Are you one of the millions of underwater homeowners hoping to get your mortgage lender to let you sell your home for less than you owe so you can move on? Real estate attorney Jo Ann Koontz, CPA is helping clients do just that in Florida, one of the states hit hard by the real estate downturn. In this edited excerpt from a recent interview on Talk Credit Radio she offered her best tips for giving a short sale your best shot.
Gerri: What is a short sale?
Jo Ann: A short sale is simply a sale of a property where you know going into it that the sale proceeds will not be sufficient to satisfy all of the outstanding liens against the property, meaning all of the mortgages aren’t going to be paid in full.
Make a Good First Impression
We’ve heard of people who get these amazing deals where the lender pays them to walk away from their home and then other people say they can’t get anywhere when they talk to their lender. Can you give us an idea of some of the ways the lenders are working with consumers in these situations?
What we see most commonly is that the lender is going to want to receive a complete and accurate package, all in one piece. So for example, most lenders will not accept a short sale request or application until the seller has a buyer under contract, fully executed.
They’re going to want 2 years of tax returns, 3 months of bank statements from a primary checking account, 30 days of pay stubs or proof of income. If the person has Social Security, they’re going to want the award letter. All of these documents must be in place all at once and submitted to the lender. It doesn’t guarantee you’re going to get (approved). It just gives them the basic information that they need to start their analysis.
The lender will then go to its own independent resource to research the value of the property. They’re going to order what’s called a “BPO” or a “broker price opinion.” It’s essentially an appraisal performed by a Realtor that the lender hires. It’s not performed by an appraiser but they get the value of the property from that report. It could be right, it could be wrong.
If that report comes back and the value of the property is said to be much higher than it really is, then we need to engage in a value dispute and say “No, lender, here’s why you think this property is worth more than it really is. You have failed to take something into consideration — location, view, something.”
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Live with Uncertainty
It’s confusing. You’re going to put your house on the market for less than what you owe and you don’t know what the lender will go for?
You have no idea. The best way to combat that is (sellers should) contact a real estate professional knowledgeable in short sales who can provide them with an analysis of their property and make a suggestion. For example: “Mr. Seller, I think your house is worth somewhere between $180,000 and $220,000 and maybe we list just right in the center.”
The bank is going to expect that the buyer of the property receive a discount off of the fair market value but they’re not going to give the property away. They’ve got a lien that they could enforce through a foreclosure. They’re going to want to recover more than those proceeds in a short sale.
There’s got to be something in it for the bank. They don’t have emotion, they’re just in it for business. So if the numbers make sense, they’re very likely to approve the short sale.
[Related Article: Underwater On Your Home Option 4: Short Sale]
It’s All Relative
What kind of hardship do you have to demonstrate to a lender to convince them they should let you do a short sale?
Well hardship absolutely runs the full gamut. Sometimes folks come in and they say, “I’m not certain I can get approved for a short sale. A hardship could be the obvious ones — death, disability, divorce. The lender is looking for an involuntary change in your circumstances, and those are homeruns.
But certainly there’s (other types of) hardship. One would be maybe reduced income. Maybe you didn’t get a raise you thought you were going to get. Or “Hey, I thought I’d get this bonus, (or) I thought I’d get this raise or promotion and it didn’t materialize.” It doesn’t just have to be “I’m making less than I used to.” That sometimes takes people by surprise.
Other things can simply just be increased expenses. Maybe your income hasn’t gone down but trying to purchase health insurance, homeowner’s insurance, real estate taxes, even just the cost of gas, everything has gone up over several years. You’re comparing your financial circumstances now to the time that you took the loan.
So it doesn’t necessarily mean you are poor or you can’t afford your school expenses or other required household expenses. All it has to be is a demonstration that this mortgage payment is causing a burden on your overall household income.
You’re Just One of Many
And I think some people expect they will have to provide a detailed budget with every line item scrutinized by the lender. Do they go into that much detail?
Here’s the thing, we’re dealing with such a volume that there’s essentially a “McDonald’s theory” going on where most of the lenders are just cranking them in and cranking them out. It’s very uncommon that they dive too far down in terms of detail. They’re not forensic accountants that work for the bank. The banks had to ramp up these lost mitigations departments and get these folks trained very quickly.
What Works Today Can Change Tomorrow
It’s been a lot of trial by fire, which is part of the reason that you see so much misconception out there when people talk about how a friend or neighbor did a short sale and people will say, “Oh, Bank of America was awful and Wells Fargo was fantastic.” These things are very fluid and very dynamic and they change all the time. What happened a month ago, or 3 months ago, or a year ago is not necessarily what’s going on now.
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How to Give A Short Sale Your Best Shot (cont.) »
Image: Kevin Shorter, via Flickr
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Gerri Detweiler Gerri Detweiler is Credit.com's Director of Consumer Education. She focuses on helping people understand their credit and debt, and writes about those issues, as well as financial legislation, budgeting, debt recovery and savings strategies. She is also the co-author of Debt Collection Answers: How to Use Debt Collection Laws to Protect Your Rights, and Reduce Stress: Real-Life Solutions for Solving Your Credit Crisis as well as host of TalkCreditRadio.com.
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I sold my home with the agreement of Wells Fargo on a short sale in Dec. of 2010. I had lost my fiance the co-borrower on the loan and had tried for two years to sell the home with not one offer. This depleted all of my savings. When I asked Wells Fargo for help with refinanceing they declined because my income was not enough to qualify. I was then given the green light for a short sale. Now my problem is I am being deluged with e-mails and letters from businesses who say that Wells Fargo is being investigated for not dealing with its clients fairly. And, I am also told that my case is one of the ones being investigated. But, when I call and ask for more details I am told the investigation does not go back to 2010? what the heck is going on? Is this another scam that we have to be careful of, or what? I am confused by all of this. I also did receive a 1099 for m regarding the monies owed after the short sale. But, because I only have Soc. Sec. disability income and have not filed taxes for 3yrs. I did not file the form. Am I now in trouble for that also? You are right,.this nighmare just does not go away. Thanks for any help. LS
Lillian –
I’m so sorry to hear what you been through and you have my condolences on the loss of your fiancé. As far as the calls you are getting, I don’t know what those are about. But you can check for yourself whether you may be eligible for compensation under the National Mortgage Settlement or the Independent Foreclosure Review.
As for your 1099 issue, please keep in mind that the lender files the 1099-C with the IRS, not you. So the IRS may have already received that form, and you may get a tax bill as a result. I would recommend you request your transcript from the IRS for the past three years to see whether the 1099 was filed with the IRS. If it was, you’ll have to find out whether that means you may owe taxes for the year in which it was filed. You may be eligible for free tax preparation assistance because of your disability, or you may need to talk with a tax professional. Good luck with this – I hope it turns out okay.
Thank you Gerri for you quick reply. I have contacted the Atty. General in the state where my home was located and given them my current address. I will await their reply and will let you know how things go. Thank you again for your help with this matter. I am also going to report to them the ‘scammers’ which I have encountered.
Sincerely,
L. Sottosanti
Houses in our price range are not selling. If it did it would probably sell for $50,000 less than we owe. We can afford the mortgage payments (although I hate paying on something that has no value). However, my husband was transferred to another state (from California to Arizona) 2 years ago and his company will not pay to move us or help with the sale of the house. This has been very hard on our family. He is gone from Sunday afternoon until late Friday night each week. This house should sell for more than $500,000. Is there anyway we can qualify for a short sale?
Thank you for your help,
M. Germain
Mary – You may very well qualify for a short sale. Your husband’s move is a hardship that can be documented. I would definitely encourage you to try to pursue it. Start by meeting with a couple of real estate professionals in your area who have helped clients with short sales. They can often refer you to legal professionals locally who can assist as well.