish this final blog with a question that I always receive from short sale selling participants: am I going to be responsible for the deficiency between what is owed and what I sell my home for? The answer is: maybe. The reason for this is that it all depends on what your home is classified as: a homestead or investment property or second home. If your home is homesteaded, under the Debt Forgiveness Act of 2007, “…..the Act allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on your principal residence.” (You can read more on this at www.irs.gov). If your home is an investment property or a second home, you will be responsible for the deficiency in the loan. Many times the lender will issue you a 1099-A and will write off their loss. You will then be responsible for the taxes as a result of the sale. Please remember, you will receive a deficiency whether you sell your home in a short sale or you allow it to go to foreclosure. Its much easier to erase late payments from your credit than to erase a foreclosure. Some lenders will place a judgement on your credit. The problem with this is that the judgement goes away in 10 years unless it is renewed. This is usually too much for a lender to keep up with.
I hope that this three part series has been a good tool to prepare yourself for a short sale. If you have any questions regarding the contents of this blog or would like to discuss other options for your home, feel free to contact me at tteichelman@firstpreston.com. Thank you.