Short sales have become part of the real estate landscape, and as one in four homeowners are underwater nationwide, they will likely continue to stay there for some time. Lenders have finally accepted this and have been trying to implement new programs to make them a better choice than foreclosures. For the most part, they are on the right track, but we are still seeing resistance and lots of snares in the road. The new Fannie Mae/Freddie Mac short sale program offers something big to struggling homeowners: the chance to short sale their homes even if they are current on their mortgage payments.
Normally, in order to short sale your home you have to be delinquent on your mortgage payments. Some lenders say they will consider short sales for those not yet delinquent, but the reality is that until you are late with your payments they don’t have the time to tango. Now, if your loan is securitized by Fannie or Freddie, you could be eligible for a short sale even if you are not delinquent, but can prove a hardship.
If you are in this situation you will need to contact your mortgage servicer and ask them to participate in the Fannie/Freddie non-delinquent short sale program. You will want to find a qualified area real estate agent who is experienced in selling short sales, and get your home listed on the market. Once you find a qualified buyer, you will present the contract to your servicer, along with proof of hardship (there is a packet of information you will have to provide – whether your servicer wants it up front or at the time you have an accepted offer will be up to the servicer).
Hardships: There are multiple kinds of hardship that could be acceptable. These may include job loss, injury or disability, major illness, job transfer (there are usually mileage requirements), pay cuts, divorce, and death of a borrower or wage earner, to name a few. If you think you have a hardship, contact your servicer to find out whether you qualify.
1. Credit implications: As with every short sale, you will need to be aware of potential credit hits. There is no lesser effect for these types of short sales, however, apparently it is in the works. Typically with a short sale you can expect your credit score to drop up to 150 points, but that really depends on where it was before you were approved for a short sale. I have seen some sellers take a big hit, and others barely see any negative effects. If you keep in mind the 150 number, that is most likely the worst case scenario. Hopefully soon there will be an exception with the credit bureaus for these types of short sales.
2. Second liens are another potential snake in the grass with the new program. First lienholders have agreed to pay only up to $6000 to second lienholders upon a successful short sale closing under the program. If you have a large outstanding second lien balance, there is a chance that lienholder may refuse to accept this sum (which is ridiculous, as they would likely get nothing if the home went to foreclosure, but such is the case). Make sure you know exactly how much you owe and what the second lienholder’s policy is – a savvy short sale agent/negotiator will know how to help in this regard.
3. Deficiency states: if you live in a deficiency state (where the state can go after you for the difference between the short sale price and what you owed on your mortgage), you need to beware. The lender may require a cash contribution to cover the difference on the loan balance, or possibly have you sign a promissory note. California is NOT a deficiency state, so selling your home via short sale requires NO contribution from the borrower, and there is no state tax liability on the sale.
As always, I recommend really understanding all the implications of a short sale before embarking on one. Make sure you hire an agent who really knows how to negotiate, as well as all the steps involved throughout the short sale process. If you are informed you will make the best decisions for you and your family. To find out whether your loan(s) is owned by Fannie Mae, visit https://www.knowyouroptions.com/loanlookup. For Freddie Mac loans, go to https://ww3.freddiemac.com/corporate/.
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