Short Sale Primer for Santa Clarita Homeowners

If you’re a Santa Clarita homeowner having troubles paying your bills each month, including your mortgage, then this short sale primer is for you!

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Selling your home as a short sale doesn’t require you to be flat broke, nor does it require you to be seriously behind in your mortgage payments or to have financing via a so-called sub-prime loan program. You will, however, be required to show a true financial hardship and be basically insolvent on paper.

Let’s start first with a few definitions that are an integral part of the short sale process, and then move on to how the short sale process is completed.

What is the difference between a Foreclosure and a Short Sale?

With a foreclosure, the bank will take your house back at auction and then remarket it as an REO, or bank-owned, property once you have moved out. Typically they will pay you a small amount of funds, or what we call a “cash for keys” payment, to get you to move out and leave the house reasonably clean within about 30 days after the auction date. While this may sound like the easiest way to go, the downsides to a foreclosure are huge. Not only is there a major impact on your credit report, but any security clearances you may have may be placed in jeopardy with a foreclosure on your record. For many, the loss of a security clearance level can mean a demotion or unemployment, so the impacts of a foreclosure should not be taken lightly! A foreclosure is said to have about the same impact as a felony when it comes to security clearances and other credit checks.

With a short sale, the bank allows you to market your home for sale on your own, but you will need the bank’s final approval before opening escrow since the bank will be getting paid less than what they are owed on your mortgage(s). This process does take patience and a lot of paperwork, but in the end it will have a lot less impact on your credit report, and it allows you to remain somewhat in control of your move-out date. With a short sale, your credit report typically will show that your mortgage has been paid in full for less than the balance owed, which is far less damaging than a foreclosure.

What defines a financial hardship?

A financial hardship for purposes of a short sale can be created in many different ways, some more obvious than others. Most people assume that the Number 1 reason is an increase in the interest rate of an adjustable rate mortgage (ARM), since that’s what the news reports tend to focus on. However, it doesn’t take a mortgage rate increase to send a homeowner into foreclosure. Read the “Diary of a Distressed Homeowner” to see how seemingly minor changes in a family’s situation can create a severe financial hardship in a very short time.

We all know the stories of homeowners taking out 2nd, 3rd and even 4th mortgages when the market was “hot”, using those funds to buy toys, cars, vacations, gambling and even for paying their monthly mortgage payments, thus creating a huge monthly liability that is either difficult or impossible to keep up with. While these situations certainly exist in the Santa Clarita Valley, many homeowners facing foreclosure did not fall into this trap. They simply got over their heads because of other situations out of their control, including the following categories that may be included as financial hardships for purposes of a short sale:

• Loss of a job or a business failure: A decline in income, even if only temporary, can put a homeowner at risk of foreclosure. Even if you find a new job, it may not be at the rate of pay that you were receiving at your previous job. For those who are self-employed, a business failure or a major decline in business revenues can create a hardship situation.
• Change in family situation: This category includes the death of a family member, especially if that family member was a wage earner contributing to the family’s monthly income. Also included in this category are divorce and separation, since these will also create a decline in the total household income.
• Relocation: While this hardship typically does not include voluntary relocations, it can under some circumstances. In some cases, a relocation is the only way to maintain any level of income. In others, the relocation is a mandatory requirement for continued employment with your current employer.
• Illness in the family: A major illness can be a double-whammy if it involves one of the wage earners in the household, with both loss of income and medical bills to cover. Even if the illness involves someone else in the family, the medical bills alone can create enough of a hardship for a family to be facing foreclosure.
• Military Service: Extended leaves for military service can put a severe strain on a family’s financial stability. While there are some programs to help, quite often a short sale is the best option for military families who find themselves financially overwhelmed. For servicemembers, a foreclosure on your record is almost as bad as felony, and thus it can severly impact your security clearance and your future promotions.
• Too much credit card or other debt: Credit cards are truly one of our worst enemies when it comes to facing financial difficulties. While it’s easy to finance monthly expenses on a credit card, one missed payment can boost you into the 30% interest rate overnight, thus doubling your monthly minimum payments and making it impossible to meet your monthly obligations.

What if your house value is declined, but you have money in the bank?

You don’t need to be down to your last dime to qualify for a short sale, you just need to be what is called “insolvent”. This means that your monthly income cannot be enough to cover your monthly expenses, and you don’t have enough savings to carry you through the tough months until you get back on your feet.

If you do have significant reserves, the bank may either deny the short sale or require you to carry back a “soft” or unsecured note for all or a portion of the shortage. Many homeowners will attempt to shift assets to others prior to attempting a short sale in order to avoid this, but be advised that this may be considered to be fraud, and thus could result in jail time if you’re caught. The bank may process the short sale and let you get out from under your current mortgage, but there is no guarantee that they won’t come after you later once the short sales start to slow down and they find themselves with an abundance of underworked employees who can be shifted into investigating potential fraud situations.

How does a short sale work?

A short sale is much like a regular sale in many ways. You’ll list your home for sale with a qualified Realtor (be sure to choose one who is very experienced with short sales!) and show it to buyers just as you would with a regular sale. The difference is that the buyers must be notified up front that you’re selling as a short sale, and there is a lot of extra work to be done once an offer is received from a qualified buyer.

Once an offer is received for your home, your Realtor needs to go to work to present this offer and a lot of other documentation to the bank in order to process the short sale request. This includes information regarding your current income and assets, information regarding your home and its current condition, information regarding the current real estate market activity in your area and an estimated closing statement (HUD-1) showing how much money the bank will get from the sale of your home. This may sound simple, but a complete short sale package generally includes about 70 pages of documentation or more.

After the short sale package is presented to the bank(s), it will be assigned to a Level 1 Negotiator for the initial review. Depending on the amount of the loss (shortage) and other factors, this person may need to pass your file on to a higher level negotiator before it can be sent along to the bank’s investors for final approval. During this time, the bank may request additional information from your Realtor. Or the bank may lose your file… again… and again…. and again… Your Realtor needs to be prepared to submit all or part of your short sale package as many times as required until the bank approves your short sale.

The short sale approval process generally takes a minimum of 30 days, and can often take several months. Your Realtor will need to follow up on a regular basis to make sure that your file is being processed, instead of being lost in a deep dark corner never to be found again. DO NOT call the bank yourself to check the status on your file – the bank prefers to deal with your Realtor, and calling to check the status won’t make the process move along any faster.

Once you get the short sale approval from the bank, you can open escrow with your buyer just as you would with a regular sale. The bank will generally not allow more than a 30-day escrow from the date of the approval letter, but in certain situations you can ask for an extension for a few days if needed. During this time, you’ll need to provide the buyer with all required written disclosures and allow them into your house for their physical inspection. If you haven’t ordered a termite inspection yet, it will be done during this timeframe as well.

What if your buyer backs out?

Short sales can be a messy business, especially when it comes to flaky buyers. It’s hard to say why so many buyers back out of short sale deals, but typical reasons include losing patience while waiting for the short sale approval and/or buyers continuing to look for homes after they have submitted an offer on your home. Buyers are also subject to the same situations that got you to this point as well, with job losses and other unforeseen situations causing them to back out of the purchase of your home.

My advice is to be patient… while flaky buyers may create somewhat of a revolving-door situation, generally the bank will postpone the foreclosure process while all of this is playing out. This means that you can stay in your home a while longer instead of paying rent somewhere else, which is not necessarily a bad thing.

How do you know which Realtor to hire to handle your short sale?

Selling your home under any circumstances is a major undertaking, since for most families their home is their largest investment. A short sale adds a new layer of complications to the normal home selling process, and therefore you should not trust the sale of your home via a short sale to your cousin’s sister’s best friend’s brother, unless he is a qualified short sale Realtor.

How do you know if a Realtor is qualified to handle your short sale? First of all, be sure to ask if the Realtor has completed additional training specifically targeted towards helping homeowners successfully sell their homes as a short sale. The most highly-recognized training and certification program is the Certified Distressed Property Expert, or CDPE, program. This program provides extensive training in the area of short sales, as well as forms and other tools to make the data collection process easier on the homeowner.

If you’re considering listing your Santa Clarita home as a short sale, be sure to contact Santa Clarita Realtor and Certified Distressed Property Expert Linda Slocum at 661.670.0349 or email her at Linda@SantaClaritaRealEstateBlog.com.