Lexington, KY - In today's stressed economy, many homeowners find themselves struggling to make their mortgage payments. Indeed, quite a few are facing the harsh reality of losing their home to foreclosure. Realty Trac stated that 279,581 properties - - one for every 452 households - - went into foreclosure nationwide in October. The rate in Kentucky, which had 528 new filings last month, was one foreclosure for every 3,576 households. Although Kentucky is rated below the national average, foreclosure is still a reality.
An alternative to foreclosure is the short sale. It can provide financial relief for the distressed homeowner and the mortgagee can recover up to 80-85% of the fair market value of the property while avoiding costs associated with the process.
What is a short sale? In a short sale, the lender agrees to accept a lesser amount of money than what is owed on the home, typically due to a hardship on the homeowner's part. Often, this is done when a home is in danger of foreclosure. It is important to note that a short sale does not erase the debt that the mortgagor owes to the lender; rather, it is just the two parties negotiating a sale of debt, short of the debt amount. That remaining debt still exists and is not extinguished, unless it is contemplated in the settlement offer.
The short sale is a viable option for those who are facing foreclosure. But, a homeowner does not need to be in default before a lender will consider a short sale. Other circumstances, such as the value of a home dropping, could also lead to the option of a short sale. Also, not all lenders are interested in discounted mortgages. It might not be worth it to them if it would be financially wiser to proceed with foreclosure based on the fair market value of the property. The lender, in determining whether or not to agree to a short sale, will also consider how many other properties the current mortgagor has in default. In addition, the lender will consider whether there are co-signers that can be held responsible for the balance owed on the mortgage. If a lender will not consider a short sale, it is worthwhile to speak with them about loan modification, as most lenders are willing to work with homeowners to prevent foreclosure.
The main benefit of the short sale is that it prevents foreclosure. To the seller, the short sale avoids the negative implications that go along with having a foreclosed home. Furthermore, once a person has gone through the process of a short sale, they are viewed as less risky than those who have endured a foreclosure. In fact, most short sellers only have to wait a couple of years before they will be able to obtain a loan for a home again, whereas those who have a foreclosure in their past may have to wait up until five years to purchase. Short selling also offers advantages to the lender - - a short sale returns the lender's value on the loan quicker to the mortgagee, allowing them to avoid legal costs during a potentially long foreclosure proceeding. These costs could include eviction costs, property taxes, property insurance and potential damages to the property.
Who else can benefit from a short sale? Well, a knowledgeable buyer. A potential buyer of a short sale property should work with a realtor that has experience in short sale purchases. With the record number of foreclosures, and pressure to get rid of bad debt, it behooves the buyer to be represented by an agent who is familiar with the strict guidelines and procedures outlined by the lending institutions. Again, it is imperative that the potential buyer be aware of the condition of the property. Often, a home going for short sale is a fixer-upper, as the owner has not had the finances to properly maintain the property. Frequently, possession can be delayed even after closing while the current homeowners vacate the property and remove their possessions. In this instance, a written post occupancy agreement should be in place addressing specific deadlines and penalties.
A potential buyer armed with this knowledge has the possibility of finding a real bargain, but must recognize it is an "as is" purchase. The purchase of a short sale property can prove to be an economical investment for a buyer who has a good credit rating, is pre-approved, does not need to close quickly, and is willing to spend money on the necessary repairs. The short sale process typically takes 30 to 60 days if all goes well and other liens on the property can be effectively satisfied.
Conversely, the short sale carries with it some heavy ramifications. A short sale homeowner's credit will still be affected negatively by settling with the lender. The short sale and the foreclosure affect a person's credit score similarly, with both potentially dropping a homeowner's credit score 200-300 points.
If you are looking to purchase a home by short sale, there are a few necessary steps to follow. First, as mentioned earlier, hire a real estate agent with short sale experience. This will help to expedite the process and protect you as a buyer. Second, check on the condition and the encumbrances on the property. It is important to find out how much is owed to the lender, so you can consider that in the offer price. Also, it is necessary to determine if there are multiple lien holders on the property. Next, make sure the seller has prepared a hardship letter to the lender. Several lenders are now requiring that the property be listed with a real estate agent. Once you have a buyer's offer accepted by the seller, you must submit that offer, along with a pre-approval letter or proof of funds to the lender. There is no deal until the lender accepts. Also, it is advisable to give the lender a deadline in which to accept your offer. When dealing with the lender, the proper course is to speak with the loss mitigation department (after they have obtained authorization from the seller to deal with you).
In the end, the short sale is not a simple solution. It certainly is not a magical fix for a homeowner facing foreclosure. However, it might be a workable alternative to losing a home. And of course, the potential buyer armed with knowledge and an experienced agent may come across a great buy.
Jennifer Mossotti, CCIM, is a Realtor with Prudential de Movellan Real Estate and former LFUCG Council member. She can be reached at jennifermossotti@insightbb.com.