WHAT IS A SHORT SALE?

Not long ago, foreclosures only affected the economically challenged; today, everyone is affected: the poor, the middle class and the affluent.

Since the real estate market has taken a down turn, a lot of area homeowners have found themselves in a position where they owe more on their mortgage than their home is worth. As long as you don’t need to sell your home and as long as you can afford the payments it may be in your best interest to hold on and do nothing. The market will rise and you will recoup your home value.

What if you have to sell? What if you are faced with a job loss, divorce, relocation, illness or financial hardship? What happens if you can no longer make your mortgage payments? Is foreclosure your only option?

Many homeowners are approaching their mortgage company and requesting that they accept less than what is owed. This is called a short sale.

A short sale takes place when the lender is willing to accept less than the full mortgage pay off. The lender agrees to an amount that is less than the outstanding mortgage and in most cases allows the borrowers debt to be forgiven.

A home is a candidate for a short sale when all liens, plus costs of the sale exceed the market value. Liens include mortgage liens, mechanics liens, tax liens, unpaid judgments and unpaid HOA fees.

The good news is that the lender pays the closing costs, commissions and title fees. The seller gets the home sold, the loan satisfied, avoids foreclosure and saves point deductions on their credit. 

WHAT IS A FORECLOSURE AND WHAT IS THE TIMELINE?

A foreclosure is when the borrower is behind on their payment and the lender takes legal action against them in order to seize the property. The lender becomes distressed when a borrower gets behind in making their payments. They are in the business of making loans and are not in the business of repossessing properties. When a borrower defaults, the loan becomes a nonperforming asset, at which time it is no longer earning interest. If a loan is not earning interest, it is not producing income for the lender. 

In addition to not generating interest income, nonperforming loans actually cost the lender more money because of the lost earning power of the assets and the legal and administrative costs associated with collecting the loan or repossessing the property.

Example: If the lender has a $100,000 nonperforming asset, then they are required to keep seven times that amount (which is $700,000) in reserves. Therefore, if the lender would take a discount of $60,000 for the $100,000 loan, it allows them to put back into circulation the $700,000, in turn allowing them to collect interest making up for the $40,000 short sale that they took on the $100,000 loan.

What is the Illinois Foreclosure Timeline?

When one buys a house with borrowed money, their lender will place a lien against the property by using a Mortgage or a Deed of Trust. The Deed of Trust or the Mortgage is recorded at the courthouse, telling the public what is owed to them. Homeowners will sign a Note, which personally guarantees that they will pay the borrower money back to the lender.

FIRST MONTH: Homeowners get behind on their first payment. They receive a letter from the lender advising them that they did not receive their payment.

SECOND MONTH:  Homeowners get behind on their second payment. They receive a letter from the lender advising them that they did not receive their payment and they need to remit a payment promptly.

 THIRD MONTH: Homeowners get behind on their third payment. They receive a letter from the lender advising them that they did not receive the payment and that the lender has forwarded this file to the attorney. The attorney will start foreclosure proceedings if the homeowner does not pay.

FOURTH – EIGHTH MONTH:  A Complaint for foreclosure Summons and a Notice of Lis Pendens is filed with the court, advising the public that the sellers are in foreclosure.

• Lis  Pendens notice is served to the homeowner. The homeowner is allowed 20 days to file an answer. The serving could be immediate, because they are easy to personally serve, or it could take some time if they have moved and cannot be found. If the Plaintiff/Lender cannot find the defendant/Sellers to serve, they will have to publish notice in the newspaper for period of a month or more, depending on the statute of law. Once service is made on each party, they have 20 days to answer the complaint from the date they are served. Most sellers do not answer the complaint.
• Answering the complaint may delay the time period for the foreclosure, but with no guarantee. When ALL PARTIES (husband, wife, tenants, all other occupants, other lien holders) are served, there is a hearing date scheduled.
• After the answer period ends (and sometimes even before), the lender’s attorney will file a motion with the court to declare summary judgment. There is an additional 20-day answer period before the hearing can be held. Defendants are allowed to attend the hearing and speak. It is recommended that an attorney speak  for the borrower if they so desire.
• At the hearing, the judgment is entered and a sale date is set. Then the property is sold at auction to the highest bidder.

After the sale, there is a 21 day waiting period to have a confirmation of sale. Occupancy is terminated 30 days after the confirmation of sale; at this time, the eviction process will begin.

WHAT ARE MY OPTIONS IF I CANNOT PAY MY MORTGAGE?

1. Contact your lender: Homeowners facing financial difficulties often make the mistake of avoiding their lender, which is the worst thing you can do. If you are unable to make your payments contact your lender as soon as possible and explain your situation. You need to find out what options are available through your lender.
2. Contact your family and friends: Homeowners can ask for help from family and friends. Pride shouldn’t stand in the way. If you were in a position to assist a family member or friend who was facing a similar situation, how would you feel if they didn’t ask for help?
3. Reinstate the mortgage: If you expect your financial situation to improve, you may ask the lender to work with you through this temporary setback. If you can come up with enough money to bring your mortgage payments up to date, the lender will probably agree to hold off on foreclosure proceedings. This is commonly called a “workout agreement.”
4. Negotiate Forbearance: Forbearance allows payments to stop temporarily or be reduced for a specific length of time. The lender may grant forbearance of principal, interest or both. You will be responsible for repayment of accrued interest charges. Sometimes you can make interest only payments or have the interest added on to the principal. The key is to contact your lender right away.
5. Refinance and consolidate the debt: With a good credit history, you may be able to consolidate your debt with a loan that requires a monthly payment of less than the total payments being paid on all other loans put together. Be careful with this approach. It may make things worse.
6. Sell the house: If there is equity in the house, consider selling and finding a more affordable home. Selling the home is what 90% of people facing financial difficulties really need to do, but unless you act quickly, you may run out of time.
7. Negotiate a short sale: Lenders usually want to avoid foreclosing because of the associated costs. Most lenders are open to negotiating a short sale on the home. This isn’t something that a homeowner should attempt alone. You need to talk to a knowledgeable Realtor.
8. Give a deed in lieu of foreclosure: You may be able to offer the lender the deed in exchange for them not foreclosing. This usually affects your credit as badly as letting the bank foreclose.
9. File for bankruptcy: Bankruptcy is rarely a good choice. In most cases it simply buys time, but it does not stop foreclosure. Bankruptcy is catastrophic to your credit and is costly. The lender usually forecloses to get the title released from your name after a bankruptcy because the bankruptcy only releases you from the debt.
10.  Foreclosure: This is, by far, the worst option for most people because of its wide ranging emotional, financial and credit implications. With foreclosure the home is lost, as is any equity you may have built up. You will probably not be able to purchase another home for years to come and your credit will be destroyed for years. There is even a chance for a deficiency judgment. This is when you still owe the lender what they lost on your loan.

1. Do nothing: Many people do nothing and end up in foreclosure or bankruptcy. Most people stay in denial too long and lose the opportunity to salvage their financial situation. Doing nothing is not an option. Don’t wait until it is too late to get help.

            If your financial situation is unlikely to improve in the next 6 months, a short sale is the best option.

IS A SHORT SALE RIGHT FOR YOU?

Are you facing a hardship that makes paying your mortgage unlikely? A lender will not accept a short sale if you simply don’t want to pay your mortgage. You must be able to prove a hardship, like loss of job, divorce, illness or some type of financial hardship.

Are you at least one month behind on your mortgage? Normally, lenders will not consider a short sale if you are current on your mortgage payments. Even if you are one month behind you will probably be dealing with the Customer Service department. Their job is to collect a payment. Short sales are handled by the Loss Mitigation Department.

Do you have a ready, willing and able buyer? If you try to find out what short sale price the lender will agree to before you have a buyer, you will not be successful. The correct order is to put the home on the market, find a buyer, execute the contract and then contact the lender. You need to negotiate a pay off acceptable to the lender and a price acceptable to the buyer.

Have you depleted your savings? If you have enough saving to make the payments, your short sale will not likely be approved. It’s not that you don’t want to make the payments, but that you CAN’T make the payments.

HOW WILL A SHORT SALE AFFECT MY CREDIT?

Your credit score will take a much bigger hit by going through foreclosure or going through a deed-in lieu of foreclosure than with a short sale. A short sale may result in a 80 -100 point loss on your credit score. A foreclosure or deed-in lieu of foreclosure may result in a loss of 250 points or more. A foreclosure will force you to wait a minimum of 3 years before you can purchase another home. However, with a short sale you can buy again in about 18 months.

FACTS SELLERS NEED TO KNOW ABOUT SHORT SALES.

Negotiating a short sale between the borrower and the lender takes skill, patience, and expertise. Everyone involved in the transaction need to know what to expect.

     1. The seller’s credit rating will drop after a short sale, but not as much as with a  foreclosure. I have seen estimates of a drop of 80-100 points off one’s FICO score. That kind of drop is far less damaging than what a foreclosure dose to one’s credit score.

2. The U.S. House of Representatives has passed the mortgage cancellation Tax Relief Act (H.R.1876) which eliminates taxes on any forgiven debt on a principal residence through a short sale or foreclosure.

3. Changes of getting a mortgage during the next 12 months are almost zero. However, if they have paid all their other bills on time, their credit score will probably improve rather quickly

     4. The short sale process may take months. This is not a quick process. It can easily take three of four months, at minimum.

     5. Buyers may not have the patience to wait for the lender’s approval, and my back     out. This is a risk the seller takes when a contract is signed. It is advisable to make sure the buyer understands the short sale process and ia willing to hang in there for the time it takes.

     6. All commissions, expenses, fees and closing costs can be wrapped into the short sale so the seller has no out-of- pocket expenses.

WHAT BUYERS NEED TO KNOW

Buyers of short sale properties need to understand what they are getting into. Some buyer’s believe that they are going to be able to “steal”  a property and make a killing by reselling it. They have heard the stories that investors tell and think it’s a piece of cake to buy a property fifty cents on the dollar.

While that may be the case in some instances it is not the norm and should not be expected. Remember, the lender wants to sell the property as close to the market value as possible. In fact, most lenders have pretty rigid guidelines as to how far below market value they will sell for. Beyond that point, they will take the house back in foreclosure. Today’s lender is expecting about 83% of the market value of the property.

For the seller, the best buyer is what I call the “end-user” buyer. That is, a buyer who is actually going to live in the property. If you sign a contract with an investor who is looking to offer only 50 percent of the market value, it is unlikely that the sale will be approved. Plus, you will lose valuable time looking for a new buyer.

So, what do “end-user” buyers need to know?

• Buyer’s need to know that short sales require patience. It may take two to four months to complete the transaction.

• They should be pre-approved before submitting an offer. The  borrower’s lender is going to require proof of funds if it’s a cash deal or a commitment letter if there is financing involved.

• A buyer offering to close quickly with a substantial down payment is more attractive than one seeking 95 percent financing.

• Buyers may not want to spend money on a home inspection or appraisal until after the short sale is approved.

• Buyers should expect to buy the home in its “AS IS’ condition. The seller doesn’t have any money to make repairs and the lender is going to require an AS IS offer.

Buyers should onlywork with REALTOR who is knowledgeable about the short sale process. Inexperienced agents may hinder the transaction.