Category Archives: Denver Short Sales

When Can I Buy a New Home After I Had a Short Sale?

Home owners who have had to sell their homes via a Short Sale often ask me how long must they wait before they can purchase a home again.  Short Sales typically occur when the homeowner is unable to sell because they owe more than the home is worth.  Often in these situations the owner has had some credit issues, due to changes in income status due to loss of job, health problems, divorce, etc.

Thankfully homeowners are not punished forever when this occurs.  The key to purchasing a new home is dependent upon re-establishing credit and waiting the required about of time.

Here are the Current Guidelines for Purchasing After a Short Sale:

FHA has a three year wait period for borrowers who were in default at the time of the short sale (or pre-foreclosure sale). FHA tends to be a popular option as the minimum down payment is currently 3.5% and FHA is more forgiving with credit than Fannie or Freddie.

Fannie Mae has various wait periods depending on loan to value:

  • 2 years with a minimum 20% down payment
  • 4 years with a  down payment of at least 10%
  • 7 years with standard down payment guidelines.

Freddie Mac has a 4 year waiting period.

Fannie Mae and Freddie Mac may consider “extenuating circumstances” which would allow a buyer to be considered eligible at 2 years.

The date of the short sale is based off of the date closed as disclosed on the final HUD-1 Settlement Statement from the closing of that sale. Potential home buyers should until three years have passed from that date before entering a purchase and sales agreement or a loan application.

Underwriters will scrutinize a borrowers credit history following a “derogatory” event, such as a short sale. Late payments on a credit report following a short sale and low credit scores will impact a borrowers odds of becoming “approved” with a lender. Lenders will want to see that the credit has been re-established with three to four credit lines in good standing with a two year history.

Get a Game Plan Started To Repair Your Credit As Soon As Possible!

If you’ve had a short sale in the past few years and are considering buying your next home, please contact me.  I can suggest a few lenders who would be glad to consult with you by reviewing your credit report. There could be items disclosed on your credit report that you may want to deal with or perhaps you need to work on re-establishing credit. Starting early will help make sure that once your waiting period is over, you’re in a better position to become pre-approved to buy your next home.

Please keep in mind that the information in this post are based on guidelines as of the date this article was published. Fannie Mae, Freddie Mac and FHA guidelines change often as do lender’s underwriting overlays.

How Can I Sell My Home if I Owe More Than it is Worth?

Are you in a situation where you must sell your home but you owe more than it is worth? Many homeowners have found themselves in this position. The good news is, you can sell.

Selling your home when you owe more than it is worth is possible with the participation of your mortgage holder.

In order to qualify you must be ready to provide the mortgage holder with your financial information. This would include the following:

  • Two years tax returns
  • Two months of your most recent bank statements
  • Two of your most recent pay stubs
  • A letter stating your hardship, I.e. why you cannot afford to sell your house and why you must move.
  • Sold comparables indicating what your home is currently worth (this is usually something a real estate broker like myself can do)
  • A listing contract
  • Copy of the MLS sheet showing your home has been on the market for sale
  • A contract with a buyer who knows you a planning to sell the home short

Since the mortgage company will not approve a short sale until you have a buyer, you will need to put the home on the market first and find a buyer. The good news here in the Denver market is due to an inventory shortage there are plenty of buyers who are willing to purchase your home.

The bad news is nothing about a short sale is short. The time it takes to process a short sale is uncertain. While many banks have improved their process, the is no guarantee you can:

  1. Get a short sale
  2. Or get acceptance of a short sale before the buyers get bored with waiting and move on

Many short sellers will see a series of buyers get in line to purchase their property only to have the 3rd or 4th buyer actually purchase it.

If you are thinking about selling your home and think you will need to short sell it, give me a call. I am not an attorney so I don’t give legal advice, but I can discuss with your your options so you can make an informed decision.

Short Sale vs. Foreclosure Not a Toss Up!

Short sales make up a huge percentage of the Denver real estate market.  Depending upon the area, we are seeing as much as 50% of the market consisting of short sale transactions.

For those of are unfamiliar with the term, “short sale” these are sales when the homeowner is selling the home for less than the mortgage value.  Many homeowners have found themselves in a position where their home value has dropped.  This fact plus the typical expenses associated with selling a home mean the only way a seller can sell his home and move on is to bring cash to the closing table.

Some buyers have the cash reserves to bring to the closing table, but many do not.  When this happens, the homeowner has to make a choice, do they sell as a short sale or just give the keys back to the bank and let the bank foreclose on the property.

To get a short sale, the homeowner needs to ask their lending institution and provide evidence of proof, a hardship letter, income statements and find a buyer who is willing to wait while the bank goes through the steps to approve the short sale.

This process is anything but short.  In fact the term short refers only to the amount the seller is “short” from being able to sell rather than the length of time to complete the short sale.

Many sellers are overwhelmed by the lengthy process and work involved.  These sellers may think the better option will be to just let the bank foreclose.  This may be true, but there are long-term benefits to doing a short sale over a foreclosure.

The KCM Blog offered a great example recently demonstrating examples:

Example A- Short Sale

Mr. Smith owns a home in which he has a mortgage balance of $220,000 and a current market value of $150,000. Mr. Smith has elected to short sell his property. His Realtor successfully obtains a buyer who puts forth an offer price of $120,000 (80% current market value according to Realty Trac Foreclosure Report 5/26/2011). After reviewing the buyers offer and the financial hardship information from Mr. Smith, Mr Smith’s bank agrees to accept the short payoff of $120,000 which would leave a deficiency balance of $100,000.

The transaction closes and is final.  Mr. Smith then pulls his credit report 30 days after the transaction takes place. On the report he notices that the mortgage trade line states “Mortgage debt was settled for less than full” and the balance on the mortgage is $0.  Mr. Smith is now on the road to financial recovery.

Example B- Foreclosure

For the ease of illustration we will use the same value and mortgage debt amounts as in Example A. However, Mr. Smith has elected to forgo the short sale process and let the bank foreclose on the property.  The bank holding his mortgage facilitates the proper legal procedures to foreclose on the property, all of which are costly.  Mr. Smith is notified and his property foreclosed upon of which is taken back by the bank to sell as an REO.

Six months later, the bank finally sells Mr. Smith’s home only they sell it for $90,000 (60% of current market value according to Realty Trac Foreclosure report dated 5/26/2011). Remember, as a short sale, the home would have sold for $120,000 keeping the deficiency to $100,000. In addition to the deficiency now being $130,000, the bank has elected to add on legal costs of $15,000 and asset preservation costs of another $5000 for a total deficiency liability of $150,000. Mr. Smith pulls his credit report 30 days after being notified that the bank has sold his property and of his liability.

On the report he notices that the mortgage trade line states “Foreclosure” and the balance is $150,000. Because of Mr Smith’s choice to choose foreclosure vs. short sale his road to financial recovery has taken a major detour. He not only has a foreclosure on his credit report but now has a much larger deficiency balance in which the bank, in most cases, will report on his credit report as a balance owed.

When considering the consequences of a short sale vs. a foreclosure, the decision should be clear.  Typically a foreclosure is going to cost more and stay on a credit report forever.

Looking for a solution to your questions regarding selling  your home?  Please feel free to call me.  I can offer insight, information and guidance.  I welcome your call.

Buying a Short Sale? Here’s what you should know…

Denver Short Sale Advice:

Homes selling as short sales in the metro Denver area are very common.  Most buyers aren’t aware of the difference between buying a short sale home and any other type home on the market.

By definition Short Sales are homes where the seller is upside-down with their mortgage.  The reason being upside-down could stem from many factors.  Typically it is because the home was purchased at the height of the real estate market when values were higher.  It could be the seller has refinanced and taken out equity in excess of the home’s value.  Whatever the reason the seller now needs to sell and is doing so by asking his mortgage company to participate in the sale by making up the difference in what is owed and what the home is now worth.

Why would a bank take less than what is owed?

The answer is a matter of economics. Short sales are a way a bank can benefit in the long run.  If the seller defaults on the loan the bank ends up with a foreclosure which is much more costly for the bank.

What should a buyer of a short sale be prepared for?

Short sales differ from “normal” sales in that as a buyer you negotiate with the seller of the property who in turn negotiates with his mortgage company.  The process is NOT a short one!

Buyers who need to be in a home by a specific date should not count on short sale contracts happening on time.

Are there benefits of purchasing a Short Sale?

In a word, yes.  But short sales are NOT for everyone.  To purchase a short sale one needs to be very flexible on a move in date.  It also helps to have a lot of patience and to work with people who have been trained and have experience negotiating with lenders.

In the end, if one has the time, patience and can move quickly when the deal is approved, you stand to purchase a home that is slightly under the value of others in the neighborhood.

Typically a short sale is a home that is still occupied by the owner.  It stands a better chance of being in good condition, as compared to a foreclosure that may have been vacant for many months.

Common Pitfalls of Short Sales

Untrained agents will price a short sale so low that it will attract offers.  The reason they do this is to get the transaction started.  For instance if the short sale mortgage is a VA, the transaction cannot be input into the system until there is an offer.  Getting an offer is the first step in getting started.

Sadly that price may not be the price the VA mortgage holder is willing to accept, which means the first buyer will either have to raise their agreed upon price or walk away from the transaction.

The seller and the listing agent set the price without a blessing from the bank (except in FHA Short Sales). Then when the bank comes back with an offer that is higher, the buyer feels as though they have been subjected to a “bait and switch” technique that is unethical and illegal.  This is the system we are required to work under. Without guidance from the bank, it’s hard to know in advance what they will be willing accept, so the whole transaction is worked in reverse.

Other pitfalls arise when the transaction is being handled by untrained agents or 3rd party companies.  I’m not saying all are bad, but as with any business there are good ones and not so good ones.

Personally I had a bad experience with a 3rd party company last year.  They came to me with the referral for a condo to sell which I did quickly.  The nightmare began when the 3rd party company stopped communicating with me.  It made me look bad to the selling agent who brought the buyer, I was rendered helpless!  Eventually the 3rd party company moved away in the night!  The telephone number was disconnected and I no longer had a contact.  No deal, just a pile of unless paperwork for a sale that was never consummated.

Since then I have taken matters into my own hands and now have organized a Short Sale Division in my company that takes care of all contact, communication and negotiation.  This way I take responsibility for making things happen. When something isn’t happening I know it’s not for me not trying!

Short Sales Buyers and Sellers are Protected in Colorado

Because of the nature of Short Sales, in Colorado we have a Short Sale Addendum that is part of the Colorado Contract.  It provides an escape for either party or any reason.  Gulp.  Yes, a buyer or seller can withdraw from the contract if the transaction is not working out for them.

A seller may opt to do this if the bank requires them to make up the deficiency for the sale.  In this case the seller may just tell the bank to take the property back.

For buyers who only have so much patience or time, they may decide they just can’t wait any longer.  When that happens they can opt out of the contract.

In Summary of Short Sales for Buyers

Be prepared to wait for a response.  Having an open mind and no particular deadline is the best way to go.

Enlist the aid of an experienced Colorado broker who has been to the Short Sale closing table before.  Communicate with them on a weekly basis, not daily.  If you don’t have the patience, don’t play the short sale game.

If you do, more power to you.  There are plenty of very nice homes available for you to seek out.