Short Sale Primer

With many Santa Clarita homes financed well beyond their current market value, Santa Clarita homeowners are starting to look to short sales as a possible option to get them out of hot water.

From what we’ve seen so far, most of the homeowners who are in serious hot water are those who did cash-out refi’s to take excess equity out of their homes after the purchase, and not so much those who did 100% financing. However, those who did 100% financing and were qualified only based on the introductory interest rate (intro rate), are also finding themselves in trouble as their rates adjust to the current market rates.

So what is a short sale? This is where the lender allows the sale of a home for less than the balance of the mortgage(s). Factors that can cause a short sale include a change in the borrower’s (homeowner’s) circumstances, the property’s condition or local real estate market conditions.

Although many TV infomercials will make this sound like a slam-dunk proposition, a short sale takes a lot of time and effort to complete. It’s absolutely mandatory to have a qualified Realtor on your side, and one who is a Certified Distressed Property Expert (CDPE) is recommended. While it used to be very hard to get short sales approved, it has become somewhat easier, although it is still a lengthy process.

In order for the bank to consider “hardship” as the homeowner’s reason for a short sale, there must be some major issue that has caused a change in the homeowner’s financial status. Examples would be a major illness in the family, death or divorce of a spouse who contributed to the family income, a job transfer out of area where the homeowner is unable to rent out the home to someone else, a call to active military duty, permanent disability, unemployment where there is no expectations of finding a new job in the near future, the homeowner has become financially insolvent, or the homeowner is in jail.

The bank may be more willing to consider short sales if the bank’s conditions are favorable to this. The bank would have to look to its loss mitigation policy as well as the number of non-performing loans that it has in its portfolio.

The property itself also has a role to play in this, where the bank will analyze how much it would cost to put the home in resale condition, keep it secure during the sales process and then market and sell the home. They will also compare as-is value to the home’s value if the home was to be repaired by the bank.

After all this is done, then the last deciding factor is the approval of the investor holding the loan. Where the investor is Fannie Mae or Freddie Mac, it can take 30 days or more for the short sale to be approved.

While homeowners can certainly contact the bank on their own, it’s normally best to get a Realtor involved so they can assist with the process. You’ll need to get a bona-fide and reasonable offer on the property to present to the lender to start the process rolling, and this offer cannot be from a relative. It’s hard to do this as a FSBO with the current market conditions, so you’ll likely need to list your home for sale at or near fair market value. Also, don’t expect to get any cash out of this situation, since the bank will be looking only to maximizing their recovery on the sale of your home.