Homeowners in mortgage distress (and first-time buyers) can find advantages in short sales

BY STEPHANIE FOX

Home owners facing mortgage problems that have not been able to complete a loan modification program might consider a short sale. For many, it’s a way out of a difficult situation with as little financial damage as possible. For buyers, purchasing a house in short sale can be a golden opportunity for home ownership.

A short sale is an agreement by the holder of a mortgage to allow the homeowner to sell the home for less than is owed. The credit hit for short sales is smaller than a foreclosure. A short sale may lower credit scores by only 50 points and affect credit for three years while a foreclosure drops scores by as much as 200 points and remains on credit histories for seven years.

While a short sale may be the best option for many in mortgage trouble, don’t expect the process to be smooth or swift. The current rule of thumb is that a short sale takes 120 days, but in reality the process can drag out much longer.

Banks agree to short sales to save themselves money. Foreclo-sure is an expensive legal process for them and banks prefer to collect at least some of the money owed rather than having to maintain and sell a house acquired at a sheriff’s sale.

Sellers looking to short sell are required to write a handwritten hardship letter showing why they should qualify. Legitimate hardships includes job loss or business failure, sickness, disability and medical bills, divorce or death. Simply owing more on a house than it is currently worth is not considered a hardship.
Sellers must submit additional documentation, including two years of tax returns, pay stubs for two months, bank statements for three months and more. Many real estate agents will help sellers navigate through this process. (Banks usually lose some or all of these documents at least once, so keep copies and be ready to fax them again.)

Once qualified, the seller’s real estate agent will put the home on the market. Most banks are willing to negotiate offers from interested buyers, but the banks always have the final word on what they will accept. One positive note: Most banks will temporarily halt the foreclosure process once they get a legitimate purchase agreement, but short sales must be started well before foreclosure.

Part of the reason short sales take so long is because the local community bank or lender who issued the mortgage no longer owns it, and the entity where homeowners send their monthly mortgage payment is simply a servicer. Because of deregulation in the lending industry, mortgages are now broken up and bundled with other mortgages, then sold to investors like shares of stock.

It takes a month or two for the bank to assign the file to an overworked specialist who can approve the short sale. Once a purchase agreement is negotiated and finalized between seller and buyer, it is assigned to another overworked short sale specialist—this can take 45 days or more—and then works its way up a chain of bank workers until it reaches the final authority. It is then sent to the investors who bought parts of the bundled mortgage, all of whom need to give it their go-ahead.
The process can be frustrating and emotionally stressful for everyone involved. But in the end, the process can be worth the trouble.

It is important for sellers in mortgage trouble who are considering a short sale to contact their bank and real estate agent early in the process to give them time for getting approval for the short sale and for finding a buyer. There may be legal and tax repercussions, so sellers should also talk with their accountant and lawyer to fully understand what the consequence of a short sale will be in their particular situation.

Buyers hoping to take advantage of the current short sale market and low interest mortgage rates can find a lot of properties to choose from at below market value. Since the short sale can often take months from purchase agreement to closing, the best candidates to buy a short sale are first-time buyers (now making up 51 percent of buyers) who have no home to sell or homeowners who can afford to pay two mortgages at once for a few months until they sell their current home. Investors can also benefit in this market.

Starting in April, changes in FHA rules will make it harder to get certain mortgages popular with first-time buyers and subsequently, for sellers to sell. Among these changes is one that requires new borrowers to have a credit score of 580 to qualify for a 3.5 percent down payment. Buyers with less than a 580 score will have to come up with 10 percent of the mortgage loan, in cash. In addition, buyers may need additional money to cover closing costs as allowable seller concessions (the money from the seller that covers buyer closing costs) drops from 6 to 3 percent.

Like sellers, buyers will need patience and must be willing to wait for months, sometimes without any communication from the bank, before getting word that their offer has been approved. But a buyer willing to go through the process can end up with a good house bought at a sharply discounted price.

Stephanie Fox is a South Minneapolis real estate agent at Coldwell Banker Burnet. Many of her clients are short sale sellers and buyers.