The Short Sale

Will you see more "Foreclosure" signs in your neighborhood? It depends on whether the homeowner learns about an alternative called "The Short Sale."

Mortgage loans during the first half of this decade were deceptively easy to get. Now, as the impact of the sub-prime mortgage crisis is becoming more and more clear, thousands of homeowners are resorting to a method to sell their home for less than they owe on it as a means to escape foreclosure.

The process many distressed Sellers are using is called a “short sale,” and if done properly, it allows for a “win-win” between the lender and the beleaguered homeowner.

Before exploring the process further, let’s look at the numbers… they’re staggering. The mortgage industry says that sub-prime lending practices between 2001 and 2004 raised the mortgage default rate to between 3% and 6%. The good news is that upwards of 94% of all borrowers are making payments on their mortgages, but that 6% of borrowers who are in default amounts to $548 billion (with a “B”) in property nationally headed to foreclosure.

So what is a short sale? Simply put, a short sale is when an owner who’s in default on his or her loan sells the home to a third party for less than the amount owed, and the bank forgives the difference. The primary winner is the owner, because the transaction reads as a paid lien or judgment — rather than a foreclosure — on his or her credit report. But the bank also wins because they capture as much of the non-performing loan as possible. And neighbors and communities win because the stigma of a foreclosed property can have a negative impact on other homes on the market nearby.

Homeowners who are having difficult making their mortgage payments and who may be considering a short sale must generally meet three qualifying criteria: 1) they must be at least two months behind on their payments, 2) they must be able to prove a legitimate hardship, and 3) they must have little or no equity in their home.

So why don’t more short sales happen? Some homeowners don’t realize that their home qualifies for a short sale. (By definition, if the amount owed on a home is more than the current market value, the property is a candidate for a short sale.) Further, many homeowners already behind on their mortgage payments don’t realize that a short sale is an option. According to Freddie Mac, of homeowners who have loans that enter into the foreclosure process, 50 percent did not have contact with the lender before foreclosures began. Others might only have talked with the loan servicer’s collection department — whose income is based on collecting a debt… not finding ways to “work things out.” A short sale is also a great deal more complicated than a “normal” real estate transaction. In addition to the normal cast of characters (Buyer, Seller, two agents and Buyer’s lender), a short sale can also include the Seller’s loan servicer, the loan servicer’s loss mitigation department, housing counselor, junior lienholders, mortgage investors and mortgage insurers.

The first step for a homeowner is to determine if a short sale is an option. Contact a professional Real Estate Broker — like me — who is certified to participate in a short sale transaction. After consultation, a plan can be put into action to guide the homeowner through the short sale maze. If you have questions concerning short sales, please don’t hesitate to call me at 919-402-1242 or e-mail me at rflinn@fmrealty.com.