Short Sales An Answer For Tough times
Many areas of the country are seeing an alarming increase in foreclosures. There are quite a few options that can minimize the damage done by such a loss. The short sale is one, but beware it is not for everyone.
Home prices: More pain to come: The outlook for home prices this year - already expected to post the first drop on record - got worse Wednesday as an industry group cut its forecasts for sales and prices for 2007.
Home prices: More pain to come: The outlook for home prices this year - already expected to post the first drop on record - got worse Wednesday as an industry group cut its forecasts for sales and prices for 2007.
The National Association of Realtors said it now sees the median price of existing homes sold falling 1.3 percent this year. That's almost twice the 0.7 percent drop forecast just two months ago, and is worse than the 1.0 percent drop in prices it estimated in May. As recently as March, the group was forecasting a 1.2 percent rise in the median existing home price for this year.
Mortgage Rates Rise Again on Growth In Durable Goods Orders: The 30-year fixed-rate mortgage (FRM) averaged 6.42 percent with an average 0.4 point for the week ending May 31, 2007, up from last week when it averaged 6.37 percent. Last year at this time, the 30-year FRM averaged 6.67 percent.
The 15-year FRM this week averaged 6.12 percent with an average 0.4 point, up from last week when it averaged 6.06 percent. A year ago, the 15-year FRM averaged 6.26 percent.
Five-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) averaged 6.19 percent this week, with an average 0.5 point, up from last week when it averaged 6.02 percent. A year ago, the 5-year ARM averaged 6.26 percent.
One-year Treasury-indexed ARMs averaged 5.57 percent this week with an average 0.6 point, down from last week when it averaged 5.64 percent. At this time last year, the 1-year ARM averaged 5.68 percent.
Well you bought your home during good times and now times have changed. Your property rentals are down or you’ve lost your job and cant carry the mortgage. Worse than that, the markets have changed and you cannot sell for what you’ve paid. Still you have no choice but to sell or foreclose. There is one possibility besides foreclosure and that’s a short sale.
What is a Short Sale?
Its not a Get Out of Jail Free Card
A short sale in the mortgage world amounts to a lender agreeing to accept a pay off less than the original mortgage. For example, if your mortgage was $200,000 and all your property would bring in todays market was $160,000, a lender may agree to accept the lesser amount to clear the debt. That amounts to a forgiveness of $40,000.
Why Would a Bank Say Yes?
It’s a resignation on the part of the lender that this is the best it will get. Banks do not want to foreclose and they do not want to take the property (known as a deed in lieu of foreclosure). They are not in the property management business and foreclosure look bad on the books. It may even affect their ability to borrow if the lenders have too many foreclosures on the books, its not a stretch to wonder whether they have been prudent lenders. There are down sides to this procedure and it may not be the best alternative for you. 1. If their is a second mortgage on the property, its not likely the second lender will agree. 2. The IRS will consider the $ 40,000 of mortgage debt forgiven by the bank as gross income and the tax bite may be prohibitive. You would need to talk to your adviser (just when you can afford it right?) to confirm that the tax implications of a short sale make sense for your situation. 3. You cant fake this, you must truly be destitute. The seller will need to be in default. That is to have stopped making mortgage payments. 4. You must clearly have no equity left in the property for the lender to agree to accept less than the full debt owed. 5. It will be reported to the credit reporting depositories and it will remain on your credit report for 7-10 years. It’s a derogatory
What the Buyer Needs to Know
1.You must have a firm offer before you ask the lender to approve the sale. 2.You do not have a deal until the lender approves your deal. The agreement with the seller is not the final agreement. The lender must agree to the purchase. It can be wise to create a contingency here requiring the lenders to respond within a specific time frame. This will give you a reason to back out if its dragging on. 3.The deal can be held up because lenders often will want to re-negotiate the commission structure, even though you have signed a listing agreement with your agent. 4.You can expect be offered the property “as is”. This can be ver
y a costly so we think you should have the property inspected by a building inspector, home inspection and a termite report. If you cannot negotiate the “as is” component of the sale, cover yourself by knowing what you are buying. Make the deal contingent on your approval of the properties condition.
5. Even if a bank approves a short sale in principal, they make not accept any of the offers or they may simply bury the offer and never respond.
Why Do Banks Do It
2.It may cheaper and less time consuming for the bank than a foreclosure process
Why Do Owners Do It
Although its reported to the credit agencies as a derogatory, its less severe than a foreclosure or bankruptcy and may be a bit kinder on your FICO score. If you are looking for a short sale deal you might start with the lenders “Lis Pendens” list. This is where lenders start the foreclosure process.
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