The following will explain a short sale or pre-foreclosures in detail but first let’s cover some quick answers below.
The definition of a pre-foreclosure sale
A pre-foreclosure sale is when a borrower must sell their home and the proceeds are less than the amount owed to pay off the mortgage balance. A short sale is appropriate for owners whose financial situations command that they liquidate their interest in their home and who are unable to qualify for other loss mitigation techniques. Simply put a short sale is when the value of the property has dropped below the current coins mortgage balance owed.
Will my bank consider me?
Banks do not want to do a foreclosure. A foreclosure cost the bank lots of money and statistics have shown that when a bank receives a property through foreclosure it is in much worse condition than other options because angry owners who have been foreclosed on often leave the property in disastrous condition before leaving the home. A pre-foreclosure reduces the banks losses and helps the mortgage holder maintain their credit. If you are in a hardship situation your bank would much rather do a short sale than foreclose on your property.
Will my FHA loan be considered for a pre-foreclosure?
Absolutely a bank will do a pre-foreclosure on an FHA loan. There is actually a new program called PFS Pre-Foreclosure Short Sale Program that will pay the homeowner up to $1,000 at the end of the pre-foreclosure just for finishing the program. This program was designed to help you transition to more affordable housing without the impact of foreclosure and keep the property in good condition for the bank.
Is it true that you have to be delinquent on your payments to do a short sale?
No you do not need to be behind on your loan to complete a successful bank short sale. There is additional info below on the requirements for short sale approval but it is important to know that a pre-foreclosure can be accomplished simply because the value of the home has declined below the mortgage value or when the home owner has fallen on difficult times. Basically you don’t need to be late just in a hardship situation. A reason for not approving a short sale is that you don’t like the neighbors loud late night parties. An approved bank short sale requires a true hardship situation.
Do I have to pay a tax on my short sale?
New laws have been passed that prevent lenders from sending you a 1099 tax form after completing a pre-foreclosure. In 2007 President Bush signed The Mortgage Debt Relief Act that eliminates taxes, 1099 forms and tax losses on short sales. It the past it was normal for short sale banks to send out a 1099 tax form to the seller after the short sale that required the seller pay a tax loss. These activities have been temporarily halted due to our countries current economic condition. Currently the Mortgage Debt Relief Act has been scheduled to last through 2012. It is important to consult a certified accountant in regard to your personal situation because not all short sales are protected from taxes. For instance an investment property sold by short sale is not covered by the Mortgage Debt Relief Act but there might be other options for an investor.
How long does a pre-foreclosure sale take?
A good pre-foreclosure package is designed to Royal Australian Mint get quick results. Many inexperienced realtors will drag a short sale out over 6 months to beyond a year and often times fail to ever close the short sale. A knowledgeable short sale agent will promptly finalize the short sale procedure and get your home sold in about 60 days from contract date. Short sales are a highly technical business and it takes realtors with the know how who will finalize the pre-foreclosure at a quick pace.
Before attempting a pre-foreclosure you should look at a few other options.
A pre-foreclosure sale occurs when the home owner must sell but the proceeds are not enough to cover the balance of the mortgage. A short sale is ideal for home owners whose financial situation or circumstances require that they sell their house and have run out of other loss prevention options. A pre-foreclosure happens when the property value has declined below the balance of the loan.
Knowing your options before a short sale is important. Sometimes if you are in default on your loan it is a curable situation and there is a strong possibility that you are capable of replacing lost earnings or diminish your expenses.
Special Forbearance A special forbearance is a payment contract between you and your lender that consists of a plan to reinstate your loan after it has become delinquent. This could include settlement over a period of time, a lessening of your monthly payment for a short time, or a strategy for you to begin again with complete monthly payments while delaying the missed payments. In a sense your bank is allowing you to get caught up on your missed payments.
Loan Modification Modifying your loan is a permanent change to your mortgage. It designates that your loan will be reinstated and supply a monthly monetary obligation that you can afford. Modifications allow for a number of options like dropping your percentage rate, or extending the time available to pay off the mortgage by re-amortization of the amount owed. It’s similar to applying for a new loan but unfortunately not all homeowners will get approved for a modification.
Combining Options Your lender can also combine the above to attain a preferred end result. Banks are diversified on how they handle these matters but the idea behind the mitigation process is consistently the same. Your lender is working with you to keep you in your home and help you recover from a change in your financial condition.
Often the situation has gone too far and there is no chance of you keeping your home. If mitigation doesn’t work or can not be considered you are headed toward a potential foreclosure. There are however options for you instead of letting your home go into foreclosure.
Deed-in-Lieu Deed-in-lieu of foreclosure is simply giving your property to the bank by deeding it to them. Essentially you give away your home to the bank holding the mortgage. This may sound like a viable option compared to foreclosure but there are a few hidden details.
- A deed-in-lieu has just about the same effect on your credit as a foreclosure.
- Lenders don’t really want your home. It becomes an asset they have to deal with and they are not in the business of selling houses. Many lenders will not take a deed-in-lieu and will suggest you do a short sale.
Short Sale– A short sale allows you to sell your home and use the proceeds from the sale to pay off part or most of your mortgage. In most situations your lender is willing to accept less than the amount of the mortgage balance. As already noted this option is for home owners whose financial situation requires that they sell their property.
Here are some of the reasons your lender will do a pre-foreclosure sale:
A declining home market This reason does not take into account your credit or your financial condition. This is a case where the property value has declined below the mortgage balance on your home but you are forced to sell it. Don’t forget a short sale means you must sell your home. A short sale cannot be used if you want to upgrade to a larger home or decide to move away for no apparent reason.
The loan is in default or close to it This is the reason for most pre-foreclosures. There was a time when lenders would not do a short sale if all the payments were current. Banks have now realized that in many cases it is logical to do a pre-foreclosure sale before the payments are in default.
The Seller has Met With Hard Times This is a short sale condition where the owner of the property is in a distressed state of affairs. Here are a few common hardships: (Divorce, Illness, Unemployment, Death) All lenders require a hardship letter detailing the reason for the short sale. Sometimes a hardship description can be overdone. It’s good to know the guidelines for writing a good hardship letter. Your hardship letter should always state that you seek a short sale so that you won’t have to do a foreclosure.
You should also consider your assets when submitting for short sale. Your short sale bank will ask you to fill out a financial worksheet listing all of your assets. If they find that you have a bunch of money lying around they could deny the short sale because they see that you have funds to get caught up on payments. Another common possibility is for you to be granted a short sale but your lender will ask you to pay back part of the shortage with a promissory note. This can still be a good solution for a seller who must sell their home who has the ability to pay back a reduced amount of their mortgage loan.
Negative Amortization Some loans that were formed before the housing bubble allowed for negative amortization. The amount of payment made every month is not adequate to cover the loan interest. A lender will consider a short sale in these situations.
Aggressive Secondary Financing Throughout the housing expansion period some lenders were creating second mortgages for more than the house was worth. This is another situation that will be considered when requesting a short sale. Second and Third mortgages get a little tricky when doing a short sale but a good agent will have experience in dealing with these tough situations.
