If You're Facing Foreclosure Consider a Short Sale
Foreclosure is an ugly word which is heard more often during uncertain economic times. Foreclosure means dreams destroyed, homes lost and families in chaos. Foreclosure seems to be an almost inevitable result of homeowners in debt too deep with more house than they can afford. But foreclosure can be avoided in many situations using a process called a short sale. Homeowners in this unpleasant situation can be rescued and still retain a satisfactory credit history.
The predominance of sub-prime loans has added greatly to the foreclosure rate. Sub-prime lending is the practice of granting loans to home buyers at a rate several points lower than the prime rate. This sub-prime rate is variable, meaning that after a set period of time the interest rate increases to a higher level. This causes a homeowner’s payment to escalate, often to the point that they can no longer make the payment. The sheer numbers of these loans granted, and the resulting foreclosures, have caused more homes than normal to flood the market. This glut of houses has caused real estate prices in general to fall.
The phenomenon of falling prices and increased payments places the homeowner in a terrible situation. The value of their property has fallen. The payments are more than they can afford to pay. They now owe more than the property is worth. Payments are missed, and the lender is threatening foreclosure. What is the solution to what is a very desperate situation?
The solution may lie in a procedure called a short sale. What is a short sale? Quite simply, the short sale is a process in which the sale of a property occurs, with the lenders permission, for less than the outstanding loan obligations on the property. This allows the homeowner to avoid foreclosure and the dark stain this can leave on a credit report. The short sale will still be a negative entry on the credit report, but not nearly as bad as a foreclosure.
If you already have your home on the market and are utilizing a realtor, you should inform the agent as soon as possible that the property is scheduled for foreclosure. The agent can take steps to guide you through the short sale process, help you work with your lender and possibly accelerate the home selling process. It is important in this situation to not procrastinate. Call your realtor and your banker, as both are willing to help you.
The first thing you will need to do if faced with foreclosure is to determine your properties market value. This value is based upon what someone will currently pay for it, not what you paid for it or what you need to satisfy the mortgage. A realtor can help you immensely here. A realtor will perform a Comparative Market Analysis (CMA) on the property. This is not the same as an appraisal, which can only be done by a licensed appraiser. A CMA is a comparison of similar properties in the neighborhood which have recently sold, and real estate currently for sale. The average sale price of these properties will give a realtor some idea of what your home will sell for. If you need to sell quickly, you will need to sell your property for less than all of the similar homes currently on the market.
There will be some costs associated with selling your property and these may vary from state to state. These can include title insurance, closing costs and home inspection. A realtor, title company or real estate attorney can help guide you in determining these costs.
Now you need to find out how much is owed on the property via mortgage loans, home equity loans, business loans in which the property is the collateral, and any other liens against the property. You must also figure in the realtor’s fee in the cost of the sale if you are utilizing a realtor. There is also the matter of real estate taxes. You will probably have to pay a portion of the current year’s taxes. The county assessor will help you here. Now you know how much you need to settle all the financial claims against the property and may proceed with the next step in the short sale.
Total up the outstanding obligations. Now you must subtract this number from the estimated sale price. This will in all likelihood be a negative number. Now you need to call your lender to explain your situation. Most banks have a foreclosure department, and a person with authority to make an arrangement with you is who you need to talk to. Banks are all different in the procedure that they use. Some will be willing to set an amount that they will accept to settle the loan. Some will want to see a purchase offer from a buyer. They will then probably want to approve the sale before it can proceed. Most will want you to fill out some kind of financial disclosure form. If you are dealing with a realtor to sell your home, chances are you will have to send the lender a letter giving the realtor permission to discuss the account with them. The bank will also have other information the realtor will need to do a short sale.
Once the house is on the market, do what you can to help it sell. Follow the proper procedures in staging the home. You want the home to be as presentable as possible to ensure a quick sale. Again, a realtor can help you with this. If you get an offer, remember that the bank will probably have to approve the sale before you can proceed. Sometimes the bank will require the buyer to make up the difference between the short sale price and what is remaining on the mortgage. You may want to consult a tax accountant when the property sells, because the short sale is regarded as relief of debt. They may regard this money as income and tax you for it.
The short sale can help the homeowner avoid foreclosure and maintain a satisfactory credit rating. This can be achieved as long as they do their research and consult the proper professionals during the entire process. Homeowners must do all that they can to avoid foreclosure, and the short sale may just help them do that.