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How a Short Sale Prevents Home Foreclosure

Johns Wu Posted in Foreclosures by Johns Wu
July 23, 2007 03:57 AM - 13 Comments

SHORT SALE FORECLOSURE The loss mitigation department of your mortgage lender is charged with handling short sale properties. During a short sale, you will be selling your property to an interested buyer for less than the amount you actually owe on your mortgage. Short sales are thoroughly investigated by the mortgage company and the process can be long an arduous, but the result is that you, your mortgage lender, and your buyer each gain something from the deal. Short sales are one of many ways of stopping foreclosure of your home.

Many loss mitigators are paid a bonus related to how many defaulted loans they are able to clear from the mortgage lenders books. With this in mind, the mitigator assigned to your case is as motivated to approve the short sale as you are, assuming it is in the best interests of the lender. Before they approve the sale however, you, and your buyer, will probably be required to submit a mountain of information to help the mitigator determine the value of the sale.

After you have submitted all of the documentation the lender asks for to determine the viability of your financial situation; documents such as a hardship letter, paystubs, medical bills, bank statements, and any other evidence that proves your predicament; and, assuming that the lender agrees that you are likely to be unable to repay your loan, the mortgage company will order what is called a brokers price opinion.

BPO (Broker’s Price Opinion) is Key to a Short Sale

The Broker’s Price Opinion, or BPO, is the process which gives the lender an idea of the market value of your house. This is one instance where you want the value of your home to be low. If the broker’s price opinion is high, the mortgage lender may elect to foreclose on you home and put the house on the market themselves, where your property will be snagged up by home foreclosure buyers. So, the lower the BPO, the more likely it is that your lender will approve the short sale.

Finally, your buyer will need to submit documents indicating the costs involved in the sale and where financing for the sale is coming from. After they have reviewed all of the required documentation and determined that a short sale is in their best interests, the lender will give permission for the sale. Although the process is long, frustrating, and somewhat intrusive, you avoid foreclosure, your mortgage lender gets the best deal they can, and your buyer gets a home for less than market value.

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  1. Nathan said:
    on July 24th at 03:21 pm

    I think foreclosures will becoming more frequent and thus house prices will be declining.

  2. KJones said:
    on July 26th at 05:38 pm

    My aunt did something very similar to this. Her household bills were too much and she grew further in debt and further behind each month. This went on for about 18 months.

    Her mailbox was filled with letters from her creditors threatening to turn her over to the collection agencies.

    She was prompted to find out more information to sell her house for less than the mortgage value when she was sharing her financial woes with a friend of hers. Her friend told her that she thought the house was not worth what she owed to the finance company and that she should consider finding a broker to help her with the arrangements of getting a buyer for the house and an estimate on the value.

    Finally she found an agent that set up a plan for her to get out from under her mortgage and still be able to save her credit rating and what was left of her dignity.

    She came out of the entire mess without much damage at all. She spent the next two years in a duplex type home until she saved enough to buy another house.

    I would recommend only using this type of service as a last resort and that is what it is intended for. Of course you can only hold your head above water for so long, but you should always consider asking help from your loved ones before worse comes to worst, but main thing here is avoid the foreclosure your property by seeking alternatives. Do your homework.

  3. Amadeus said:
    on July 27th at 08:46 pm

    Probably the best place to start if you’re seriously considering a short sale is to do a simple analysis yourself. This can be summed up as:

    (Estimated selling price at foreclosure) – (Estimated transaction costs of selling property at foreclosure) – (Proposed short sale price)

    If the number you arrive at ends up to be negative, then you have a compelling argument to take to your lender for taking a short sale. To get the estimated selling price and transaction costs you can either do the research yourself or hire a real estate broker.

  4. James said:
    on July 28th at 04:13 am

    One of the attractions of a short sale is that it may not have the lethal effect on your credit rating that foreclosure has. However there is a problem here in that this is not guaranteed. One of your negotiating points with your lender should be that you do not want an adverse credit report to be sent to the rating agencies. If you ask this has a reasonable chance of being granted, and frankly it has a higher chance of being granted if you do not ask. One thing that you should be aware of is that there may be a policy by the lender that they have to report all defaults to credit rating agencies.

    You may still need to sell your home for other reasons – but keep your wits about you if you want to get a decent credit rating in the future.

  5. ciscogrove said:
    on August 1st at 01:43 pm

    Short sales are indeed a good deal, sometimes. One thing most people don’t understand is the lender’s risk. How lenders insure against risk is with government insured loans.

    You’ve heard of them – VA, FHA, etc. The chances of a lender accepting a short sale with an insured loan are slim to none.

    Why?

    Duh! They get paid either on the court house stairs by a foreclosure investor or, if it doesn’t sell, immediately after the sale closes.

    The best advice w/a short sale is to start as early as possible in the process. By early I mean the minute you even suspect you won’t be able to meet your payments.

    Talk w/your lender about their short sale procedures. Believe me, they will tell you. This is definitely one of those areas where you will need to do your homework.

  6. gkr said:
    on August 5th at 02:27 pm

    There are more chances for the mortgage lender to approve a short sale than to not. The foreclosed homes cost money to maintain. The court costs also go up to thousands of dollars. In this scenario any reasonable short sale deal not less than 50% of the market value of the home will be accepted by the lender.

    Some people can prevent foreclosure by working with their current lender and creatively finding a way to remain in the same home. There is also way to get out of this by taking a second mortgage. This is better only for those who have chances of bettering their financial situation atleast in the future.

    As the credit history of the homeowner is important it is always better for him to choose a short sale to prevent home foreclosure.

  7. Tim said:
    on August 25th at 12:15 am

    As one who’s been there, if you’re involved in a short sale on your home MAKE SURE THAT ANY FUNDS COMING FROM YOU ON THE HUD FORM ARE MINIMIZED! In a short sale, the seller CANNOT receive any proceeds from the sale, so any funds coming out of the seller’s column will not be refunded to you if they are overpaid. In our case, they took out county taxes and an escrow for settling with the utility company; we later found out that the taxes had already been paid by our lender and the utility company settlement was less than half the escrow…and we cannot be refunded those monies even though we brought them in cash to the closing table. In particular, if you’re working with Bank of America, watch out for their deceptive loss mitigation department…they’ll put charges on your HUD form that don’t need to be there, extorting money from you they know they’ll get back.

  8. MonkeySold said:
    on September 30th at 07:59 am

    Short sales are the way to go!

    And I know, believe me. I have lost all my savings by investing in real estate. Although I was cautious and have been putting 20 to 30% down. I still got in trouble because of a high vacancy rate.

    So let me share some experience.

    When you see it coming and you know you’re going to fall behind, you are desperately trying to save your credit.
    So first thing you do is trying to be pro active.
    You call the bank, explain the situation and ask for a loan modification or any other help.
    And what do they reply?
    Sorry, can’t help you.
    Why?
    You’re not behind in payments.
    So? You’re telling me that I have to stop paying in order to get you to help me?
    Uhh,

    It’s so frustrating but it is a fact, you have to stop paying for them to listen or help!
    Well, when you stop paying, your credit gets a hit.
    Result of that is that they won’t help you because now you have bad credit.
    So, they are shooting themselves in the foot.

    Now, here’s the deal.
    In a short sale the bank accepts a lower payoff, they waive deficiency Judgment and it appears on your credit report as a settled debt.
    That’s much better than a foreclosure or judgment.
    Now You’ll be able to apply for another loan in about 18 months.

    Why would a lender do that?
    They look at the actual value of the property, that means today’s value, Not what you owe.
    Because they know if they foreclose they are only going to get market value or below anyway.
    On top of that, a foreclosure is costing the lender on average $50,000 and it is bad for the lenders credit score as now they have an increase in foreclosures. So they are seen as bad lenders, and as a result of that they need more reserves, that means less money to work with.

    Are you still with me?
    The best is yet to come :-)
    So, Now the lender accepts my buyers short sale offer, forgives me the difference in what I owe and what the property is sold for AND waives deficiency judgment against me.

    Good Stuff.

    Now watch out!
    When you decide to go that route, make sure that you use a licensed Realtor or specialized processing company. Don’t try this on your own!
    Do you due diligence, ask the Realtor how many short sales he has successfully done, check out the Better Business Bureau. Because time is of the essence. And the clock is ticking.
    Also once you work with someone, keep checking with your lender, nothing wrong with checking if your Realtor does his job.

    Last but not least, make sure you have an offer on the property!
    Any offer will do.
    Why?
    Because, again, your Lender won’t move as long as you don’t make him to.
    Why does an offer make them move?
    They have to, because if they don’t, you will tell the Judge.
    So, now they appoint an appraiser, they check out the value and will get back to you with a Yeah or Nay.
    When it’s a Nay, you’ll know how much they are looking for and believe me they are not unreasonable.
    As long as you or your Realtor don’t come up with one of those ‘investors’ offers and try to steal the property from the bank, they will accept any offer that is close to market value.

    So what are you waiting for?
    Get that Monkey Off of Your Back!
    Go short sale!

  9. RonOrr.com said:
    on October 2nd at 08:43 am

    MonkeySold thanks for the experience, everyone should listen to him as he has been through it and has been a landlord/owner.

    James I agree with you on trying to help your credit.

    Short sales can be much better than full foreclosures, and I tried to write a long informative article in my state to help answer a lot of questions.

    http://www.minnesotainvestors.com/blog/what-short-sale-information-minnesota-short-sale-process/

  10. Short Sale Homes said:
    on October 12th at 11:34 pm

    This is a good little article on short selling. If you are looking for more detailed information on Short Selling Homes I would highly suggest checking out How To Short Sale Homes (howtoshortsalehomes.com). It is by far the best free Short Sale guide I have found on the web!

  11. Terrin said:
    on July 8th at 05:44 pm

    Often times short sales are the worst thing you can do, and foreclosure is a much better option. For instance, just because a lender agrees to lift it’s lien to allow a sale to go through, doesn’t mean it is necessarily agreeing to not sue you for any deficiency you owe after the sale. For instance, if you owe the Bank $ 200, 000 on a mortgage, you can’t sell the house until either 1) you pay the bank $200, 000 or 2) it lifts it’s lien without that amount being paid. So, if it lets the house sell on a short sale for $150, 000, you can still be on the hook for $50, 000. The bank specifically has to agree to both lift the lien and not go after you for the deficiency. Some banks simply will not do that. Instead, once the sale goes through they will write the debt off and sell it to a third party collection agency who then will try to collect from you.

    In such a scenario, foreclosure is often better. First, with a foreclosure often times the bank will buy it back itself for what it owed. So, in my above example the bank would buy it for $200, 000. Here there wouldn’t be a deficiency balance. Second, many states have a redemption period in which you can live in the house after the foreclosure sale. So often times you can live in the house for free for a long time before the bank takes possession. You may be able to save significant funds if you are not paying a mortgage. Those funds can be used to negotiate a deficiency balance pay off if the bank sells it at a foreclosure sale for less then owed (and you live in a state that allows banks to go after deficiencies after such a sale).

    Also, some states do not allow the collection of a deficiency balance after foreclosure, but often times the bank will require you to sign a promissory note during a short sale agreeing to pay back money that you wouldn’t have to if it is sold.

    So, in summary short sales usually are only good if you don’t owe any money after the sale, which typically is not the case.

  12. Las Vegas Short Sales said:
    on August 6th at 04:20 pm

    Another key is the sellers actual finances and having an actual hardship.

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