Despite what you may have heard from your neighbors, your family, your bank, … you CAN do a short sale on your home if you are current on your mortgage.
Under the right circumstances.
One of our clients recently completed a short sale even though they hadn’t missed a payment. Their job relocation to Santa Barbara was a valid reason for the bank to accept the discounted payoff of their mortgage.
And with no late mortgage payments on their credit report, some financing programs allow them to immediately re-enter the housing market.
WHO CAN QUALIFY?
Here are examples of valid hardships for a short sale with current payments:
- Job relocation: In today’s economy, a job relocation is the difference between working and free government cheese. To survive, people go where the jobs are. If it’s too far to commute, and your income won’t support two households, you have a hardship.
- Exploding loans: The last of the five-year loans adjust in the last quarter of 2012. And don’t forget the seven- and 10-year adjustables. A homeowner who sees that train coming has a legitimate hardship.
- Layoff or pay cuts: Many people have had to endure reductions in their work hours, and hundreds of thousands of people have lost jobs nationwide. Those using their savings to supplement lost income know that money eventually will run out.
- Divorce: When couples part ways, one usually moves out. And a soon-to-be single parent with two kids and one job could have difficulties when one spouse leaves.
- Illness: A major medical crisis can impact a person’s ability to continue to work and earn.
A homeowner with any of these hardships can complete a short sale without a delinquency. But it’s up to their real estate agent to make the case to the bank. It can be difficult task, one not easily taken on by the inexperienced or uninitiated agent. Getting the bank to listen can be daunting.
WHY WOULD BANK ACCEPT?
For most banks, it’s all about “the numbers.” Short sales routinely help a bank net a higher return than it would through foreclosure. From 8 percent to 12 percent more.Reasons foreclosures cost the bank more:
- It takes longer: The process to foreclose is seven months minimum, and that doesn’t take into account common delays for loan modification, short sale, bankruptcy and eviction. Add holding time for marketing, repairs, sales, escrow and closing. All of these factors keep the bank’s money out of circulation, which is where they earn their income.
- More fees: Each step costs more, from processing a foreclosure, to hiring attorneys, filing paperwork, hiring real estate agents, securing and maintaining the property, paying city code enforcement fines, etc.
- Repairs: Homes seized in foreclosures usually require extensive repairs.
- Lower market value: Bank-owned properties routinely sell at the low end of the price range for a neighborhood.
So it makes sense that a bank would accept a short sale on a home that was destined to become a bigger loss, right?
QUICK RECOVERY
An April study by Fair Isaac, the company that created the FICO credit-scoring formula, indicated just one missed mortgage payment is a 90- to 110-point hit for a borrower in the 780 range. A short sale with no deficiency balance, which is the norm in California, would shave another 15 points off that score.
Missed payments are the most damaging to your score, and a key indicator when qualifying for a home loan.
Today, a short sale can keep someone from getting a loan for 2-3 years, mostly because of missed payments.
Some banks have FHA programs that will allow a homeowner with no missed payments to purchase immediately after a short sale. While home prices are at the bottom of the market and interest rates are in the 4 percent range.
CONSEQUENCES
California has laws to protect consumers against banks pursuing them for the balance of a loan after a short sale.
California Civil Procedure 850e covers all liens on a property, regardless of whether the owner lives in it, regardless of whether the loan was a cash-out refi. And the federal Mortgage Forgiveness Debt Relief Act of 2007 exempts a homeowner from paying taxes on that loss, with certain restrictions. (Check with your accountant and attorney for guidance on your specific situation.)
But it’s possible to sell your home for less than it’s worth, negotiate with the bank to accept a discounted payoff, walk away without owing the balance, avoid the tax bill, and be able to purchase another home right away.
If you are facing “imminent default,” the bank will accept a short sale. The alternative is a foreclosure that will bring the bank less money. And at the end of the day, that’s the name of the game in the banking world.
