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How a short sale works to help with high mortgage debt forgiveness

Author: Lauren Nemeschansky
Real Estate, Short sale
Real estate, short selling a home, mortgage forgiveness, real estate agent

A short sale is often a good debt relief option and foreclosure avoidance alternative for a home owner who owes more debt on their mortgage than their home’s current market value. These homeowners are commonly referred to as owners who are “upside down” on their mortgage debt . The benefits of a short sale is that once approved by the lender the homeowner is forgiven all of the mortgage debt on both the first and second equity line which will never have to be repaid. Usually the homeowner can qualify for a new mortgage loan to purchase their next home in approximately 24 months after the short sale is completed. The homeowner’s credit can remain intact although it often does take a moderate drop in the FICO score mainly because of any missed mortgage payments rather than as a result of the short sale itself

It is important to realize that unlike a foreclosure or deed in lieu of foreclosure a short sale does not typically “destroy” the homeowner’s credit although it does somewhat lower the fico score.A short sale is not “stamped” on the homeowner’s credit report as is a foreclosure but is usually reported to the credit agencies as “paid as settled”. A very high percentage of the Santa Clarita Valley home sales are comprised of short sales. Short sale homes make up at least 80% of the current real estate sales in Valencia, Saugus, Newhall, Castaic, Stevenson Ranch and Canyon Country as well as a large percentage of all home sales in Los Angeles and Southern California.

A short sale is used for loan and debt forgiveness and is a permanent solution to mortgage debt that is simply too high. It is used for debt relief by homeowners who no longer can or want to keep their home or keep paying on high mortgage debts. These home owners have “negative equity” which means that more is owed on the home than it is currently worth. Sometimes homeowners are having problems making their high mortgage payments , which sometimes are still increasing, while all around them their neighbors in similar homes are paying significantly lower monthly mortgage payments. Unfortunately for these homeowners because of the lack of equity in their homes they are unable to qualify to refinance to better rates or terms on their loan and fall deeper and deeper into debt.

It usually takes about 24 months after completing a short sale to be allowed by most lenders to qualify for a new home loan. The goal of most home owners who short sale is to be able to jump back into the real estate market to purchase a new home at a much better price and terms than the home that was short sold. A homeowner must meet certain criteria to qualify for a . The qualifications vary for each type of short sale but most people qualify for one type or another and all approved short sales grant forgiveness from mortgage debt on both a first and second equity loan. There needs to be a “hardship” reason sent as a letter to the homeowner’s current lender just prior to doing the short sale. However, the reason for the hardship does not have to be severe or extreme, it just needs to justify the reason for the sale. A short sale Realtor who is a negotiator can and should help the homeowner in composing this letter of hardship . This is to make sure that the key elements of the lender requirements of a “hardship” are met by the homeowner.

It is important to realize that just because a homeowner did not qualify for a loan modification does not mean that the homeowner will not qualify for a short sale, quite the opposite is true. It is a statistical fact that most people who try to qualify for a loan modification are denied but usually their short sale application is approved by their lender(s). Many times when homeowners apply but are denied for their loan modification it is suggested to them by their lender that they consider a short sale for their home as a logical alternative to avoid foreclosure and to be relieved from their current debt. There are several different types of short sales available to the homeowner, each one has its own set of qualifications. Under the governments Homes affordable program short sale, HAFA, the home owner receives several thousand dollars as a “moving incentive”. It does have a few extra requirements and requires a little bit of extra paperwork than a standard or traditional short sale. A few of the lenders such as Bank of America and GMAC, as well as a few others sometimes offer a PREAPPROVED short sale option to the homeowner. In a preapproved short sale the lender guarantee that they will allow the homeowner to short sale the home and forgive you of all the mortgage debt if the home is sold at the price that they suggest, also they often will include cash moving incentives of several thousand dollars to the home owner. Sometimes the preapproved price can be lowered if the short sale negotiator Realtor can convince the lender that the market will not support the preapproved price which often requires that he negotiator Realtor do an “appraisal disupute” with the lender which requires special experience and skills that the Realtor should posses.

In a standard or traditional short sale the requirements are not as strict as for a HAFA short sale and investment properties can also be included as a short sale. While some homeowners who short sale are insolvent or struggling financially, many homeowners who short sell have good jobs and assets. When short selling a home, it is essential to use a Realtor who is also an experienced and certified short sale negotiator . All mortgage debt on both the first and second mortgage or equity line, even money that was NOT used for purchase or home improvement should be completely forgiven by the lender with no future repayments required. The forgiven debt should be reported as paid as settled by the lender.

The short sale process involves lots of paperwork , emails and phone calls to the homeowner’s lender. As the listing agent and short sale negotiator my primary goal is to get the buyer’s offer accepted by the lender as an approved short sale and the debt forgiven . It is best and much less stressful to start the short sale process as soon as the homeowner feels the need for debt relief. With that being said, sometimes homeowners “put off” making the call for help until the last minute. I have had the pleasure and stress of helping several families who contacted me in desperation only days before a foreclosure eviction. I have been able to stop the foreclosure process or postpone it so that a family can stay in their home for several months until the short sale process in completed. This has been a blessing to the families that I have helped so that they can relocate when it is more convenient for them and move out with the dignity of selling their home rather than having a foreclosure on their record and the public humiliation of an eviction . A “ for sale” sign or lock box on the property is not required and will be only placed there at the request of the homeowner.

The short sale, mostly due to any missed payments, does negatively affect a homeowner’s credit somewhat but not nearly as badly as does a foreclosure or bankruptcy and often can help prevent one or both of those outcomes. Sometimes a short sale can be completed without any payments being missed by the homeowner, preserving the homeowner’s good credit. This decision would be at the discretion of lender. Most commonly it takes between 5 to 7 years for a homeowner to qualify for a new home loan after a bankruptcy or foreclosure. After a short sale most of the homeowners are qualified by a new lenderand ready to buy back in after about 24 months usually at much more favorable prices and mortgage rates.

A short sale should be provided at absolutely no cost to the homeowner. The lender pays for all of the sales transaction fees, commissions and costs that are typically associated with a home sale. A real estate agent should not be charging a fee for a short sale, that would be unethical since they are being paid by the lender for those services. For more detailed information about short sales visit my short sale website. I would like to touch on the subject of the other foreclosure avoidance alternatives ; a loan modification and a deed in lieu of foreclosure A loan Modification is negotiated in a manner similar to a short sale but very specific qualifications and conditions must be met by the homeowner. It can be a good alternative for a homeowner who’s primary goal is home retention rather than selling the home.

It is unfortunate that very few loan modifications are granted and usually those that are granted do not offer terms that are beneficial to the home owner or significantly reduce the payments to the homeowners. More often than not, I have had many homeowners call me and tell me that their payments were only reduced by a few dollars per month. I have also had many homeowners tell me that their lender had offered them a loan modification where the monthly mortgage payments would actually be INCREASED! Understandably shocked and disgusted with the solution offered by the lender to their high mortgage problem they questioned the reasoning of the lender. Most were were told that the modification was an “improvement” over their old mortgage terms because a larger amount of the money would be applied to their equity rather than to the interest. Not a very helpful solution when the homeowner already feels that the monthly payments are too high. Some but very few of the “lucky” homeowners have had their monthly mortgage payments cut significantly, usually temporarily , called a “TRIAL PERIOD” which must be renewed periodically, subject to lender approval, to continue the modification at the reduced rates. I have found that a loan modification is most beneficial for people having a temporary financial hardship. As such it should be viewed as a temporary fix rather than a long term solution for mortgage debt that is too high. The debt for the reduction is usually not truly eliminated nor forgiven but is rolled over into the future mortgage payments which are “stretched out” but still owed to the lender. While the homeowners who received the loan modifications are joyful that they are one of the lucky few who received the loan modification, they need to realize that eventually the modified terms will be increased and the money that they owe will need to be repaid.

A deed in lieu of foreclosure is commonly stamped on the credit report just as a foreclosure and carries the same consequences to the home owner of usually 5-7 years of bad credit and the inability to qualify for a new mortgage loan. Currently, with few exceptions, it is viewed by most lenders and employers as being identical to a foreclosure and in most cases and with very few exceptions should be avoided if possible. By contrast, a short sale is not stamped on the credit report as a foreclosure or deed in lei would be. A short sale is simply reported to the credit agencies usually as “paid as settled. “ For more detailed information about short sales please visit my short sale website. Feel free to contact me for information and to learn all of your options in dealing with a “too high” mortgage or to determine if you qualify for a short sale and if it’s the best option for your particular situation. All contact information and any information provided will be kept completely confidential. All consultations are absolutely free of charge.

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Santa Clarita, Ca 91381

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About Lauren

REMAX Real Estate Agent
Lauren Nemeschansky is a REMAX
Real Estate agent serving
all of Santa Clarita,
Valencia, Stevenson Ranch,
Saugus, Canyon Country,
Newhall and Castaic.
San Fernando Valley and Los Angeles
HAFA short Sale Expert
CDPE certified real estate agent
M.S. Degree from California State University, Northridge
Real Estate License DRE#0172935: