In these difficult financial times, more and more sellers are finding they need to sell their homes for less than they owe on their mortgages, known as a “short sale .” This can be a good deal for you as a buyer, as long as you’re aware of the extra time and work required to make it happen.

The Mortgage Lender’s “Short Sale” Factors

The seller’s mortgage lender will be considering many factors in deciding whether to approve a short sale, including:

* Whether the seller is deserving of a break, due to financial hardship caused by unforeseen circumstances such as layoffs, divorce or illness
* Whether it would be cheaper to simply repossess the house, make any necessary repairs and sell it through a real estate agent
* How many other properties the mortgage lender currently has in default
* Whether there are co-signors who can be held responsible for the balance owed on the mortgage

The Short Sale Process

Your chances of success with the seller’s mortgage lender improve if your communication with them is organized and complete. Your first contact with the seller’s mortgage lender’s “loss mitigation department” is crucial in making a good impression. You’ll want to send them what’s called a “Release” or “Authorization to Release Information” already signed by the seller, which allows the mortgage lender to talk with you about the seller’s mortgage.

In your first talk with the mortgage lender’s loss mitigator, you’ll want to find out:

* Whether they think a short sale might be a possibility
* What information they’ll need to complete the process

Loss mitigators sometimes receive bonuses based on how many defaulted loans they can clear up, so they’re more likely to pay attention to your sale if you can show them you’re taking care of as many details and objections as possible.

It will be necessary to be specific about the seller’s financial difficulties with what’s called a “hardship letter.” The mortgage lender may also require paystubs, copies of medical bills, checking account statements and other appropriate evidence from the seller. The seller’s mortgage lender will look at the seller’s credit reports to verify the seller’s financial predicament. This will all take extra time.

Broker’s Price Opinion

The mortgage lender will order what’s called a “broker’s price opinion,” which gives the mortgage lender some idea of what the property is actually worth in the current market. A broker’s price opinion will be based on:

* the value of comparable properties in the same neighborhood
* the general condition of the neighborhood
* the condition of the specific property in relation to neighboring houses

If the person who is inspecting the property needs to look at the interior of the house, you’ll want to be sure someone is there to let him or her in. You may also want to provide the inspector with copies of low comparable houses in the neighborhood, and high estimates on any needed repairs. The lower the broker’s price opinion, the more likely the mortgage lender will approve a short sale.

Settlement Statement Scrutiny

The seller’s mortgage lender will want to have an advance look at what’s called the ” Settlement Statement” or “Settlement/Disbursement Estimate.” The mortgage lender will be carefully reviewing:

* Commissions going to real estate brokers
* Where your financing is coming from (Cash? A loan?)
* Payments to cover outstanding liens and taxes
* Approximate date of the closing
* Any cash to the seller (a definite no-no)
* Any other expenses which may raise a red flag

While buying a home on a short sale can be frustrating and time consuming, your hard work can pay off in a home that’s worth considerably more than you paid for it.

Foreclosure

Foreclosure is a legal process (in most states) that results in the lender regaining title to the property due to nonpayment by the borrower.

When applicable, the court awards a deficiency judgment to the lender the amount of which is determined by the difference between what the house is eventually sold for (minus expenses) and the borrower’s mortgage balance.

The foreclosure remains on the credit report for 7 years. The statute of limitations on the judgment varies from state to state and 20 years is not uncommon. New lending guidelines extend the wait period for a new mortgage to 5 years BUT the judgment would need to be satisfied before any mortgage financing is allowed.

The combination of the foreclosure and the open judgment is devastating to the borrower’s credit score.

Deed-In-Lieu of Foreclosure

The borrower must document economic hardship and an inability to pay. If there is equity in the property (the home is worth more than the balance due) and there are no other liens, the lender may consider an exchange whereby the borrower surrenders the deed and is released of any obligation to the mortgage note.

If it is reported as a foreclosure (lender’s discretion) it will remain on the credit report for 7 years but there will not be an unpaid balance reported

Short Sale

If the lender is convinced that they cannot collect payment from the homeowner due to financial hardship they may accept a sale price of less than what is owed on the property.

The price is normally discounted from a quick sale price in an effort of avoiding the costs and risks of the foreclosure process. In some cases, usually where there are second liens involved, the borrower may still be obligated for an amount owed but the loan would be unsecured.

There are various ways for the lender to report the short sale, the most common of which are “satisfied mortgage” or “paid settlement”. As a satisfied mortgage the only damage to the credit score is due to any late payments prior to the sale. A settled account is more damaging as it reflects it was not paid as agreed but, in both cases the damage pales in comparison to a foreclosure and deficiency judgment.

How the lender is going to report the short sale is rarely, if ever, a negotiable item.New mortgage lending guidelines require a 2 year wait after a pre-foreclosure sale.

Bankruptcy

Bankruptcy involves a settlement of debts through a variety of means. Bankruptcy is severely damaging to a credit score and remains on the credit report for 10 years.

Because there are no judgments involved the borrower may generally be eligible for new mortgage financing in as little as 2 years from the date of discharge.