During the 2007-2008 financial crisis many New Haven homeowners were finding themselves in financial distress and unable to make their mortgage payments.
The decline experienced in home prices during that period was leaving them with little or no equity in homes that were worth less than what they currently owed on the property. We’ve seen a considerable turn around in the market since then with a rise in home appreciation and homeowners gaining equity again in their homes.
However there are still many homeowners facing the burden of a financial hardship. An alternative they are commonly unaware of when they need to sell but are either facing foreclosure or owe more than their home is worth is a short sale.
How Does A Short Sale Work in New Haven?
What is a short sale in CT?
A short sale is the sale of a home negotiated with a bank or mortgage company to accept less than what is owed on the property.
For example you may have a mortgage on your home of $250,000 but in today’s market find that the current market value is only $225,000 based on the recent sales in the neighborhood. The lender must agree to take less than what is currently owed for it to be a short sale.
A lender’s decision to do a short sale depends on a number of factors and criteria. While your home may fall into this category it is the lender who determines what they need to move forward with the short sale process.
Do You Qualify?
If you own a home in the New Haven Connecticut area, are in arrears on your mortgage payments or have found out that you owe more money to your lender than what a buyer is willing to pay for your home does not automatically mean you will be able to just sell your home for less than what is owed to your lender. It is going to be dependent on many factors.
The simplest way to get a short sale approved is to pass the hardship test. The more worse off your situation is financially, medically, etc. the less complicated it can be to get your shot sale approved. To qualify as a New Haven short sale, you must pass the Hardship Test and show just and provable reasons why you cannot keep your home any longer.
The Hardship Test– As you go through each of these questions take a look at your current situation to see if it will pass the hardship test.
- Did you lose your job since you bought the home?
- Have you incurred new large medical bills since you bought the home?
- Did your interest rates increase so much that it is now a hardship for you to pay your mortgage?
- Are you recently divorced or have to pay high child support payments?
- Have you had an illness, injury or bad accident and could not work?
- Have you been relocated to another city or state?
Naturally each situation is different. Each short sale request is looked at individually. Bottom line is you must be able to prove there is a hardship.
What is NOT a Hardship? If you took all of the equity out of your home and used your home as an ATM machine and are now in debt you are going to have a very tough time having that accepted as a hardship. Unless you plan to take part in the loss to some extent we would propose that you do what you have to do to be able to keep your home.
If you bought your home at the height of the market and it is now worth less than what you paid for it that is not a hardship or reason to sell your New Haven home as a short sale.However just the bare fact that you may be upside down in your mortgage is a circumstance that your lender may be wiling to take under consideration as long as you are agreeable and willing to contribute a promissory note or a one lump payment. It all comes down to this being a business decision.
The Asset Test –Are there assets that you can liquidate to bring to closing when you sell your home short of what is owed to your lender?
- Do you have money in CD’s and savings accounts?
- Do you have stocks and bonds?
- Do you have equity in other properties?
Your lender is not going to take all of the loss if you have any of these types of assets and not have you bring some money to the table at closing. Your lender will only accept the short sale if you contribute to the loss as well. You may however be able to negotiate the loss with your lender.
The Fraud Test– Did you commit fraud on your loan application for this property? If you were not truthful and lied about anything on your loan applications like:
- Where you worked?
- What your assets were?
- How much money you were making?
Lenders have access to your original loan application and any untruths or lies are going to be checked out by the lender. They will be matching up what you are saying now to what was said on your original application when you applied for the loan. If there are any big differences then you better have a very good explanation of why the change. An obvious reason would be a job loss.
If you committed fraud we will not list your home as a short sale because you will be expected to turn in a short sale package to send to the lender along with an offer and then you are exposing the fraud and that can have serious legal implications to you.
Put your House on the Market with a Real Estate Agent
Once your real agent agent has prepared a CMA (comparative market analysis) of what similar properties in the neighborhood are currently for sale and have recently sold it will help you and your REALTOR® determine your property’s market value.
This value is based upon what a buyer is willing to pay for it, not what you paid for the home or what you need to satisfy the mortgage. In the event you need to sell fast, you will need to price your property for less than all of the similar homes currently on the market.
What Documents Will The Lender Need?
An important component of a short sale package are the documents that your lender will require. One of most common question many sellers ask is what documents will I need to provide? While the paperwork required may vary from lender to lender the following is a typical list of documents you’ll need for your short sale package.
Your short sale package should be put together prior to listing your property with your agent. This will help your agent and your short sale attorney to process the short sale quickly and efficiently. This is an important step in the process because as soon as an offer is made on your property your short sale package must go along with that offer.
Don’t wait until you have an offer before you collect all the documents you need in your short sale package and risk losing a possible buyer by delaying the process.There is no getting around this process so take the time to prepare in advance.
Your first step in putting your short sale package together is to call your lender to tell them you are putting your house up for sale and to confirm who the lender is.
Make sure the note holder or servicer is in fact the lender you are calling. Don’t just take a chance by sending out your short sale package to your lender and then discover that the note was sold to another lender. Save yourself some valuable time by confirming your lender.
The second step requires that you write an authorization letter for your attorney giving him/her permission to speak on your behalf to discuss with you lender the status of your loan, details and short sale offers. In addition this letter must include your name, property address and loan number along with your attorney’s name and company. The letter must be dated since many lenders limit the time in which the authorization letter is valid and once that time has expired you will be required to write another authorization letter.
Listed below are the documents that may be required to present a complete financial package to your lender. It is better to be prepared with all of the documentation and send more than what is required than to submit and incomplete short sale package. With the amount of files lenders receive they may not even look at incomplete packages.
A completed and signed personal financial statement that either you or your short sale attorney has received from the lender. It is not uncommon for each lender to provide their own financial statement. It is not a difficult form to fill out and usually includes two columns; an asset column to write in all of your income and a debt column for all of your expenses.
- Two months most recent mortgage statements (all mortgages)
- Two months checking account statements (all borrowers if separate)
- Two months savings account statements (all borrowers if separate)
- Two months other accounts statements (all borrowers if separate)
- Last two paycheck stubs (all borrowers) or if you are self-employed a copy of your most recent profit and loss statement
- Copies of your last two years tax returns for all signers on the mortgage.
- Any lender correspondence you may have received
- Your authorization letter as defined above.
- Handwritten hardship letter describing your hardship – This letter should explain as persuasively as possible the compelling reasons why it is necessary to sell your property as a short sale and must be dated and signed.
- A signed copy of your listing agreement with your Realtor®; this will be provided by your agent.
After you put all of these documents together give them to your attorney who will then work on your short sale package to make all the necessary notations. Every document must have your loan number written on it.
Once you get an offer on your property you, your attorney and real estate agent will prepare the rest of the package and that includes:
A fully executed purchase and sale agreement and any other supporting documentation.
Written proof of the buyer’s pre-approval to purchase the property or evidence of cash available (a current bank statement).
An estimated HUD-1 settlement statement certified by your attorney listing all the fees as completely and accurately as possible. The lender will reference this closing statement in their approval of the expenses prior to accepting the buyer’s offer.
Along with your short sales package your agent should put together a sales package. This will include your current market value paperwork with supporting sales data showing the offer is reasonable.
Your agent can support this documentation with a short narrative about the market and market trends taking place in the immediate area and include materials such as newspaper articles and recent economic data. Documentation is better than conversation, This is one example where you can take all the bad news and work it in your favor.
Your Short Sale Attorney will Negotiate with the Bank
- Submit short sale package
- Submit offers
Lenders have a policy to follow. The policy is that once your attorney submits the short sale package the lender will then order an appraisal. In some cases the lender will wait until an offer has been received. The appraisal usually comes back in 7 to 10 days. The lender pays for the services of an appraiser to determine market value.
The value that the appraiser provides to the lender will be the amount they begin negotiation with. Once the appraisal is returned they work their formula and send a statement of what they will need to net.
During the time when the initial file has been received by the lender or any subsequent offers, the attorney’s office will follow up at least once a week with the negotiator; in some cases twice to check on the progress and status of the file until the short sale is approved.
Insider Tip: Quite often there are note holders that service loans they do not own. In these instances, the servicer oversees the care of all of the short sale paperwork and acts on behalf of the note holder.
Lender may also contract their short sales to companies that just do short sale processing and negotiations. These companies are getting paid upon the completion of each short sale and are quicker to respond and you can usually get right through to the negotiator on the file.
Then there are the lenders trying to do it all by themselves. They own and service the note and handle every detail of the short sale. These tend to be the most difficult lenders to get through to. They have no experience in doing short sales and are totally overloaded with files. You are working with a a salaried employee who has little to no knowledge of the real estate business. Many times a buyer is gone by the time these lenders do something with your short sale package.
Insider Tip: Even if you do lose the first buyer, you’ve accomplished three things. One, you’ve completed your short sale package and it is submitted to the bank. Two, you have demonstrated to the bank that you are making every effort to sell the property in many cases delaying a foreclosure. Three, you have discovered what the lender tolerances are for a deal they will accept. This will make it easier to negotiate offers and contracts with subsequent buyers
Enough cannot be said about how important it is to for the attorney to keep everyone aware of what is going on at each critical step of the negotiating process.
Why a Short Sale is Better than Foreclosure
In a foreclosure credit your credit score may be lowered from 250 to over 300 points It will remain as public record and can affect your score for many years. In the case of a short sale the hit to your credit score could be around 100 points if all other payments are being made. The effect of a short sale can be as brief ans 12 to 18 months to qualify for a new loan, however in the event of foreclosure this can take up to seven years.
A bank has the right to pursue a deficiency judgment in 100% of foreclosures (except in those states where there is no deficiency). It is possible in some successful short sales to convince the lender to give up the right to pursuit a deficiency judgment against a homeowner.
Disclaimer: This post is not intended to provide legal or tax advice. We recommend that you speak to your attorney and your CPA regarding specifics on deficiency judgments or the impact to your credit as these are “general” estimations)
This information is brought to you courtesy of Jamie Dumaine-Russell at RE/MAX Alliance. I am happy to be your neighbor and friend in real estate serving New Haven, East Haven, Branford and the Greater New Haven area including Hamden, North Branford, North Haven, Guilford, Madison, Milford, West Haven, and Wallingford.
Please remember me for all of your real estate needs and give me a call at 917-705-5675.