Because more than 5 million households are behind on their mortgages, two commonly heard, and sometimes confusing, terms are short sale and foreclosure. This article will define and explain a short sale. Part 2 will examine the foreclosure process, and Part 3 will attempt to compare and contrast the two to help you decide which better fits your circumstances.
A short sale is, in essence, the sale of a home for less than what is owed on the mortgage. This sale is done by you the homeowner, and your realtor, not the lender, and you may continue to reside in your Bradley Beach NJ home until it sells. Such a sale is not an “easy out” for the homeowner, however. The lender (and any investors who own your loan) must agree to the short sale and will often do only so after loan modification alternatives (restructuring the loan) have been fully explored. For obvious reasons, many lenders prefer to forego a few monthly payments or lower your interest rate rather than having to begin foreclosure proceedings and take over the property.
You will have to convince the lender that you are sincere in your desire to make the short sale work and reach a fair settlement. You will most likely have to find a realtor who is willing to work for a smaller commission, contribute any available assets you have to lessen the outstanding mortgage balance, and demonstrate that you have “tightened your belt” by scaling back on your spending. Those things being accomplished, your lender may approve the short sale process in order to take a smaller loss, prevent a lengthy and costly foreclosure procedure, and avoid being saddled with a hard to sell foreclosure property.
Home Affordable Foreclosure Alternative
To further encourage “underwater” homeowners to use the short sale approach and lenders to approve such sales, the federal government has instituted a new program that provides financial incentives to the parties involved. Known as HAFA (Home Affordable Foreclosure Alternative), the homeowner who uses the short sale process could receive up to $3000.00 for relocation assistance, and a maximum of $6000.00 could be available to the lenders/investors serving the mortgage. Under this program, which has not been as successful as originally hoped, the lender will use real estate agents to determine the value of the home and the minimum to accept. If an offer comes in that is equal to or higher than that figure, the lender must accept it.
Major lenders seem to be taking a cautious approach to the government’s initiative, however, and homeowners applying for the program have faced qualification difficulties, need for documentation, long application forms, too much bureaucratic paperwork, and a longer completion time. To qualify for HAFA, you must first qualify for the federal loan modification program (HAMP), meaning that your loan is more than 31% of your current income. You must also show evidence of financial hardship such as job loss or rising interest rate. If you qualify for HAMP but are still unable to keep your mortgage in good standing, then you can qualify for the HAFA program.
If you are not interested in the federal initiative, you begin the quest for a short sale yourself by following these (simplified) steps:
1. Verify the current value of your Bradley Beach NJ home with your broker.
2. Ask the realtor for an estimate of all closing costs.
3. Find the total amount owed against the property.
4. Calculate the negative difference between the total amount owed plus closing costs and the estimated proceeds of the sale.
5. Contact a lender (or lenders) or have your agent talk with them.
6. Request approval for a short sale.
7. Sell the house. (Oh, if only it were this easy!)