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Underwater On Your Home Option 4: Short Sale

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In this series, I detail six possible ways to deal with an “underwater” home—one that’s worth less than the amount of money owed on it. Here is part four of my six-part series.

Option #4: Short Sale

In a short sale, you sell your home for less than you owe. CoreLogic reports 62,000 short sales in the first quarter of 2010—tripled from the second quarter of 2008.

For the homeowner/seller, the goal is to get the lender to approve a short sale and forgive any remaining debt. This can get especially tricky if there is a second mortgage, but it’s not impossible to wipe out deficiencies on both first and second mortgages. While it would seem to be common sense for a lender to accept a short sale rather than allowing a home to go into foreclosure, where losses could be even greater, it’s not always easy to convince a lender—or lenders—to agree.

The Home Affordable Foreclosure Alternative program (HAFA) is a government-initiated short sale program. Sarasota Florida real estate professional John Scherden has found himself working with an increasing number of clients involved in short sales after the Florida real estate market took a nose dive. He says HAFA is making a real difference, and believes the program is “extremely beneficial” for those who qualify. “If all parties agree, the (remaining) debt will be forgiven and the seller will walk away with $3000 at closing.” For those who don’t qualify for HAFA, lenders may still be willing to negotiate a short sale, but it could leave the seller on the hook for a deficiency.

Attorney Anne Weintraub, a Florida real estate attorney and partner in the firm of BandWeintraub, P.L., says that, overall, it is getting easier to get a short sale approved and closed. She explains that in recent years “most servicing banks have invested in partnerships with vendors who can assist with processing short sale packages electronically which has improved the pace of short sales and the chances the homeowner’s documents will not go missing. In other banks, the short sales have become easier because of the hiring of much-needed staff to man the phones, review the borrower’s documents, and analyze the files.” But she also warns that some banks haven’t done anything to speed up the process of short sales, often resulting in so much frustration on the part of both sellers and prospective buyers that they give up.

Scherden agrees. He is in the process of working with a client whose short sale will end up taking less than 90 days from start to finish. But both Weintraub and Scherden both warn that the short sale process can be daunting and is not a DIY project. If you’re thinking about selling your home in a short sale, consult with:

  • A real estate professional with strong experience in short sales to both evaluate the value of the property and to help guide you through the process. Your lender is not going to want to hold your hand through a For Sale By Owner short sale. One designation you can look for: “SFR” or “Short Sale & Foreclosure Resource” certification;
  • A real estate attorney with experience in foreclosures and short sales to walk you through the legalities, help you avoid a deficiency, and to continue to defend the foreclosure case until the short sale is finalized; and
  • A tax professional to help evaluate whether you may owe taxes on the forgiven debt

Short sales involve extensive documentation, and the borrower must be able to document a hardship. All that paperwork can be to the detriment of the homeowner who wants to get out of a bad situation. “Typically a short sale won’t be approved if you have a retirement plan that could be drained, or the income to support the payments on the mortgage,” warns John Maddux, CEO of YouCanWalkAway.com.

“About half of our clients have looked at the option of a short sale, and they’ve already talked with their lenders,” he says. “There are some states where a short sale is worse than a foreclosure. In Nevada they may include in short sale verbiage that they have up to two years to collect a deficiency. Also you have to divulge a lot about your finances, which means it can be easier for them to pursue a deficiency judgment because they have so much information about your finances,” he warns.

It’s also essential that sellers make sure the prospective buyer is committed to the short sale, warns Weintraub, who advises her clients to get an escrow deposit from the buyer and to complete inspections early in the process. “The worst possible scenario is that the homeowner hires professionals, completes all of the paperwork the bank requires, obtains the short sale approval, and then the buyer walks away with the homeowner getting nothing for their efforts and time the property (is) taken off the market,” she says.

Other options for homeowners with “underwater” mortgages:

  1. Underwater On Your Home Option 1: Stay and Pay
  2. Underwater On Your Home Option 2: Refinance
  3. Underwater On Your Home Option 3: Get a Loan Modification
  4. Underwater On Your Home Option 4: Short Sale
  5. Underwater On Your Home Option 5: Walk Away / Foreclosure
  6. Underwater On Your Home Option 6: Bankruptcy

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  • Bruce Selin

    Hi Gerri. Your article contains a lot of good info on short sales. However, I’d like to suggest a couple additional things that distressed homeowners need to know.
    1) Don’t just look at designations to determine who to list your property with. NOTHING counts more than experience which, woefully, only a small minority agents really have. Short sales are often complex, lengthy and the process very fluid. Don’t work with an agent who hasn’t already closed less than 10-15 short sales.
    2) I think there is entirely too much emphasis placed on the deficiency issue. An experienced short sale agent knows ways to get deficiencies waived for homeowners who are truly experiencing hardship; job loss, decreased income, medical emergency, job transfer, etc.. But look, if you have other assets, the bank isn’t going to absorb all the loss without you participating in the pain. Nor should they. If you simply want to get out of an “underwater” situation, ie., you aren’t in financial distress, or have a good paying job, expect to either sign a note or settle the deficiency for cash. So, take the hit, then move on. If you don’t have assets and you’re really in financial distress, don’t worry about deficiencies!
    3) Lastly, the whole question of which is worse: a short sale or foreclosure. Mr. Maddux’s comments notwithstanding, foreclosure is virtually always worse! He looks at only 1 of the 3 relevant considerations. Either choice will affect your credit score, your public record and your ability to re-purchase later. While it’s often stated that foreclosure and short sale may hurt your credit score about the same, that assumes that that you’ve missed payments, ie. defaulted, in both cases. However, if you haven’t missed payments prior to the short sale (rare but possible), you will NOT take as bad a hit on your credit score. But, credit involves something else. A foreclosure is recorded publicly and will follow you everywhere for a minimum of 7 years! Worse yet, if you require a security clearance for employment, or work in certain industries requiring licensing &/or bonding, foreclosure can be grounds for immediate termination. Most credit applications ask if you have ever had a foreclosure. Alternatively, both the short sale and any deficiency judgments, when paid off, show as “settled”. They are not public record! NO credit applications ever asks if you’ve done a short sale or had a deficiency judgment. 3rd point. Repairing your credit after foreclosure takes longer and your ability to re-purchase after foreclosure is impaired longer than after short sale.
    In conclusion, I think too many commentators inflate the boogeymen associated with short sales and inappropriately deflate the very devastating impact of foreclosure. They portray foreclosure as bringing some kind of “closure” to a distressed homeowner’s financial trauma. Well, it just ain’t so. In fact, it is usually just the beginning of 7 years of misery! Short sales may not always be a great option, but it beats ALL the worse options.

    Coming Soon! HelpforHomeowners.net

    • http://www.Credit.com Gerri Detweiler


      Thanks for your comments. I agree that if you are going to go this route it’s essential to work with a professional who has been involved with short sales. Looking for someone with the experience you mention is a good idea.

      However, one comment gives me pause: “If you don’t have assets and you’re really in financial distress, don’t worry about deficiencies!” My experience is that debt collectors can be just as aggressive with someone who has no way to pay a debt. I’d like to see homeowners resolve the deficiency issue one way or another (negotiate into the short sale, settle, bankruptcy) rather than just hoping for the best.

      Overall some good info here, thanks for weighing in.

  • http://www.seattleshortsaleblog.com Peter

    Short sales are definitely a viable option for those who are either in foreclosure status or going to be in foreclosure status. I highly recommend pursuing a short sale with a professional negotiator to handle the transaction. Short sales are a very difficult transaction to execute and many of them have failed in the past years due to inexperienced realtors who try to handle the situation themselves.

    The HAFA program intitally was not accepted well by many because of their failure to actually help homeowners. The completed HAFA transactions only amounted to 661 at the end of 2010. However, this number increased exponentially as policies were revised. Although I was a skeptic at first, I now believe it is a feasible option for homeowners as they could walk away with $3000 relocation assistance as well as no liability after closing the short sale.
    Great article!

  • http://sellnyhomesnow.com eric

    it;s my understanding that they cannot touch assets in the retirement plan. Homeowner should not voluntarily liquidate it before talking to a competent attorney. What is most important is going after the lender with some firepower. Respa, Tila, robo-signing, missing chain of title, and much more. One should really consider getting a forensic audit on the mortgage documents as well as the bank’s paperwork. They will much more receptive to doing a short sale.

    • http://www.Credit.com Gerri Detweiler

      Good point Eric. I am thinking maybe I need to do a story about fighting a foreclosure!

      And yes, retirement plans are usually safe from creditors. A bankruptcy attorney can tell you for sure.

  • http://www.shortsalene.com/ Elizabeth

    Wow, thank-you Gerri and Bruce for your thorough advice and thoughts! This was all a wonderful read. Would either of your be interested in and willing to write a guest blog post for http://www.shortsalene.com/?

  • Michele

    Having recently successfully short sold our home (yes, it was hard, gut wrenching and heartbreaking, but there is life after losing your forever home) I have some thoughts and tips as well.

    Bruce brings up a very important point regarding short sales vs. foreclosure and impact on credit. Having worked for a financial company many years ago, I’m aware that the initial default can be extremely painful on your credit. My husband and I found ourselves in the unfortunate circumstance of having to default on our mortgage when my income dropped significantly (self-employed) and I was unable to obtain fulltime employment after 1 1/2 years of searching. We knew if we did it right, we could successfully short sale our home because 1) it was an extremely quaint and attractive home and 2) we were in a highly sought-after neighborhood with great schools. So we paid the $350 per hour fee to meet with a real estate lawyer and got a real estate agent we trusted. The lawyer, like so many others, emphasized going the short sale route versus foreclosure stating it would be less harmful to our credit (up to this point, we’d had stellar credit) and it would make it easier for us to find a place to rent.

    However, what she didn’t point out, but I knew due to my experience in the finance industry, is that it’s the 30, 60, 90-day delinquent payments reporting that can hurt us so much. Although we successfully short sold our home in a relatively short period of time that doesn’t mean it will show as just “settled” on our credit report. The delinquencies will continue to show probably a years to come.

    It would’ve been wonderful to have gotten approval to short sale the house without going delinquent, but that wasn’t going to happen. 1) Because we just couldn’t do it without completely depleting our savings and retirement, which we weren’t willing to do, especially since it became all too apparent that I wasn’t going to find work anytime soon and 2) I strongly suspect the bank would’ve never agreed to a short sale had we not been delinquent. Despite trying to work with them the year before (when I knew my business was heading into serious trouble), we were flat out told by our lender that unless we were delinquent there was no way they would even consider modifying our payments (HAMP). Her words were to the effect of “there are thousands of people behind on their payments and struggling to hang on to their homes … and you’re current.” My response, “Are you telling me that unless we’re delinquent you won’t work with us,” and she said “Yes.” Anyway that’s a whole other story.

    I wholeheartedly agree with Peter regarding a negotiator; however, I would add, try and find a real estate that’s willing to work with and pay a negotiator. Our agent hired a professional short sale negotiator and they were completely amazing. Our agent and the buyer’s agent had to each take a ½ percentage point off their commission to pay the negotiator (negotiators usually charge 1% of what the house sells for), but for the agents it was worth it because they (and my husband and I) didn’t have to deal with the lenders directly at all. So though having to give up our home was very painful, it would’ve been much more painful if we would’ve had to deal with the horrible collection calls and letters (I got a taste of those collectors about 2 weeks after our first missed payment and I got to tell you those are some mean people). Of course there are real agents who aren’t willing to work with a negotiator because they don’t want to give up commission, so as Gerri and Bruce advise, you should make sure that your agent has a strong record of successfully doing short sales and is willing to help you through the trauma of dealing with collectors.

    And despite the fact that we were able to provide very clear evidence of financial hardship (the substantial drop in my income as indicated by 2 years of tax returns) the investor on the second insisted we provide a lump sum of money … why? because our credit was “too good.” (You’ll note I wrote “investor” not lender… yes, it’s all extremely complicated).

    If you can do it (and I understand there are circumstances where people just can’t do the short sale, they have to do foreclosure), go the short sale route and hire a real estate agent who is willing to pay for the negotiator. I’d have to say that no matter how you slice it, it looks much better to have “settled” a debt, even with delinquencies attached to it, than to have an open unpaid ongoing debt worth hundreds of thousands of dollars on your credit. Yes, it still hurts, but I do believe that there will be increasing understanding among landlords, employers and creditors that, like millions of others, you were hit by the housing crisis that I believe ultimately led to the down in the economy, and if you can show that you did your best to fulfill the financial obligation the better off you’re likely to be.

    (And one last note regarding employment applications – though the application doesn’t ask if you’ve ever short sold, etc., some will ask if you’re “90 days or more delinquent” on an debt … this I know for sure).

  • Jennifer

    Could a short sale be right in this situation?
    Spouse passed away a little over a year ago, and while there was a nice life insurance policy the house payment and raising 4 boys and all the other bills are eating away at it. The widow doesn’t have a job and having been a military spouse hasn’t worked more than part time in 19yrs. The house has both names on it but she is not sure if she is just on the title or on the loan as well. Her husand sent her papers to PA where she was staying but the house is in VA.
    They want to sell the house and get something more affordable that they can just pay for with no house payment to worry about…I don’t know the exact numbers but the house was financed for between 250, 000 – 300, 000 and that was 7 yrs ago and since then the houses in the neighborhood have dropped drastically…in fact the house across the street has been on the market for 3 yrs now..

  • http://here Michael

    I’m in the process of a short sale, and I was surprised to find out how willing my lender was first in agreeing to a short sale, and secondly, how rapidly they wanted this to close. This is contrary to a lot of what I have read on other websites.
    There are a lot of contradictory statements, about how the short sale appears on your credit, and if it is better than a foreclosure. I’m really not sure?
    I know that I have read about various codes and I have no idea what they mean and how they differentiate between how they are revealed, read, and determined on your credit report?
    I have read that the negative on your credit is based primarily off any delinquent payments? There’s so many contradicting information on the internet, as usual.
    My short sale is under a HAFA agreement. I have 2 loans on the home, and from what my lender has told me is that, the debt will be erased?

    • Gerri Detweiler


      I wouldn’t be too worried about the fact that the lender is anxious to do a short sale. Consider yourself fortunate! They may have a reason for wanting this loan off the books. I just wrote about this in an interview I did with an attorney who handles a lot of short sales. You may to read that piece: How to Give a Short Sale Your Best Shot.

      With a HAFA short sale there is not supposed to be a deficiency, but review your paperwork carefully to make sure that’s the case. If you aren’t sure, it would be well worth it to have your own attorney review it before you finalize it.

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