What Do I Need To Know About Buying a Short Sale Property?

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Realtors get asked this question a lot. And the answer is simpler than people might think. Aside from the fact that the sellers are in a distressed situation, the process itself is not too much different than a regular home purchase. The main difference is that the bank(s) holding a lien on the property will have to be involved in terms of final selling price since the home will sell for less than what is owed on the property. By definition (according to the National Association of Realtors) a short sale is “a sales transaction in which the seller’s mortgage lender agrees to accept a payoff of less than the balance due on the loan”. So naturally the bank would want to evaluate whether or not the offer that has come in on the property is an acceptable one.

How is a Short Sale Different from a Standard One?

The process itself entails the usual – the seller lists the home at the selling price they have come up with under consultation with their Realtor, potential buyers view the property and then an offer or offers come in on the property. The seller then evaluates any or all offers and then makes the decision to accept (or reject) them. Once accepted, the seller than takes it to the lender.

This is where the process deviates from standard home purchase procedures. Once received by the bank, the offer is passed through to the institution’s loss mitigation or compliance department.

What Happens Once My Offer Reaches the Bank?

Keep in mind that at any given time, a loss mitigation officer or loan negotiator may have several hundred short sale applications on their desk. Not only do they carefully study all comps on the property and evaluate whether the short sale carries value to them in the long run, but they also have to contend with the sheer volume of these transactions lately.

The outcome can be one of several things. First, the bank can choose to accept the offer given. They can also choose to come back with a counteroffer. Finally, if after careful evaluation the reviewer decides that the loss is too much, they may opt to reject the offer altogether.

What Can I Do As a Buyer To Help the Process?

The single most important thing that a buyer can do to help the process along is to remain patient. Once the agreement of sale is signed and sent to the bank, the process begins and it can take a painstakingly long amount of time. Realtors are often unable to obtain updates on short sales that are in progress because of how slow the process is at times. Maintain an open line of communication with your agent but also be realistic in your expectations. If your expectations are reasonable, it will help to ease any frustration for you and Realtor as you both wait for a response to your offer.

Another very useful tool when buying a short sale property is to be working with an agent that is well versed in short sales. There are many different aspects to this type of transaction as compared to a traditional sale and by working with an agent with experience in the field you can save a lot of time, energy and money in the long run.
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Remember, as things take a while to come full circle – it is essential that you keep your eye on the prize. Though a bit more tedious than normal home purchases might have been, you will undoubtedly be getting a great deal and the patience required in doing so is very well worth it!

Exploring the Main Differences That Makes a Short Sale a Better Choice Than a Foreclosure?

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Just a couple years ago, most people usually thought they had to give up their home in a foreclosure when they faced a financial stonewall.  However, since then the phenomenon of short sales has been on the rise, leaving homeowners a bigger, better and brighter option for the present and future.  In this article, we explore the comparative differences between the two so you can gain an edge when deciding which is better for you.

Purchasing Power

After walking away from your mortgage through a foreclosure, you can expect to feel the negative impact of it for five years, in terms of being able to purchase another home.  Even then, like a bankruptcy, a foreclosure is something you will perpetually have to report no matter how long it has been since the home went into foreclosure.  

Though these days you see a lot of talk about the financial and credit impact foreclosures have on homeowners, the unseen part of it is something to be dealt with.  Going through this process can leave a lasting emotional hole in people who otherwise were law-abiding citizens, going about their normal lives when all of a sudden they are faced with severe financial hardship and must resort to extreme measures.  That, or if the value of their home has dropped well below the amount they paid for it and they see very little hope for the future.

Short sales are much simpler.  They will affect your purchasing power for a mere two years, often just the amount of time it takes to get back on one’s financial feet.  Not only that, there is no requirement to report a short sale transaction.

Credit Outlook

There are two main areas that are of concern when it comes to your credit – your credit score and your credit history.  In case of a foreclosure, credit scores drop a whopping 200 to 300 points.  This can have a significantly negative impact on your ability to purchase big-ticket items or secure loans in the future.   Not to mention it takes years to rebuild a credit score that has dropped that low.   In terms of credit history, a foreclosure remains visible on your credit report for anywhere from ten years or more, rendering each future potential lending transaction either useless or very hard-pressed at getting approved.  The overall impact you will see on your credit will be for about three years.

Short sales are far easier on your credit outlook, in that the point drop is only about 50 on average and the transaction itself will impact your credit profile for as relatively little as 12 to 15 months.  The one thing to keep in mind is that if you have defaulted on any payments or if you already have a weak credit profile, the post-short sale point drop on your credit report can be more than just 50.  Also, there is no formal reporting or declaration of a short sale on your credit report like a foreclosure although the transaction will show up as either settled or not paid in full.

Amount Still Owed

Usually there is a gap in the amount owed after owners walk away from a property and the bank assumes responsibility.  In case of a foreclosure, given the amount of processing time and resultant vulnerability and exposure of the property, the value can and often does drop greatly after vandalism and from sitting there unused.  The Deficiency Amount (also called Judgment Amount) is the difference that remains after the bank calculates what was owed on the property at the time of foreclosure and when they sold the home. Because of this vandalism and vulnerability, the amount of value drop is far more than with a short sale, when the homeowners are still residing in the property during processing.  The bank has the legal right to pursue homeowners for the amount difference.  

Short sales differ in that not only is the deficiency amount much less but also, your Realtor can negotiate a waiver of that amount so you don’t have to pay for it.

New Changes to the HARP Loan Program Means More People Getting Much-Needed Help

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The announcement made recently by the Federal Housing Finance Agency about proposed changes to the Home Affordable Refinance Program (HARP) could mean that many more homeowners will get much-needed assistance during this difficult economic time.  Homeowners that are underwater have traditionally turned to HARP loans to help them refinance their homes, being able to keep them rather than losing them to foreclosure.  Here are the main differences between the old and the new programs and how they will potentially affect homeowners going through times of strife.

No More Glass Ceiling for HARP

With the old program there was a limit to how much borrowers could borrow with respect to thehome’s loan to value.  This posed a problem for many people that owed far more on the home than it was valued – given the steep decline in housing values during the past two or more years. 

New changes to the program will allow homeowners to refinance no matter how foregone the situation is with respect to more money owed on a property than its market value.  The elimination of the 125 LTV ceiling for fixed-rate Fannie Mae or Freddie Mac backed mortgages is by far the most impactful proposed change to the program.  This change will quite possibly help millions of people avoid undergoing foreclosure. 

Fewer Fees or Better Yet, No Fees For Some

As per the current HARP loan process, risk-based fees are assessed and applied to loans to protect the lender.  Considering borrowers’ credit profile, the lower the credit scores, the higher loan to value and that translates to greater risk to the lender.  Fees that are traditionally associated with this risk are a huge burden for buyers.

With the expected new HARP guidelines there will be no more risk-based fees for homeowners that refinance their home into short-term mortgages and fewer fees for others.


No Longer A Need For a Property Appraisal

The cost of getting an appraisal done on a home can get quite expensive and adds up when you factor in all the other costs of getting into a new home.  Most home purchases entail having an appraisal done on the home – at the buyer’s expense. 

The changes that are looking to be implemented soon for people seeking assistance through HARP will include eliminating the requirement of a new property appraisal.  The only thing that buyers need to be wary of is that there must be a reputable AVM estimate in lieu of the appraisal.

The Absence of Warranties That Put Lenders In a Stronghold
Lenders are at a huge risk when borrowers default on their loans and as a protective measure Fannie Mae and Freddie Mac guarantee those loans but not without a long list of warranties that protect the creditor.  At present, refinance loans that have these warranties or stipulations on them cause lenders to comb through each application very carefully before considering an approval.

With the proposed changes taking place, the warranties will be waived, reducing secondary exposure to lenders of buying back the loan in case of default or even indication of default.  The change will make it far easier for homeowners to obtain the refinance loan they seek to help get them out from underwater. 

More Time For Homeowners to Get Afloat

The HARP loan program began in April of 2009 and after an extension in March of this year (2011) the deadline was extended to June 30, 2012.

According to the list of projected enhancements to the program, the program’s deadline will be extended to December 31, 2013 – giving more homeowners more time to avail this opportunity.

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Now that the new proposed changes have taken effect, there are a few important points to remember. First, not only does the HARP loan apply only to homeowners that have a mortgage owned by Freddie Mac or Fannie Mae, the mortgage being refinanced must have been obtained on or before May 31, 2009.  Second, this applies only to homeowners who have not previously refinanced their home.

It is also important to note that these are projected changes – and they can change at any time contingent upon policy at Fannie Mae and Freddie Mac.