June 27, 2008

LETTERS From CAMP Rehoboth

CAMP Money

Next month, I will have completed ten years working in the mortgage industry. It has been an ever evolving and unprecedented period. Countless times I have been approached by friends, family, and clients about a new trend or product that has become the next wave in home financing…think Interest Only mortgages.

Not until very recently, however, have I ever discussed the term “short sale.” With the state of the economy being what it is today, I thought it an opportune time to introduce this increasingly common term as there is a good chance it could become familiar to you, or someone you know. If it does, I hope it is in a favorable way, as short sales can bring both substantial risk and reward in an extremely complex and often drawn out process.

What is a Short Sale?

A short sale is a legally-binding agreement to allow a home to be sold for less than the amount that is owed. Primarily due to increasing inventory levels, default and foreclosure rates, many lenders are much more eager to negotiate with borrowers who are having trouble paying their mortgages. For many homeowners facing foreclosure, it certainly represents a last resort, but on the positive side, it also represents a great opportunity for potential home buyers and real estate investors.

In many cases, the short sale allows a property to be purchased at a significant discount and well-below current market value. In light of a lengthy, and potentially greater loss, lenders holding existing financing are more likely than ever before to accept short sale offers.

Prospective buyers of a short sale property are encouraged to first consult with a mortgage professional to determine qualification ability, as these guidelines have also changed in light of the current market, in many cases, dramatically. A mortgage pre-approval letter should be submitted with the offer to purchase as the buyer’s ability to finance will be a factor in the lender’s decision to accept or deny the short sale.

Herein lies the key distinction between a short sale purchase and a traditional home sale transaction, and consequently the greater risk to a potential buyer. The decision to accept the offer is not in the hands of the seller. Instead, the lender’s loss mitigation department is typically the “authority” which will issue a decision as to whether or not the short sale will be permitted, and the offer therefore, accepted. Currently, lenders are taking approximately one month to make this determination, significantly lengthening the buying process.

Several factors affect this lengthier process. Lenders are going to great lengths to ensure their decision to accept the short sale is based upon sound fiscal rational, and not to simply bail out “flippers” or other borrowers who have simply overextended themselves.

In most cases, the property owner must have suffered a serious financial hardship that directly caused him or her to default on the mortgage: the loss of a job, a serious illness, or the death of a loved one. A written declaration and supporting documentation demonstrating financial hardship will definitely be required by the lender. This may include pay stubs, tax returns, and liquid asset statements, among other documentation.

Key Considerations to Keep in Mind

It’s important to note that the difference between what is owed on a mortgage and the final amount the lender collects after the costs of the sale, including real estate commissions and possibly other charges don’t simply disappear in a short sale. In the past, this deficiency or “canceled mortgage debt” was considered taxable income to the borrower. Thanks to the Mortgage Forgiveness Act of 2007, the tax burden for qualifying canceled mortgage debt (as high as 35% for primary residences only), has been temporarily waived until the end of 2009.

If there are multiple liens against the property, all lien holders will have to be involved in the negotiation process, not just the first lien holder. Therefore, communication and patience are essential components of any short sale. This is why an experienced real estate agent and mortgage professional become so valuable to this process.

If you have questions regarding short sales, or are in need of home financing, “Call Me, I’m Your Neighbor!”

Chris Beagle is a Senior Loan Officer at GMAC Mortgage. E-mail [email protected] or call 302-226-2448 ext 15.

LETTERS From CAMP Rehoboth, Vol. 18, No. 08 June 27, 2008