Your Short Sales Support - Frequently Asked Questions
I owe more on my house than I think my house is worth. What can I do?
It depends. If you can afford to make your payments and want to stay in your home, you need not to do anything. Simply continue to make your monthly payments and enjoy your home. Eventually the market will recover and you will most likely recover the equity that you have lost in the house.
If you cannot afford to make your mortgage payments, and you are not quite sure what you should do, you have five options:
1. Deed in Lieu of Foreclosure
Deed in lieu of foreclosure is a deed instrument in which a mortgagor (i.e. the homeowner\borrower) conveys all interest in a real property to the lender to satisfy a loan that is in default and avoid foreclosure proceedings.
The deed in lieu of foreclosure immediately releases the homeowner\borrower from most or all of the personal indebtedness associated with the loan. The borrower also avoids the public notoriety of a foreclosure proceeding and might receive more generous terms than he/she would in a formal foreclosure. Generally, this procedure results in less damage to credit ratings than a foreclosure. Advantages to a lender include a reduction in the time and cost of repossession and additional advantages if the borrower subsequently files for bankruptcy.
In order to be considered a deed in lieu of foreclosure, the indebtedness must be secured by the real estate being transferred. Both sides must enter into the transaction voluntarily and in good faith. Sometimes, the lender will not agree to this procedure if the outstanding loan exceeds the current fair market value of the property, unless the lender concludes that they will end up with the property anyway and wants to avoid the cost and delay of foreclosure.
Because of the requirement that this procedure be voluntary, lenders will often not act upon a deed in lieu of foreclosure unless they receive a written offer of this conveyance from the homeowner\borrower that specifically states that the offer to enter into negotiations is made voluntarily. Both sides may then proceed with settlement negotiations.
Neither the borrower nor the lender is required to use this procedure unless both agree to do so.
2. Foreclosure
Technically, “mortgage” and “foreclosure” are not the proper terms (in California) for the lenders secured interest in the home, or for the legal procedure by which a lender forces a sale of the property when the owner fails to make the monthly payments. But these terms are commonly used in everyday language. In California, home loans are secured, not by a “mortgage”, but by a “Deed of Trust”; if the homeowner defaults (fails to pay) on the home loan, a third party, called a “Trustee”, is empowered to sell the property at a Trustee’s sale, after certain procedures (Notice of Default and Notice of Trustee’s Sale, recordation, publication) are followed. When “foreclosure” is used in these FAQS, it refers (in California) to a Trustees Sale.
The first step leading to a Trustee’s Sale commences when the homeowner fails to make the loan payments, and “defaults” on the loan. Once behind a few payments (how many payments before the lender files a Notice of Default will vary, depending on the Bank, the loan officer, and the lender\property in question), the lender will record a Notice of Default. This Notice will explain that you are late on your payment and the bank may proceed with a Trustees Sale. Once a NOD has been sent to you, the bank has 45 days from that date to then send you a Notice of Trustee Sale (NOTS). The NOTS will indicate when the Trustee Sale Date is and what your remedies and rights are.
The Trustee Sale is typically conducted on the local courthouse steps, and the banks will have a minimum bid. If the minimum bid is not met, then they will take typically title to the property, evict the homeowner and list the property for sale as a REO (Real Estate Owned) Property.
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3. Short-Sale
When a homeowner lists his house for sale and accepts an offer to purchase his home for less than the total debt secured by the property, the lender might agree to accept the sales proceeds as payment in full, which is the ideal outcome for a short sale. The Short Sale process can take 90 days or longer in some cases, after ALL necessary paperwork has been submitted to the Lender. After the Seller and Buyer have agreed upon a price and have a fully executed the Purchase Agreement, the Seller must submit this Offer, with additional other financial information, to the Lender for their review and approval. The Lender review process may require multiple appraisals, or BPO (Broker Price Opinions), and involve multiple levels of review and approvals. The Lender will usually request copies of the borrower’s tax returns, bank statements, proof of income, hardship letter and financial statements. They may ask for further documentation pending their review. Short Sale approvals are not guaranteed, and some lenders may request additional money from the Sellers, a secured or unsecured Promissory Note from the Sellers, reductions in commissions, or a higher purchase price from the buyers. Often the Lenders will not submit anything in writing until the day or so before closing, and they may not counter if the Purchase Price is too low. They will simply state that the price is too low and close their file. The process must then start over from the beginning.
4. Bankruptcy
Bankruptcy is an option if the borrower has more debt than he\she can repay or hope to repay. A bankruptcy will stay (freeze) a Trustee’s sale for at least a period of time. Anyone contemplating Bankruptcy will need to consult with a Bankruptcy attorney. Please contact us if you need referrals.
5. Stay where you are.
IF you can afford your current loan, and you like where you are, and don’t need to sell, then don’t! Now is not the best time to sell your home, as it is a “Buyers Market” which means there is plenty of inventory for Buyers to choose from, prices are low, and you will not get top dollar for your home.
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What is a Loan Modification and how does it work?
A Loan Modification is a process that, with the lender’s approval, will reduce the monthly payments due on the home loan. This process will take as long as a Short Sale and will require most or all of the same financial documents as a Short Sale. The Homeowner can attempt to deal directly with their lender we strongly recommend that you have an attorney or qualified professional review the lenders new loan proposals before you sign anything.
I have Tax Liens against my property. Can these be removed prior to a short sale?
It depends. Property Taxes must be paid at close of escrow and all lenders recognize this. Federal and State tax liens CAN be removed prior to close of escrow, but this is a separate process and usually takes 30-60 days. It is also possible to have the lenders or sellers pay part or all of the liens from escrow, and\or to negotiate a settlement with the taxing agencies prior to close of escrow.
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Will I be personally liable for the deficiency balance that would be owed on my home, if there is a Trustee’s Sale, short sale, or deed in lieu?
It depends on the nature and terms of the loans on your home. If the loans currently secured by your home were taken out at the time of purchase, and not refinanced, AND you purchased the house to live in, these are called “Purchase Money Loans”; you have no personal liability for any outstanding balance on your loan even if a Short Sale or Trustee’s Sale brings in less than is owed. You can “walk away” and deliver title to the bank, or allow the lender to foreclose, and they cannot come after you for additional money to make up the deficit. You should consult a real estate attorney to determine if your loans qualify as Purchase Money Loans. If you have never refinanced your home, and the loans that you have on your house are the original loans that you used to purchase the property, than these loans are almost always Purchase Money loans.
If the lender accepts a deed in lieu of foreclosure, they agree to accept that deed as payment in full.
If you have loans on your house that are NOT Purchase Money Loans, and the banks “foreclose” on your property by filing a lawsuit against you (as opposed to a Trustee’s Sale), the bank can seek additional money from you if the house sells for less than is owed. If the lender elects to proceed with a trustee’s sale, as opposed to a lawsuit for foreclosure and a deficiency judgment, you will not owe additional amounts to the lender for the unpaid balance on your loan. Sometimes, the banks will insist that you sign a Promissory Note to make payments on the outstanding balance of your original home loan, make a cash contribution at close of escrow (for a short sale), or proceed with their legal remedies in collecting on the balance owed.
Will a Short Sale impact my credit?
Yes, but not as much as a foreclosure.
Will a Deed in Lieu impact my credit?
Yes, but not as much as a foreclosure.