Short Sales and Foreclosures

Are lenders willing to do a "Short Sale"?

The overwhelming number of homeowners experiencing difficulty in making mortgage payments has caught the financial industry unprepared.  Initially, lenders were unwilling to restructure loans with homeowners.  But as the number of foreclosure climbed, lenders realized that the cost of foreclosing on real estate was much higher than granting concessions to homeowners in default.

In a short sale, the lender is loosing money (the difference between the amount owed and the amount realized in the sale) but comparatively with a foreclosure, it is a better alternative.  In a nutshell, this is the main reason why lenders are willing to grant a short sale.

Please be aware that not all lender are willing to accept a short sale.  There are numerous reasons why they accept or reject short sale proposals.  Here is a very short list:

• the lender's financial situation
• the number of mortgage accounts in default
• the location of your house
• the amount the lender is willing to forgive
• the general economic situation of your neighborhood, etc.

As stated above, many financial institutions were caught by surprise by the wave of foreclosures in recent months.  Therefore, it is possible that a lender may change position with regard to a short sale.  In fact, you may find different opinions and requirements within the lender's own organization.

A New Option

Recently, lenders have been asking the homeowners to assume part of the responsibility for the loss.  They are doing this by requiring a note (an "I Owe You") from the homeowner for a lesser amount than the difference between the amount owed on the original loan and the amount realized at the sale of the property.

For example, a homeowner owes $300,000 to the bank but is currently in default.  The bank might approve a short sale where they allow the homeowner to sell the property for $250,000.  Instead of the bank assuming the entire $50,000 loss (the difference between the amount owed and the amount realized in the sale - also called the deficiency), the bank might ask the homeowner to pay the bank $10,000 for a period of 20 years.  Therefore, the bank is only assuming a $40,000 loss rather than $50,000.

The $300,000 owed by the homeowner is settled, the property is not foreclosed, and the amount the homeowner is now responsible for is only $10,000 (payable in 20 years) and the credit of the homeowner is not affected from a foreclosure entry.

Homeowners contemplating a short sale might use this option during negotiations with the lender, particularly, if the lender has not considered it.

This option can also be used to help a buyer "low balling" on the house you are trying to sell short.  Lenders might not be willing to accept the low offer but if you are willing to take a note on part of the deficiency amount, they might consider the low offer.

Would the lender consider a note for part of the deficiency?  It really depends on the lender.  To my knowledge, there are no rules addressing this option.  So, it really boils down to negotiating with the lender the best terms acceptable to both parties.

Let me know how it works for you.

Disclaimer - the information presented here is not to be regarded as legal advice.  Consult with your attorney, accountant, or licensed real estate agent.

Published Thursday, July 24, 2008 6:33 PM by Henry Rivera