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Short Sale VS Foreclosure VS Deed-In-Lieu of Foreclosure; which of these represents the best choice for a homeowner in distress

Owen McGab Enaohwo — Wed, 21 Oct 2009 08:52:57 +0000

The entire foreclosure process can be very stressful for homeowners; some get so depressed, that they do nothing about it. While others who are proactive sometimes end up being given the wrong advice or make decisions that are not well informed. If you are a homeowner dealing with this situation, you will have to make a decision on whether to get your property sold as a Short Sale usually at the discount approved by your lender, or give the property back to them as a Deed-In-Lieu of Foreclosure or just let them complete the Foreclosure. You need to decide which of these three options is the best for you both in the short and long term? Deciding which option to take might be tough especially if you do not know how each will affect your credit and ability to buy a home in the future.

Short Sale VS Foreclosure VS Deed-In-Lieu of Foreclosure

A short sale transaction occurs when a lender agrees to a discounted payoff on the loan balance, due to the financial hardship experienced by the homeowner and/or a decrease in the resale value of the property. A short sale is the best option if you are facing foreclosure because it is a lesser financial loss. You get to avoid foreclosure, reduce the adverse effects on your credit and increase your chances of getting a loan to buy a home within a shorter period of time.

Foreclosure occurs when a lender sells or gets back a parcel of real property, after the owner failed to conform to their mortgage or deed of trust agreements. The estate becomes the absolute property of the lender. The foreclosure process generally starts with a formal demand for payment in the form of a letter called Notice of Default (NOD) issued from the lender. It varies from state to state but in most cases the lender usually issues this notice when the homeowner has been 3 months irregular on their mortgage payments. The notice is typically a warning that they will sell your property if you do not make your payments current.

Deed in Lieu of Foreclosure is the alternative to a foreclosure. This is a settlement, which is voluntarily made, and in good faith in which the borrower surrenders their house to the lender and moves on with nothing owed. The main advantage for the borrower is that it immediately releases them from the debt associated with the defaulted loan. The borrower also avoids a painful and time consuming foreclosure. The main advantage for the lender is a reduction in the time and cost of repossessing the property. In most cases a lender will only accept a deed in lieu if there are no other liens attached to the property or these liens can be significantly reduced. The reason is because they do not want to be responsible for the other liens that are attached to the property; this is why most lenders will push for a foreclosure instead because it removes all junior liens.

How does each of the three options affect your credit and the length of time it will take to buy another home?

Short Sale:

This the best option for a homeowner facing foreclosure due to its reduced adverse effects on their credit and their ability to get a loan to buy another home in a shorter period of time.

Short sale credit reporting options are:

• Paid Settlement – In which, credit score will drop 50-150 points.

• Paid, As Agreed – in which, won’t hurt the score at all as long as the borrower is paying regularly.

• Unrated – In which, may drop a few points.

Fannie Mae & Freddie Mac guidelines states that the waiting period before you can buy a new home is 2 years from the date the proceeding is completed. And there is no exception for extenuating circumstances.

Foreclosure:

This is the least advantageous of all of the three options; it will remain in the credit report for 7 years from completion date and the credit score will drop from 50-250 points. Another disadvantage is that when Deficiency Judgment or Tax Lien is filed the credit score may drop an additional 100 points.

Fannie Mae & Freddie Mac guidelines state that the waiting period is 5 years from the date of foreclosure completion proceedings.

Below are requirements in addition to the 5 years up to 7 years after completion date:

• Purchase of a primary or principal residence is permitted, 10% minimum down payment and the minimum credit score is 680.

• Purchase of a second home or property investment is not permitted.

• No cash-out refinance is permitted.

Extenuating circumstances are acceptable such as loss of employment and severe medical crisis and if approved the waiting period is 3 years from the date of foreclosure completion proceeding. The same additional requirements are applied as above except the minimum credit score of 680 is not required.

FHA Guidelines state that the waiting period for a foreclosure is 3 years from the foreclosure completion proceedings. However if foreclosure is a result of extenuating circumstances such as serious illness or death the lender may grant an exception.

Deed in Lieu of Foreclosure:

Credit scores will carry the same serious effects as Foreclosure because most lenders report a deed in lieu of foreclosure as foreclosure. However the reality is that what is reported can actually be negotiate with the lender. It will remain on the credit report for 7 years from settlement completion.

Deed in Lieu credit reporting options:

• Paid Settlement – In which credit scores can drop up to 150 points

• Paid as Agreed- Credit scores show a dropped over 100 points due to default in payment but with this option borrower could purchase a home in a short period of time.

Fannie Mae & Freddie Mac guideline state that the waiting period for a Deed in Lieu of Foreclosure is 4 years from the date of completion proceedings.

Additional requirements after 4 years up to 7 years from completion date:

• Greater than 10% minimum down payment required for the transaction or purchase of investment property, principal residence or a second home by a borrower.

• There is a limited-cash-out and cash-out refinance are permitted if eligible and meet the requirements.

• Extenuating circumstances, physical condition such as medical crisis or other factors such as loss of employment that caused a borrower to choose the option Deed In Lieu of Foreclosure, the waiting period is 2 years from the completion proceedings.

In summary, the guidelines stated above clearly show the advantages for you to choose to short sale your property compared to allowing it to go into foreclosure or deed in lieu because the adverse effects to your credit is reduced and also, you will just have to wait 2 years to get a loan to buy another home instead of 4 years with the deed in lieu option or 5 years with the foreclosure.

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Documents required by lenders in order to begin the Short Sale process

Owen McGab Enaohwo — Sat, 19 Sep 2009 06:12:19 +0000

A Short Sale is a type of real estate transaction wherein a homeowner sells their property for less than what they owe the lender. For most lenders to consider a short sale, the homeowner must be experiencing a financial hardship and is unable to make their mortgage payments. Also, the mortgage itself has to be upside down; meaning that the value of the property has dropped and hence there is no equity. The lender takes a loss, and any unsettled balance is usually forgiven. In order to begin the process of negotiating and then approving the short sale, you will need to submit a set of documents required by most lenders. The primary documents are:

• Authorization to Release information. This authorization is an important document because it instructs the lender to discuss your loan with a third party, which in this case is your real estate agent who is helping you navigate the short sale process. The authorization should contain the following data.

a. Name of all the borrowers

b. Social security number of all the borrowers

c. Address of Property

d. Names of lenders/creditors

e. Loan number

f. Signatures of all the borrowers

g. Date

h. Name and contact information of your real estate agent (or whomever you want the lender to release your loan information to)

• Borrowers Financial Statement. This document highlights in detail your assets and liabilities. It is a worksheet that accounts for all your income and expenses. It also should include your co-borrower’s financial information.

• Listing Contract. This is the contract between you and the listing agent. It is needed so the lender can see that your agent has made the effort to expose the property to as many potential buyers as possible in order to received offers by placing it on the Multiple Listing Service (MLS). It also highlights the commission charged by the real estate agent. Agents are often needed in order to speed up the process.

• Purchase and Sale Agreement. This is an agreement that contains the accepted buyer offer. The contract should be legitimate and must be signed by all the owners of the property. A short sale package is considered incomplete without this document. Only packages with a contract that has been signed by both the buyer and the seller should be submitted to lender.

• Borrowers last two pay stubs. You need to include your two most recent pay stubs in the short sale package. This allows the lender to easily determine how much you make and verify your financial hardship. If you are self-employed you can provide a loss and profit report. For unemployed borrower you must present the latest pay stub available.

• Two months of Bank statements. You need to provide your two most recent bank statements. If you have more than one account, all the statements must be made available for the lender to review.

• Last two Tax returns. You need to provide your two most recent yearly tax returns. If you have missed filing your taxes then present the latest available and create a personal note to the lender stating the reasons why.

• Personal hardship letter. This letter must contain your true financial situation and the reasons why you need a short sale. It’s always better to mention in this letter all the steps you had taken previously to avoid having to sell the house, how getting a short sale approved is much better for you than a foreclosure and that you understand that you will not be getting any proceeds from the discounted sale of the property.

• Comparable Market Analysis of value (CMA). This is based on the characteristics of the property being considered, the number of similar properties for sale and so on; it is the estimated current value of the property. Your real estate agent should prepare the CMA and submit it with short sale packet because it helps to give the lender a clear sense of how property values have dropped in your area, hence the need for the short sale. Once the negotiation has begun, the lender will usually order a more detailed CMA a Broker Priced Opinion of value (BPO) from a third party company in order to determine the current value of the property.

The documents listed above are the vital documents needed by most lenders to begin the scalled hort sale process. However each lender might demand additional documents, hence your agent should contact the lender ahead of time and get their list of required short sale documents before submitting the complete short sale package.

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What is a Short Sale and why you should have one done for you by a Licensed Real Estate Agent

Owen McGab Enaohwo — Tue, 15 Sep 2009 07:46:16 +0000

What is a Short Sale?

A Short Sale is a real estate transaction in which the revenues from the sale fall short of the balance owed on a loan secured by the property sold. Short sales have become the order of the day due to the financial hardships experienced by homeowners whose mortgages are upside down and can no longer make their mortgage payment for one reason or the other. Instead of letting the bank foreclose and ruin their credit, homeowners are now opting to do a short sale.

Who Benefits from a Short Sale?

After a short sale, the home is sold to the buyer and the seller walks away without any cash from the sale; all proceeds go to the lenders and other creditors on title. The main advantage of a short sale to the seller is that he/she can avoid owing the balance of the loan and also get to avoid the long term negative consequences of a foreclosure on their credit.

The buyer’s advantage is clearly the prospects of getting their new home at a significant discount compared to what they might have paid for it a few years back. Buyers should be aware that the short sale process often takes time and are required in most cases to purchase the property as is. In the end, the reward for being patient is a new home at reasonable price.

Mortgage lenders benefit as well, they avoid the cost of a lengthy foreclosure process. Most lenders will agree to a short sale if the seller can prove that they are financially insolvent and also if the lender is made to see that it’s in their best interest to take the discount now instead of taking the property back after a foreclosure and then trying to sell it for less than what they can net right at the moment if they approved the short sale.

The Short Sale Process

The paperwork required can be quite daunting and laborious to put together but if done properly by an expert, the short sale will get approved by the lender in a shorter period of time and surely benefit all parties involved. The short sale process will differ for each lender but in summary it will usually work as follows:

1) Lender is contacted to discuss the possibility of a short sale.

2) The seller gathers all the paperwork that the bank requires and shows proof of financial hardship.

3) Lender reviews the completed package sent in by the seller and then starts the process to verify if it’s in their best interest to accept the short sale offer from the buyer.

4) Then the last phase is the follow up and negotiation phase until the lender approves or denies the short sale.

Hiring a Licensed Real Estate Agent

It is very important to hire an agent to get the short sale approved and find buyers for the house, a real estate professional who can answer your questions and help you steer through the process from the beginning to the end. A Licensed Real Estate Agent also performs their duties with the best interests of the seller in mind because they are bound by certain fiduciary responsibilities and their activities are regulated by the state’s real estate commission.

The foreclosure process can be long, stressful and embarrassing for the borrower. Getting a Short sale approved is the answer and all parties involved end up in a better position at the end of the process than if a foreclosure is completed .The lender automatically gets their money when the sale closes and the homeowner can walk away from the property he/she can’t afford. The buyer ends up buying a good property at a discounted price. Getting a short sale approved can be very difficult and time consuming for someone who is not an expert, if you are considering a short sale, make sure that you hire a Real Estate Agent that is an expert at getting short sales approved by the lender.

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