Short sales are among the most arduous real estate transactions, often taking six months or more to close — if they get done at all.
They can be a life raft for distressed homeowners who owe more on their houses than what they’re worth, but the experience depends on a variety of factors, such as the number of lenders involved and whether there’s a hardship, mortgage insurance attached or whether the buyer has the patience to stay with the process.
A short sale occurs when a lender agrees to accept less than what the homeowner owes. The transaction requires that the homeowner has a financial hardship.
Homes with more than one mortgage and mortgage insurance tend to take the longest, said Ellen Mahoney, president of Complete Title Services’ loss mitigation division in Birmingham, Mich. A growing reason short sale deals fall through or take longer is because of mortgage insurance purchased after the homeowner closes on the deal and the loan is later sold to other lenders and investors.
Unlike private mortgage insurance required for sellers who put less than 20 percent down, these lenders and investors buy insurance to minimize risk. It is known in the real estate industry as pool insurance because it covers a group of loans that have been purchased.
Premiums are paid by the lender or investor, and the homeowner isn’t aware of it.
When the loan defaults, such as in a short sale, the mortgage company may demand that the seller pay part of what is owed to minimize its losses.
Often, the bank holding the first mortgage isn’t made aware that the second mortgage had been insured until the end of the process, even if both loans are with the same lender. If the mortgage insurance company doesn’t sign off on the deal, the process starts over again.
These kinds of delays mean buyers walk away because of the time and frustration involved.
Banks say they’ve been working harder to make the short-sale process easier, but they acknowledge the delays.
Even the federal government’s program to streamline short sales — known as the Home Affordable Foreclosure Alternatives Program — has yet to gain traction because it doesn’t allow the lender to collect on the home’s deficiency.
The program was launched in April 2010, and through May of this year, only 8,541 short sales were completed nationally through the HAFA.
In a short sale transaction where mortgage insurance is involved, the mortgage insurance company gets a say in the sale price of the home or asks the seller to agree to repay part of the loss over time, and that can create more delays.
QUALIFYING FOR A SHORT SALE:
What you will need to qualify in terms of paper work and forms can vary by lender. Here are three key things a homeowner would need to qualify for a short sale, according to the Certified Distressed Property Expert Web site:
—Financial hardship: There is a situation causing you to have trouble affording your mortgage.
—Monthly income shortfall: A lender will want to see that you cannot afford, or soon will not be able to afford, your mortgage.
—Insolvency: The lender will want to see that you do not have significant liquid assets that would allow you to pay down your mortgage.
THINGS TO CONSIDER IN A SHORT SALE:
—Most experts agree that it is wise to hire a Realtor who is experienced in short sale transactions and a lawyer, if possible.
—A short sale is less onerous to one’s credit than a foreclosure. For instance, Fannie Mae allows people with a short sale on their record to get another mortgage after two years while those with a foreclosure have to wait seven years.
—Once the seller has negotiated a deal with the bank about how much, if any, money to bring to the closing table, the bank usually issues a deficiency waiver that would protect the seller from being sued later on for the balance.
—Keep the lines of communication open with lenders/servicers.
—Keep detailed records.
—Send everything to the lender/servicer by certified mail.
Source: McClatchy-Tribune Information Services.