Short Sales and Preforeclosures
Many Santa Clarita homeowners are finding that their homes are financed well beyond their current market value, with payments higher than they can afford on their current income. In situations where homeowners cannot qualify for loan modification programs, they should consider a short sale as their next step, since a short sale will have less impact on the seller’s credit report.
Foreclosure vs. Short Sale
With a foreclosure, the bank will take your house back at auction and then remarket it as an REO, or bank-owned, property once you have moved out. A foreclosure will have a major impact on your credit report, and any security clearances you may have may be placed in jeopardy with a foreclosure on your record. For many, the loss of a security clearance level can mean a demotion or unemployment, since a foreclosure is said to have about the same impact as a felony when it comes to security clearances and other credit checks. Expect your FICO score to be reduced 200-280 points after a foreclosure, and a 3-year waiting period before you can buy another home. Once the bank has taken your home back at auction, typically they will pay you a small amount of funds, or what we call a ‘cash for keys’ payment, to get you to move out and leave the house reasonably clean within about 30 days after the auction date.
With a short sale, you will market your home for sale with the help of a qualified Realtor®, and the bank will agree to being paid less than what they are owed on your mortgage(s). The short sale process does take patience, but in the end it will have a lot less impact on your credit report than a foreclosure would, and it allows you to remain somewhat in control of your move-out date. Expect your FICO score to be reduced 75-125 points after a short sale, and it’s possible that you will qualify to buy a new home in about one and a half years after a short sale.
Short Sale Fees and Costs
Banks will typically pay all standard fees and costs associated with a short sale, including real estate commissions, delinquent property taxes, escrow fees and title fees. They will not always pay for extras like termite inspections and home warranty plans for the buyer, so these may become the responsibility of the buyer to pay. Short sales are typically sold ‘as-is’, with neither the sellers nor the bank paying for any repairs or modifications. Also, short sale sellers can never receive any money from the sale, so expect to have your mortgage eliminated without receiving any money in your pocket as a result of the short sale.
Qualifying for a Short Sale
To qualify for a short sale, you’ll need to present information to your bank that shows that you have some sort of financial hardship that makes it so you cannot pay your mortgage, along with a signed purchase agreement from a qualified buyer. Your Realtor® will be able to assist you with the required documentation to indicate the financial hardship that you are facing, as well as requesting the required documentation from the buyers to show that they are indeed qualified buyers.
Short sales are not for inexperienced Realtors®, as they do require tons of paperwork, special processing, and lots of time following up with the bank before the bank will issue their approval for the short sale to move forward with a qualified buyer. An improperly prepared short sale package submitted to the bank may create unwarranted delays in processing, an outright denial of the short sale or even a foreclosure auction while the short sale is supposedly in process. A properly prepared short sale package will include 75 pages or more of documentation.
Be sure to use a Certified Distressed Property Expert (CDPE) as your short sale Realtor® for peace of mind and an easier process overall. Santa Clarita Realtor® Linda Slocum is a CDPE with plenty of short sale experience, and will be happy to discuss your needs with you. You can reach her at (661) 670-0349 or email her at Linda@SantaClaritaRealEstateBlog.com.
Proving Financial Hardship
A financial hardship can be created in many different ways, including interest rate adjustments on adjustable (ARM) loans, the loss of a job, or illness in the family. However, even minor changes in a family’s situation can quite easily create a financial hardship over time.
Studies show that an income disruption due to the loss of a job, business slowdown or illness can place many homeowners at risk of foreclosure in as little as 60 days. In these situations, not only is the income disrupted, but credit card payments may skyrocket as well when the rates are adjusted to 30% as a result of late payments. This credit card adjustment alone can use up a family’s ‘cushion’ for extra expenses, starting the downward spiral that can lead to foreclosure.
When looking to do a short sale, acceptable hardships from the bank’s point of view include:
Loss of a job or a business failure: Even a temporary decline in income can put a homeowner at risk of foreclosure. If you lose your job and then find a new job, it’s possible that your new pay rate will be lower than what you were receiving at your previous job. For those who are self-employed, a business failure or a major decline in business revenues can create a hardship situation.
Change in family situation: A change in family situation that could create a hardship may involve the death of a family member, divorce or separation since each of these may create a decline in the total household income.
Relocation: This hardship typically does not include voluntary relocations, although it can under some circumstances. There are times when a relocation is the only way to maintain any level of income. Relocation may also be a mandatory requirement for continued employment with your current employer.
Illness in the family: A major illness can have a major impact on household income if it involves one of the wage earners in the family, with both loss of income and medical bills to cover. When the illness involves a non-wage earner in the family, the medical bills alone can create enough of a hardship for a family to be facing foreclosure.
Military Service: Extended leaves for military deployment can put a major strain on a family’s financial stability. Even though there are programs designed specifically for deployed military personnel, quite often a short sale is the best option for families who find themselves financially overwhelmed. A foreclosure on your credit report is almost as bad as felony, and thus it can severly impact your security clearance and your future promotions. A short sale will have less of an impact, especially if you keep your superiors notified of your situation.
Too much credit card or other debt: Credit cards are one of our worst enemies when it comes to facing financial difficulties. While it’s easy to finance monthly expenses on a credit card, one missed payment can push you into the 30% interest rate category overnight, thus doubling your monthly minimum payments and making it impossible to meet your monthly obligations. Be sure to call your credit card companies and discuss your situation with them to see if they will allow you to repay your credit card debt with a payment plan that has less of an impact on your monthly cash flow.
Cash Reserves and Short Sales
You don’t need to be flat broke to qualify for a short sale, you just need to be what is called ‘insolvent’. Insolvency is when your monthly income is not enough to cover your monthly expenses, and you don’t have enough savings to carry you through the tough months until you get back on your feet.
If you do have significant cash reserves, investments, or other properties with equity, the bank may either deny the short sale or require you to carry back a ’soft’ or unsecured note for all or a portion of the shortage. Typically these soft notes carry either a low interest rate or are interest-free loans. You do have the option of refusing to complete the short sale if this happens – the bank cannot force you to accept their demand for this soft note.
Some attorneys have stated that filing bankruptcy after a short sale may eliminate this soft note, but we are not lawyers, so be sure to discuss this situation in detail with your personal attorney.
Attempting to shift assets to others prior to requesting a short sale may be considered as fraud, and thus could result in jail time if you’re caught. There is no guarantee that the bank won’t start researching their higher-loss short sales when they find themselves with an underutilized workforce that can be shifted into investigating potential fraud situations after the requests for new short sale approvals slow down. Ultimately it’s your decision as to how you handle your financial situation, but be aware that there may be future consequences when shifting assets.
Short Sale Processing
A short sale is like a regular sale in many ways. You’ll list your home for sale with a qualified Realtor®, preferably a Certified Distressed Property Expert (CDPE), and show it to buyers just as you would with a regular sale. The difference is that the buyers must be notified that you’re selling as a short sale, there is a lot of extra work to be done by your Realtor® once an offer is received from a qualified buyer, and you won’t be able to open escrow with your buyer until the bank approves the short sale.
After you receive an offer from a qualified buyer, your Realtor® needs to present this offer along with the documentation of your hardship and other data to the bank in order to process the short sale request. This documentation typically includes information regarding your current financial status, your home and its current condition, the real estate market activity in your area, and an estimated closing statement (HUD-1) showing how much money the bank will receive from the sale of your home. A complete short sale package generally includes 75 pages of documentation or more.
The first stop for a newly-submitted short sale package will be with the bank’s Level 1 Negotiator for the initial review. Depending on the amount of the bank’s loss and other factors, the Level 1 Negotiator may need to pass your file up to a higher level before it can be sent to the bank’s investors for final approval. During this time, the bank may request additional information from your Realtor®, or they may lose the file and require everything to be submitted again. Your Realtor® should be prepared to submit your short sale package as many times as required until the bank approves your short sale request.
Expect a minimum of 30 days after the short sale package is submitted to receive the bank’s approval for the short sale, although it may take several months. Your Realtor® should follow up on a regular basis to make sure that your file has not been lost or delayed for any reason. DO NOT call the bank yourself to check the status on your file – the bank prefers to deal with your Realtor®, and calling to check the status won’t make the process move along any faster.
After you receive your short sale approval from the bank, you can open escrow with your buyer in the same way as you would with a regular sale. Banks typically will not allow you to close escrow more than 30 days from the date of the approval letter, but you can ask for an extension of a few days if needed for your buyer’s funding. If you miss the deadline and the bank refuses to grant an extension, then the short sale is essentially dead in the water and you’ll find yourself facing foreclosure instead. Your Realtor® and your escrow officer will need to work very closely with each other near the end of the 30-day period to make sure that an extension is requested if it looks like the buyer will not be able to close on time.
After you receive the bank’s approval for the short sale, you’ll also need to provide the buyer with all required written disclosures and allow them to complete their physical inspection of your home. The termite inspection is usually done during this timeframe as well.
Flaky Buyers
The short sale process can be lengthy, and buyers do lose patience at times. Some will decide not to buy at all, and others will find something else to buy that doesn’t require the waiting time of a short sale. Buyers are also subject to job losses and other situations that may make it impossible for them to buy a home at this time.
There’s really not much you can do in this situation, other than bringing in a new buyer. You Realtor® may already have a backup buyer in place, hoping that they can step in if your initial buyer backs out. For this reason, your Realtor® should advise you to continue showing your home to potential backup buyers even after your short sale package has been submitted to the bank.
Realtors and Short Sales
Selecting a qualified short sale Realtor® is critical, since the short sale process can be very convoluted and time-consuming from the Realtor’s perspective. This is not the time to be doing a ‘favor’ for your Cousin Martha by letting her newly-licensed niece list your home for sale.
Selecting a Realtor® who has earned the Certified Distressed Property Expert (CDPE) designation is highly recommended, since this shows that the Realtor® has the proper training and resources to help you successfully complete your short sale.
A Certified Distressed Propert Expert (CDPE) is a real estate professional with specific understanding of the complex issues confronting the real estate industry, and the foreclosure avoidance options available to homeowners. Through comprehensive training and experience, CDPEs are able to provide solutions for homeowners facing hardships in today’s market, specifically short sales.
While enduring financial difficulties is challenging for any family, the process of finding a qualified real estate professional should not be. Selecting an agent with the CDPE Designation ensures you are dealing with a professional trained to address your specific needs. For more information, contact Santa Clarita Realtor® and Certified Distressed Property Expert (CDPE) Linda Slocum. You can reach her at (661) 670-0349 or email her at Linda@SantaClaritaRealEstateBlog.com
Short Sale Buyers
If you’re considering buying a short sale, you’re likely looking for a ‘bargain’ on a home in your neighborhood of choice. Short sales in the Santa Clarita area are typically sold below current market values, although not for pennies on the dollar.
With homes for sale in the Santa Clarita area being dominated by short sales, it’s hard to avoid considering short sales, especially since the inventory of homes for sale is extremely low. With both short sales and bank owned (REO) homes, be ready to provide your Realtor® with a pre-approval letter from your lender as well as copies of bank statements showing that you have enough funds for your down payment and closing costs. If you don’t have a lender yet, ask your Realtor® for recommendations in this area.
With most short sales, they will be sold ‘as-is’ with no repairs being done by the seller or the bank. There have been exceptions to this however, with the banks sometimes covering repairs required in order for the buyer to obtain their financing. At times the buyer will need to cover the cost of needed repairs though, especially with FHA financing where the home must be in move-in condition in order for the financing to be completed. This means that there can be no safety issues or missing items such as toilets, sinks or appliances if you’re using FHA financing, unless your lender is working with you to obtain a fix-it, or 203(k) Rehab, loan.
Buying a short sale will likely take some time and patience, but that will pay off when you finally close escrow on your new home knowing that you’ve gotten a good deal. Expect it to take a minimum of 30 days after your offer is accepted by the sellers to get the bank’s approval for the short sale. After that, you’ll have 30 days to get your funding in place, close escrow, and own your new home.
Use the search below to find foreclosures and short sales that are currently available for sale. To maximize your options in selecting a foreclosure or short sale to purchase, you should also contact a qualified Realtor® to assist you with your home search.
