Foreclosure 101: A Review on Short Sale

by Elizabeth Rush on October 28, 2008

Homeowners facing foreclosure actually have a lot of options available to them to stop it. One of the favorite options is the short sale. Although a short sale transaction is rather simple, there are still quite a few homeowners who are confused of how it works. In order to finally understand, here is a very simple explanation.

For starters, there are three people involved – the seller, who is the owner of the distressed property, the mortgage lender or holder and a buyer. The term “short sale” comes from the fact that the seller/homeowner is suffering from an upside down mortgage. This means that the seller owes more than what his home is currently valued at and could not pay the whole mortgage debt due to lack of money – thus, short in cash.

Because of this, the seller, even if he sells the property, will still owe the mortgage lender some money. This is where the agreement comes in. The mortgage lender must agree to forgive the difference of the sale so that both parties will not need to proceed with a foreclosure.

Keep in mind that the seller must show that he is unable to pay the difference of the sales proceed and the mortgage debt. If the seller can pay, the lender will not approve the short sale.

Based on this, you can actually categorize the types of sellers:

1. A seller who is not short of cash and not suffering from an upside down mortgage. He could have lost some equity but not enough that he cannot pay his entire mortgage debt if the property was sold.
2. A seller is short in cash but not in foreclosure. This only means that he is still able to pay his monthly mortgage dues but can not pay off his entire mortgage debt.
3. A seller is in foreclosure but not short in cash. His lender will not approve a short sale and he will be forced to sell the house to pay off the entire mortgage debt.
4. A seller is in foreclosure, short in cash and has an upside down mortgage – the perfect candidate for a short sale transaction.

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1. The Short Sale Process: Step One - Property Valuation

Each state in the U.S. handles it’s real estate foreclosures differently. You need to understand those differences and know your specific state’s procedures. You may hear the terms judicial foreclosure and non-judicial foreclosure. Just what do these terms mean?

Judicial foreclosure
Judicial foreclosures are processed through the courts and begins when the lender files a complaint and records a notice of Lis Pendens (lawsuit pending).  The lender will state what the debt is and why the default should allow the lender to foreclose and take the property. The homeowner will be served with a notice of the complaint and will have the opportunity to be heard before the court.  If the court finds the debt in default, it will issue  a judgment for the total amount owed, including the costs of the foreclosure process.

Non-judicial foreclosure
Non-judicial foreclosures are processed without court intervention, with the requirements for the foreclosure established by state statutes. When a loan default occurs, the homeowner will be mailed a default letter and a Notice of Default will be recorded. If the homeowner does not bring the payments up to date, and any associated fees, a Notice of Sale will be mailed to the homeowner, posted publicly, recorded at the county recorder’s office, and published in local legal publications. After the legally required time period has expired, a public auction will be held. Auctions of non-judicial foreclosures will generally require cash, or cash equivalent, either at the sale or very shortly after. Some states start this process directly with the Notice of Sale.

If you are entering into the real estate marketing focusing on foreclosures and short sales, you must know the specific laws of your state.

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1. Foreclosure Terms
2. Basic Foreclosure Process
3. Short Sales: Foreclosure Myths

When calculating a short sale purchase offer, you must consider a few facts.

• It may take some time before the lender accepts and closing.
• With the declining market, the price may continue to drop while waiting for the lender to make a decision.
• If you wait too long after acceptance, the lender may deny the offer and the contract becomes void.
• You will be responsible for any repairs the property may need.

When putting together a short sale offer, the rule of thumb is to offer 82% of the estimated value of the property. To get the property value, compare the property to the area’s lowest comparable sales. Then, reduce the value by the cost of needed repairs. Remember, you will be purchasing the property as/is so document all repairs the home will need.

Each lender is different and will have different rules for the estimated value vs offer they will accept. However, the general guideline is 82% of the estimated value.

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A home can enter into foreclosure for a number of reasons.

1. Economic Recession/Loss of Job - Many times homeowners cannot control external financial factors like a slow-down in the economy, the closing of an office or plant, or loss of a job.
2. Predatory Lending - Lesser-known lenders will often approve buyers for amounts greater than they can afford and for extremely high interest rates, knowing full-well that the homeowners will not be able to cover their payments for very long.
3. Recent Divorce - Often times, a spouse is awarded the house in a dissolution, but after a few months is unable to cover the entire mortgage payment alone.  With a divorce rate of nearly 50%, it is easy to see why so many of these houses go into foreclosure.
4. Medical Condition - Unexpected illness can create important medical expenses that cannot go ignored, causing the mortgage to become overdue.  Some things are simply more important than a mortgage.
5. Buying a New Home/Two Monthly Payments - Sometimes homeowners become so anxious to move into a new home that they buy without selling their first house.

No matter what the reason, foreclosure is not the solution.  Be proactive and learn about the foreclosure process, to talk to your lender, and find out what you can do to help yourself out of the situation. Look into short sales and see if this is an option for you.

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A foreclosure is a process that allows a lender to recover the amount owed on a defaulted loan by selling or taking ownership of the property securing the loan. The foreclosure process begins when the borrower defaults on loan payments and the lender files a public default notice.

The foreclosure process can end one of four ways:

• The borrower pays off the default amount to reinstate the loan during a grace period known as pre-foreclosure.
• The borrower sells the property to a third party during pre-foreclosure, allowing the borrower to pay off the loan and avoid having a foreclosure on his or her credit history.
• A third party buys the property at a public auction at the end of the pre-foreclosure period.
• The lender takes ownership of the property, usually with the intent to re-sell. The lender can take ownership through an agreement with the borrower during pre-foreclosure or by buying back the property at the public auction.

Some common terms used in the foreclosure process are:

Lis pendens - Latin for “lawsuit pending”
Refers to the legal process of foreclosure.

NOD - Notice of Default.
This is the first official stage in the foreclosure process. The lender has a right to file the NOD at the very first late payment. In reality it’s usually two to four late payments before it’s done.

NOT/NTS - Notice of Trustee’s sale
A recorded notice that a trustee’s sale has been scheduled. If all late payments, fees, and penalties aren’t satisfied the property will be auctioned off to the highest all-cash bidder.

NFS - Notice of Foreclosure Sale
The public notice of an upcoming foreclosure auction.

REO - Real Estate Owned by the Lender
Many properties don’t sell at the auction so they go to the Lender and become REOs.

Find out how short sales can help you, as a homeowner needing help or as an investor.

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1. Judicial vs. Non-Judicial Foreclosure
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Foreclosure laws vary in each state. The view the law for your state, visit www.foreclosurelaw.org. The basic process, however, is pretty much the same.

The lender will notify the homeowner mail that the loan is in default. Default means a debtor has not paid a debt which he is required to have paid. The homeowner will be given a certain amount of time to pay the overdue amount plus fees and reinstate the loan. This is paying all past-due installments and bringing the mortgage to a current status. If the homeowner does not comply by the given date, the lender will proceed with the foreclosure by filing a lawsuit to get permission from the court to sell your property.  If the court finds for the lender, you will be given a notice of a foreclosure sale. The may arrange a public sale by auction to sell your property to the highest bidder. If the offers do not cover the original loan amount, the lender may submit a credit bid based on the amount you owe on your mortgage. If the property doesn’t sell, the lender will sell it at a later date as a private sale. The homeowner must vacate the property by the time of the foreclosure or he will be evicted by the lender filing a lawsuit of unlawful detainer.   This is the act of retaining possession of property without legal right

At any time during the foreclosure process, the homeowner still has the option of paying the overdue amount and the foreclosure costs. Some homeowners may seek out an investor. Many short sale investors enter during this process and try to work with the homeowner and the bank to seek a solution that will help all parties.

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Myth: The lender wants your house
Truth: The lender does not want your house, it wants the money it lent you paid back with interest. Lenders hate going through the foreclosure process and will bend over backwards to work with homeowners in avoiding a foreclosure. Often, the lender’s flexibility still doesn’t go far enough in stopping the home foreclosure. Don’t confuse that with the lender wanting your house. Treating the lender with contempt or completely avoiding them on that basis will only serve to speed up the result that neither of you want, that they get your house.

Myth: The lender will not take my payments, I can do nothing else
Truth: At some point, many lenders say if you do not make payment in full they will not accept a partial payment. Maybe a month later you get that amount together only to find the lender sends it back because another month has gone by and now the amount is larger. However, if you and the lender can not get together on a solution for stopping foreclosure, a mortgage negotiation professional can set up a plan for you to pay just a portion of the payment now if, along with the partial mortgage arrears payments, you set a plan to pay future current payments and catch up on the remaining payments over time. The foreclosure process stops and you keep the home. You can’t miss a payment under the new plan or the foreclosure process can pick up where it left off and lenders rarely give second chances with this type of plan for avoiding foreclosure.

Myth: I received a foreclosure notice; I have to move out now
Truth: Most states have a very long foreclosure process, even after failure avoiding foreclosure you do not have to move. Following a foreclosure you must go through an eviction hearing. Eventually you will have to leave. Don’t try staying until the end, just know that you do not have to leave immediately. Time can be on your side if you take action early and don’t waste the opportunities for stopping the house foreclosure.

Myth: I’m in foreclosure, no lender will refinance me out of this foreclosure
Truth: If you have enough equity in your home, typically 60%-70%, specialty lenders will refinance the house to pay off the old lender and stop the foreclosure.

Myth: If I go through a foreclosure I can never buy a house again
Truth: From a banking point of view foreclosures can be viewed as one of the worst things ever on a credit report. Even so, some lenders will make you a loan very soon after a foreclosure. Be prepared for very large down payments and high interest rates. Most often the terms of these loans prevent people from buying another house. In time, provided you work hard to rebuild your credit, you can go to a lender almost as if the foreclosure never happened. That may take 4 to 7 years.

Myth: When the lender takes the house our dealings are done
Truth: In many states if the house sells for less than you owe them even after the foreclosure you will still owe them the amount they lost. They can still get interest on that too. If you think you will face a deficiency you should think harder about a deed in lieu of foreclosure where they will forgive it or a chapter 7 bankruptcy where it can be wiped out. See a chapter 7 bankruptcy attorney in your state if you have questions.

Myth: Even if I get together all of the money I owe the lender once I’m deep into the foreclosure process it’s too late
Truth: In most states if you have all of the money you owe the lender for back payments and legal fees, late fees etc, they have to take it and stop the foreclosure. It is not their choice it is the law, but where it applies you need to catch up in full.

Myth: If I file a chapter 13 bankruptcy I get to keep the house automatically no matter what
Truth: A chapter 13 bankruptcy must be approved by the courts and you must follow all of the payment rules under that plan. Then, you can keep the house.

Myth: The lender can’t expect me to pay their legal fees
Truth: You may have to if you want to keep the house. Look in your mortgage documents.

Myth: No one can help me in stopping my home foreclosure
Truth: Many methods and many professionals can help avoiding foreclsoure. A short sale can be very helpful in this situation. Lenders don’t want to lose money. They don’t always recoup the money they are owed with foreclosures. However, a buyer can help you strike a good deal with the lender where they will accept a lower payment and not require you to pay the deficit. You get out of a mortgage you can’t pay, and the buyer gets the home.

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To make a short sale possible, you will have to deal with the loss mitigation department at the lender. After working with the homeowner and receiving your approval to contact them, call the lender. Ask for the loss mitigation department. Keep in mind that some lenders will use different names for that department and the customer service representative may not know exactly who you need. If loss mitigation department doesn’t work, try the foreclosure department, the loan modification department, or the reinstatement department. Keep trying until you get who you want on the phone.

Once you have the loss mitigation department on the phone, be courteous. Getting off on the wrong foot can kill your deal. Give your name, the name of the homeowners, and tell them that you want to fax them your “authorization to release information” form. This is the form the homeowners signs that allows you to speak with the lender. The lender will not speak with you or release any information to you without it. Stay on the line with the person or get their direct line number so that you can verify receipt. Give a little background on the situation the homeowners are in and how you will be able to help both the homeowners and the lender. Be sure to use the names of the homeowners and don’t come across as an investor.

After you’ve spoken with someone in the department, send the short sale package. Call again to confirm receipt and try to call once a day for updates. Ask who will make the final decision and try to get an estimated time frame. The process can take awhile so be patient. Always remain courteous and pleasant. Your contact can make or break your deal so remain in her good standing.

When your short sale deal is accepted, be sure to get it in writing and find out the due date. Some are only good for thirty days so don’t sit idly by. Get your deal closed quickly. After closing, be sure the thank the representative that assisted you. You may need to speak with this person again so it is always a good idea send a thank you note for her help.

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If you’re thinking of getting into short sales, now is the time. With more and more homes facing foreclosure, the market is ripe with the opportunity. Homeowners are looking for a way out of this mounting debt. Facing foreclosure is a major hit for any homeowner, short sales can help. And, if you’re thinking of investing, you can make a great profit.

In Phoenix, first time buyers is becoming the largest group of buyers. This group is looking for home below $150,000. Investors account for 35 to 40% of the area home sales. They are fixing them up and making a great profit.

Lenders are having to deal with large numbers of foreclosures costing them thousands. A short sale investor is in a position to help both homeowner and lender. The time to start moving on this is now!

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In the short sales process, part of your application process is going to include the hardship letter. A hardship letter is an explanation given to the lender detailing why the homeowner is unable to pay his current mortgage or has fallen behind payments. In some cases, it can assist with stopping the foreclosure process and will allow the homeowner to work out a payment plan with the lender. In a short sale, it shows the lender how the homeowner is having difficult and will assist with the potential sale.

The following are some reasons the lender will accept in a hardship letter.

* Adjustable Rate Mortgage Reset-Payment (on the rise)
* Illness
* Loss of Job
* Reduced Income
* Failed Business
* Job Relocation
* Death of Spouse or Co-Borrower
* Death
* Incarceration
* Divorce
* Marital Separation
* Military Duty
* Reduced Income
* Medical Bills
* Damage to Property (natural disaster)

The hardship letter should describe the situation in detail, but should not be overblown or drawn out. Be concise. The letter is only a small of the short sale process and should be accompanied by additional documentation. Medical bills, divorce decrees, deployment orders, and a death certificate are some examples. The hardship letter is a very important part of the process.

In the short sale process, the hardship letter comes after the potential buyer has contacted the lender. It is a vital part of the process and should be prepared professionally. Keep the letter detailed and short.

Example of a Hardship Letter:

Your Name

Your Address

Your Lender

Loan #:

To Whom It May Concern:

I am writing this letter to explain my unfortunate set of circumstances that have caused us to become delinquent on our mortgage. We have done everything in our power to make ends meet but unfortunately we have fallen short and would like you to consider working with us on our short sale request.

The main reason that caused us to be late is (insert reason here and keep it short). Soon after being late and our income not being nearly enough, we had fallen further and further behind. Now, it’s to the point where we cannot afford to pay what is owed to (lender). It is our full intention to pay what we owe. But at this time we have exhausted all of our income and resources so we are turning to you for help.

(The approximate date of hardship) and we believe that our situation is Permanent.

Our situation will not get better because (reason here) and we feel that a short sale would benefit all parties. We would appreciate if you can work with us in our short sale request.

We truly hope that you will consider working with us and we are anxious to get this settled so we all can move on.

Sincerely,

Borrower’s Signature

Date

Co-Borrower’s Signature

Date

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