Fidelity National Title s Short Sale Guide. A Guide To Help You Navigate Through Short Sale Transaction

Transcription

1 Fidelity National Title s Short Sale Guide A Guide To Help You Navigate Through Short Sale Transaction

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3 Table of Contents 1. Finding the Right Partners 2. What is a Distressed Property? 3. What is a Foreclosure and What Does It Really Mean? 4. What is a Short Sale? 5. Foreclosure vs. Short Sale 6. Your Options 7. Credit Implications 8. How to Start Your Short Sale 9. Forms and Document Checklists 10. Resources 1

4 Document of Receipt o Finding the Right Partners o What is a Distressed Property? o What is a Foreclosure and What Does it Really Mean? o What is a Short Sale? o Foreclosure vs. Short Sale o Your Options o Credit Implications o How to start your Short Sale o Forms and Documents Checklist o Resources I hereby agree that I have received the booklet, A Guide To Help You Navigate Through Short Sale Transactions. It is my responsibility to read about the short sale process and to consult an attorney, an accountant and a knowledgeable real estate professional about the impact a short sale might have on my credit and/or the potential tax consequences that may occur from participating in a short sale transaction. Name Date Seller Name Date Seller 2

5 Finding the Right Partners

6 Fidelity National Title Agency With a proud history of more than 150 years, Fidelity National Title Agency is one of the nation s premier real estate service companies. As a member of Fidelity National Financial s family of companies, Fidelity National Title Agency is part of one of the largest title and escrow companies in the United States. We have the most substantial claims reserve in the industry. Fidelity National Title Agency is a national leader in title insurance and real estate services and we offer a complete line of title and escrow services for both residential and commercial transactions as well as a variety of other related services such as Account Servicing, Builder Development, Construction Disbursements, Foreclosure and Multi- County Title. Let Fidelity show you why customers rely on us for the experience, service and financial strength they need for real estate transactions. At Fidelity National Title Agency we are committed to providing you exceptional service. Offering you the price, service, and reliability you expect from a leader in the title insurance industry. Through our nationwide network of offices you re sure to find a Fidelity National Title Agency branch nearby for all of your real estate transactions. 4

7 Why Use Fidelity National Title for Your Short Sale Transaction? Fidelity National Title Agency is the most progressive title company in Arizona, helping agents in the short sale arena by providing education, lead generation, marketing resources and income earning opportunities. Fidelity National Title Agency maintains direct relationships with banks, asset managers, loan servicers, government programs and nationally recognized shortsale educators and programs. There is not another title company working more passionately to improve, support and create short sale commerce. Our Story $2.5 Billion Dollars in Reserve Industry attorneys on staff Over 150 years of combined Escrow and Title Experience Fidelity National Title Agency is the expert in distressed properties with over 100 CDPE certified employees Our Network Partnered with nationally recognized short sale educators and programs Over 15 Real Estate Mastermind Networking Groups Over $150 Billion Dollars in Closed Business Over 1200 Distressed Property Experts Our Experts Over 100 CDPE certified employees Escrow Officers, Sales and Management $1 Billion dollars in Short Sale volume Monthly escrow training on banking regulations, HUD s, GFE s and all Short Sale Lending Processes Over 250 events & classes annually hosted for our valued partners 5

8 Building Your Team 1. Realtor Partnering with the right real estate agent is crucial to your Success! It does matter which real estate agent you choose to sell your home. If you want great results, you will need to consider the agent s Education, Reputation and Experience. Education An educated agent focuses on the SOLUTION, not the PROBLEM. The ability to anticipate problems, resolve them and handle them quickly and professionally is the definition of a successful agent. Experience Exceptional negotiating skills, an ability to empathize with both buyers and sellers needs and turning a prospect into a buyer determines whether a property gets a SOLD contract or if the contract dies. Choosing an agent with short sale experience will be pivatal in achieving a successful transaction. Reputation When other agents enjoy working with the agent you choose, the cooperating agent will conversely want to show the agent s listings, and will want to negotiate on behalf of their buyer with an agent they respect. An agent s reputation makes it possible for your home to be shown more often to qualified buyers represented by other agents. 2. Attorney Questions to ask an Attorney ( look for a real estate based practice ): 1. What are the specific criteria for deficiency protection? 2. What are the lingering liabilities for a short sale? 3. Will you review and explain the potential consequences in my lender s short sale approval? 3. CPA Questions to ask a Tax Preparer: 1. How will a short sale or foreclosure affect my taxable income? 2. How does the IRS form 982 impact my tax consequences? 3. If I have an investment property, how will my tax consequences differ? 4. What is the criteria to qualify for exemption under Mortgage Debt Relief Act? 5. Can I do a short sale if I have an IRS lien? We cannot emphasize enough, the critical importance of consulting your real estate attorney, tax attorney or tax preparer BEFORE you enter into any short sale negotiations with your bank(s). Please know that we do not provide tax or legal advice. Therefore we insist that you obtain qualified counsel relating to implications of, and questions about, selling your property as a short sale. 6

9 What is a Distressed Property?

10 What is a Distressed Property? A property may be considered distressed if it meets the following criteria: Property on which the mortgage(s) total an amount higher than what the current market value is and an owner must sell Property that is, or will soon be, in some stage of the foreclosure process Property owned by a person who is experiencing a period of financial instability Property is in poor condition 1. Leave your property with dignity. Why a Short Sale? 2. Less of a hit to your credit than a foreclosure or bankruptcy. 3. You can buy a home within 2 years in most cases rather than 7 to 8 years. 4. Some banks will consider a Short Sale on a performing loan; you don t ever have to miss a payment, which is less risk for you down the road. 8

11 Financial Hardship Defined 3 Must Have Qualifications for a Short Sale While the misconceptions of what qualifies a seller for a short sale are many, the reality is actually very simple. The following is an explanation of the three major items that most lenders are looking for to determine if you will qualify. While a short sale is an involved process, this is an excellent place to begin. 1. HARDSHIP First and foremost a lender will want to see that you have a true and veriable financial hardship. A financial hardship is a verifiable issue that has or will cause you to miss payments or have financial difficulties. Financial hardships can be issues such as: Mortgage Payment Adjustment Job Loss Too Much Debt Business Failure A simple definition for financial hardship is: A material change between the time the mortgage was signed and today, which has affected your ability to pay. 2. MONTHLY DEFICIT Almost every lender will want to see that you cannot afford to pay your current mortgage. This is demonstrated on a financial worksheet that your agent will provide. Essentially this is a monthly profit and loss statement. While this may sound difficult, determining whether you have monthly shortfall or not is actully relatively easy. THE SHORTFALL EQUATION IS: Total Monthly Income Total Monthly Expense = Monthly Shortfall If you do not have a monthly shortfall but will have one soon due to a payment increase or pending layoff, etc. then you may still qualify for a short sale as long as this issue is verifiable. 3. INSOLVENCY In order to qualify for a short sale, you must not have the means to pay down your mortgage. This means that the mortgage company wants to see that you owe more than you have in cash (known as being insolvent). You do not however have to be completely broke this is a common misconception. The lender will want to see that over time you will not be able to pay your mortgage obligation. Having money in the bank for living expenses is common and will not disqualify you. 9

12 Notes

13 What is a Foreclosure and What Does It Really Mean?

14 What is a Foreclosure? Foreclosure is the process where a bank has the legal right to take possession of a property if the Trustor (owner) has failed to live up to the commitments as outlined in the deed of trust agreement. One missed payment can trigger the process. The term pre-foreclosure is often cofused with the term foreclosure. Technically a pre-foreclosure occurs when a homeowner is in loan default prior to notice of the pending trustee s sale. Pre-foreclosure is often used to describe a home that may end up being foreclosed upon or has entered into the beginning stages of foreclosure. Since foreclosure is a process and not a single event, the term pre -foreclosure is really a misnomer. Foreclosure in itself is pretty straightforward. The process doesn t begin until after the bank has failed to receive payment and has recorded a Notice of Trustee s Sale. In Arizona, the notice of an upcoming trustee sale must be sent by mail to all parties on the deed of trust, with the exception of the Trustee, within 5 business days from the recording of the Notice of Trustee s Sale with the county recorder. Arizona law allows the homeowner to reinstate (or cure the default) at any time prior to one day before the trustee sale. This is known as the Reinstatement Period. After a trustee s deed is recorded, the right to reinstatement is lost and the homeowner no longer owns the property. The entire process from the time the trustee sale notice is recorded to the time the property is actually sold at auction can be as quick as 91 days or less. The actual recording of Notice of Trustee Sale can be as soon as one missed payment and the passing of any cure period given in the loan documents without a cure by the owner. There is no way to know definitely how long the process will take. 11

15 What is a Short Sale?

16 Short Sale Defined A homeowner is short when a borrower owes an amount on his property that when combined with closing costs and commission is higher than current market value. A Short Sale occurs when: A negotiation is entered into with the homeowner s mortgage company or companies to accept less than the full balance of the loan at closing. A buyer closes on the property and the property is a short sale. A Short Sale is NOT: A way to avoid foreclosure or a get out of my mortgage free card. Banks will require that sellers have a valid financial hardship for why they can t pay their mortgage. A short sale is a phrase used to describe a sale in which the cost of the product or service being sold is actually more than the sales price of the product or service in question. Another common term to describe a short sale is being upside down. The term short sale has become synonymous with any real estate transaction where the lender is agreeing to accept an amount less than is owed. Short sale has other definitions in the financial sector such as when a financial instrument is sold before it is actually owned. In real estate, a short sale is a process in which an agreement is made between the bank and seller for the bank to accept a lesser amount than owed. The Typical Steps in the Process are as Follows: The seller demonstrates he is either in or about to experience a distressed state; most of the time the property is in foreclosure. If a homeowner is current on loan payments the lender may not necessarily approve a short sale. The loan is said to be performing. In those situations, there is often a request for the borrower to either make cash contribution or sign a promissory note as a condition of the approval. A comprehensive, documented package is assembled to prove to the bank that the seller can no longer make payments. Most of these documents are the same ones used to qualify for the loan. Basically, the lender is disqualifying the property owner. In addition to those financial documents, a hardship letter needs to be drafted explaining what caused the financial hardship. Also market trend reports and recent sales information help to determine why they should accept a short sale. 13

17 The property is put on the market for sale and one must show a concerted effort to sell the property at market value. There is misinformation where people believe the bank will accept any amount. This is not true. The bank will only accept market value whatever it may be. A detailed record of activity needs to be kept and submitted to the bank along with all the other documents. Once a buyer has been found, the purchase contract, along with all documents referenced, is submitted to the bank for review, verification and approval. Once approved, the sales process continues as a normal real estate transaction. Most homeowners don t know that the bank will pay almost all required fees and commissions to all parties on behalf of the seller. Essentially the homeowner does not pay for any of the costs of sale. An exception may occur when back dues or assessments are owed to a homeowners association, the homeowner is also asked to help pay for some of those fees. Also important to note, in no situation may the homeowner walk away with any proceeds from a short sale. In some cases you may negotiate with the bank for the homeowner to receive a small amount (usually no more than $1500) for moving expenses and help with rent. Besides the preceding measures, diligent communication and follow-up is a must in order to successfully facilitate, process and close a short sale. The entire procedure can take anywhere from one to six months, from purchase contract agreement to completion. What Events Can Qualify You as a Short Sale Candidate? Loss of a job Job Relocation High medical expences due to disability, injury or illness in family Marital Change Unable to afford the loan from the beginning Mortgage adjustment/unforeseen increase in living expenses Business Failure Military Unexpected major repairs needed Overextended Credit Changing Economy 14

18 Short Sale Myths MYTH #1: You must be behind on your mortgage to qualify for a short sale. Lenders look for three things: a verifiable hardship, such as a job loss, pay cut, job transfer, divorce or serious illness; a monthly cash-flow shortfall or pending shortfall and insolvency; or lack of liquid assets that would allow you to pay down your mortgage. Distressed homeowners often wait too long and should consult with a qualified agent before burning through savings or trying such desperate measures as using a credit card to cover mortgage payments. MYTH #2: Short Sales rarely get approved. Short sales take patience, requiring anywhere from 30 to 120 days for lender approval; lenders now understand that short sales make more financial sense than foreclosures. MYTH #3: Banks would rather foreclose than approve a short sale. Banks typically lose 35 percent more on a foreclosure than a short sale. They also avoid the hassle and liability of vacant properties if they can approve a sale before foreclosure. MYTH #4 : There s no time to negotiate a short sale. It s always worth a try. Don t wait too long to reach out for help. An increasing number of lenders want to see an offer submitted with all required documentation at least 30 days before trustee sale. MYTH # 5: It s fine to make simultaneous offers on short-sale properties. While it may be legal, buyers making undisclosed multiple offers is deemed unethical at best. MYTH # 6: A short sale is a fire sale. Not just an offer will do. NOT SO! Lenders expect offers that reflect true market, mirror traditional sales with counter offers and reflect dialogue between buyer and sellery. MYTH #7: Anyone can help navigate a short sale. Homeowners need to research and look for realtors with special training and skills, a strong moral compass and a high success ratio. MYTH #8: A short sale is not worth the effort. For buyers, short sale properties are often in better shape than foreclosures and are priced to sell quickly and worth the wait. Knowing the seller is living in and maintaining the home has huge value. MYTH #9: Short sales are as financially damaging as foreclosures. Unlike foreclosures, short sales are far less damaging on a person s credit history and don t present problems with employment or security clearances. Homeowners who undergo a foreclosure are ineligible for a Fannie Mae-backed mortgage for five years, while a homeowner who closes a short sale is eligible for a Fannie Mae- backed mortgage after two to three years. MYTH #10 : Short sale negotiations are adversarial. Successful short sales are more a matter of communication and organization having all the paperwork in order and knowing exactly who needs what and when, will help banks approve a sale. Creating a team approach with lenders leads to a more successful outcome. 15

19 Foreclosure vs. Short Sale

20 Fannie Mae Foreclosure vs. Short Sale Loan Foreclosure Successful Short Sale Future Loans - Primary Residences A homeowner who loses a home to Foreclosure is ineligible for a Fannie Mae mortgage for a period of 5 y ears. A homeowner who successfully negotiates and closes a short sale will be eligible for a Fannie Mae backed mortgage after 2 years. FHA Loan - Late FHA Loan - Current VA Loan - Late VA Loan - Current Conventional Loan - Late* Conventional Loan - Current* A homeowner who loses a home to Foreclosure is ineligible for a Fannie Mae mortgage for a period of 5 y ears. A homeowner who loses a home to Foreclosure is ineligible for a Fannie Mae mortgage for a period of 5 y ears. A homeowner who loses a home to Foreclosure is ineligible for a Fannie Mae mortgage for a period of 5 y ears. A homeowner who loses a home to Foreclosure is ineligible for a Fannie Mae mortgage for a period of 5 y ears. A homeowner who loses a home to Foreclosure is ineligible for a Fannie Mae mortgage for a period of 5 y ears. On any future 1003 application, a prospective borrower will have to answer YES to question C in section VIII of the standard 1003 that asks have you had property foreclosed upon or given title or deed in lieu thereof in the last 7 years? This will affect future rates. 3 years form the date the FHA insurance claim is paid to the lender - not the date of the short sale closing. No Wait - borrower must be current on all obligations, including installment debt. 3 Years 3 Years 3 Years No Wait - borrower must be current on all obligations, including installment debt. Fannie Mae Loan Future Loans - Non-Primary Residences An investor who allows a property to go to Foreclosure is ineligible for a Fannie Mae backed investment mortgage for a period of 7 years. An investor who successfully negotiates and closes a short sale will be eligible for a Fannie Mae backed investment mortgage after only 2 years. Conventional Loan - Late* Conventional Loan - Current* On any future 1003 application, a prospective borrower will have to answer YES to question C in section VIII of the standard 1003 that asks have you had property foreclosed upon or given title or deed in lieu thereof in the last 7 years? This will affect future rates. On any future 1003 application, a prospective borrower will have to answer YES to question C in section VIII of the standard 1003 that asks have you had property foreclosed upon or given title or deed in lieu thereof in the last 7 years? This will affect future rates. 7 Years 5 Years 17

21 Credit Score Foreclosure vs. Short Sale Issue Foreclosure Successful Short Sale Future Loans - Primary Residences Score may be lowered anywhere from 250 to over 300 points. Typically it will affect score for over 3 years. Only late payments on mortgage will show, and after sale, mortgage is normally reported as paid as agreed, paid as negotiated, or settled. This can lower the score as little as 50 points if all other payments are being made. A short sale s effect can be as brief as 12 to 18 months. Credit History Security Clearances Current Employ ment Future Employ ment Foreclosure will remain as a public record on a person s credit history for 10 years or more. Foreclosure is the most challenging issue against a security clearance outside of a conviction of a serious misdemeanor or felony. If a client has a foreclosure and is a police officer, in the military, in the CIA, Security, or any other postion that requires a security clearance, in almost all cases clearance will be revoked and position will be terminated. Employers have the right and are actively checking the credit regularly of all employees who are in sensitive postions. A foreclosure in many cased is grounds for immediate reassignment or termination. Many employers are requiring credit checks on all job applicants. A foreclosure is on of the most detrimental credit items an applicant can have and in most cases will challenge employment. A Short Sale is not reported on a persons credit history. There is no specific reporting item for short sale. In most cases a loan is typically reported paid in full, settled or paid as negotiated. On it s own, a short sale does not challenge most security clearances. A short sale is not reported on a credit report and is therefore not a challenge to employment. A short sale is not reported on a credit report and is therefore not a challenge to employment. Deficiency Judgment Deficiency Judgment (Amount) In 100% of foreclosures (except in those states where there is no deficiency) the bank has the right to pursue a deficiency judgement. In a foreclosure the home will have to go through an REO process if it does not sell at auction. In most cases this will result in a lower sales price and longertime to sale in a declining market. This will rresult in a higher possible defidiency judgment. In some succesful short sales it is possible to convince the lender to give up the right to pursuit a defidiency judgment against the homeowner. In a properly managed short sale the home is sold at a price that should be close to market value and in almost all cases will be better than an REO sale resulting in a lower deficiency. 1 Fannie Mae Announcement 08-16: Michael A Quinn, Senior Vice President, Single-Family Risk Officer 2 Fannie Mae Announcement 08-16: Michael A Quinn, Senior Vice President, Singe-Family Risk Officer 3 Short Sales are currently not explicitly reported on a credit report. 4 Short Sales are currently explicitly reported on a credit report. 5 Short Sales are current not explicitly reported on a credit report. *Availability varies by lender. **Does not offer second-property loans Sources: Mortgagee Letter 09-52, CHAPTER 4.C.2 effective date Dec

22 Your Options

23 1. Bankruptcy OPTIONS A bankruptcy may stop a Foreclosure and allow a homeowner to reconcile his debt and keep his property. The reality, however, is that most of the time this is not the case and the bankruptcy only stalls the foreclosure. If the homeowner is not able to make the payments after bankruptcy the house will foreclose anyway. Another drawback is that it is very difficult for the homeowner to sell his property once he enters the process. It makes it near impossible to negotiate a short sale. The only possibility is if the trustee for the bankruptcy agrees to release the property from the proceedings and will allow it to be sold. 2. Deed in Lieu of Foreclosure Essentially, the homeowner gives the deed back to the bank. The idea being, this may prevent the bank from having to go through a lengthy foreclosure process, and in exchange they will sometimes forego their rights to add deficiency judgments. The mortgage company agrees to take the deed back in exchange for the property and they typically have no further recourse. This solution only works in cases where there is one mortgage and there are no liens on the property. If an owner has equity this is not a good option since they give up any right to the property and any equity. 3. Foreclosure (As defined on previously) 4. Loan Modification In some cases where homeowners do have the means to afford their mortgage payments or very close to their mortgage payments, their mortgage company may qualify them for a loan modification. A loan modification is very similar to a lower interest refinance where the lender lowers the interest rate on the existing loan in order to lower the payments. The homeowner will have to qualify for a modification by sending proof of income and expenses. If this option is available, it is an excellent option for homeowners to keep their properties. 5. Short Sale When a homeowner (borrower) owes an amount on his property that when combined with closing costs and commissions is higher than current market value. *Definitions brought to you by The Certified Distressed Property Institute of Field Manual 20

24 Eight Steps to Finding Your Best Option When Facing Foreclosure 1. How do I find out if I qualify for a Loan Modification? Go to Follow the instructions to pre- qualify for a loan modification. You will be re-directed to your lender s website where you can complete the necessary forms. THE BANKS WANT TO WORK WITH YOU IN THE LOAN MODIFICATION PROCESS. It is not necessary or recommended that you pay someone to do this for you. 2. What are my options if loan modification doesn t work? Make sure that your lender agrees that if it looks like they are going to decline you, your letter of declination is issued at least 60 days before a scheduled foreclosure so you have time to try a short sale or request a deed in lieu of foreclosure, if you are eligible. Your lender will be helpful in exploring these issues. 3. Is expensive research really necessary if I just want to sell and move on with my life? Any major decision needs to be taken seriously. If you were faced with a major illness or injury, you would do your homework, look at your options, get referrals from trusted resources and speak with several experts. 4. There are programs that I have heard from friends that make this process very simple and involve investor option contracts and other ideas that sound too good to be true? Avoid anything that is questionable, especially paying large deposits upfront. If it sounds too good to be true, then it probably is. Other than legal or tax retainers, there should not be any cost to you for loan modifications or short sale. 5. My friends that have gone through this are giving me all kinds of tax consequence advice. Should I trust that? Contacting a skilled tax preparer or tax attorney is the only one that should advise you on the tax consequences of short sale and foreclosure. This is one time that well - meaning friends or the neighborhood expert can do more harm than good. Everyone s scenario is uniquely different and the specialist that is current with the laws, is the best equipped to assess your situation. Uncle Bob s experience is just that-uncle Bob s experience. 21

25 6. When should I discuss bankruptcy options? I really don t want to go down that path, but timing, I hear, is critical. Requirements have tightened in recent years and consulting an attorney that knows bankruptcy law and can put your case scenario through a means test is very important to your decision making. 7. I want to do a short sale, so where do I start in the selection process? My neighbor is a real estate agent and knows the area, but I really trust my cousin who lives across town. What should I do? Finding the right realtor, with the necessary training, skill- sets and successful experience working with lenders, along with the right moral compass, that you feel is your trusted advisor, is key to the success of a short sale. 8. I haven t missed a payment, but I am borrowing money to make my monthly payment. Am I starting this process too early? Lenders are contacting homeowners as soon as they miss one payment to help them with their options. Lenders have fewer options the longer you take to reach out for help. It is never too early to ask for help. 22

26 What To Typically Expect If Foreclosure Takes Place It is entirely possible that for any number of reasons, your loan modification, or short sale may not be successful, and try as you may have, ultimately you will face foreclosure. So, what does that mean? 1. What is the process for the sale itself? A trustee sale is conducted with a minimum opening bid which can be altered even up to an hour before the sale, which is known as a drop bid, and considered acceptable. It can literally take place on the courthouse steps or in any number of trustee offices depending upon who is the assigned trustee (the one conducting the sale and completing all the legal paperwork prior to and immediately after the sale). Anyone wishing to bid on the property must present a cashier s check for $10,000 and be prepared to close with funds within twenty- four hours. 70% of the time, the properties are not sold and revert back to the servicer or investor after the sale. 2. What does the sale mean to me or to my renter? In either event, the previous owner is now deemed a tenant if the property is owneroccupied. If the property were an investment and the property has a lessee in place, that contract for the current lease must be presented to either a representative of the bank, typically the REO/Bank owned Real Estate agent or the new owner of the property. 3. How much time do I have to move? Do I need to be out immediately? Within several days after the sale, the bank representative or the new owner may literally come and knock on the door, and if no one is home, will leave a notification to contact them. These are the proverbial messengers, who no more like this part of their job as you like having them come and remind you that you have to move. Should you choose to cooperate and request a reasonable amount of time to vacate, typically 30 days, leaving the property in the same condition that you as a buyer would want to receive it, you should be able to negotiate compensation for your transition into your next home. Known as cash for keys you may receive a payout on the average of $1000, providing that you leave the home completely absent of any personal property inside or out. Damage to the property or removal of fixtures is subject to prosecution as mortgage fraud. Although this is the commonplace procedure that 23

27 occurs, it is within the lender s rights to immediately file for eviction proceedings with an initial notice to vacate in seven days. Although the entire evictions process may take longer than thirty days, it is wise to make your move as quickly as possible to avoid any attempts by the lender to recover court costs from you for any vacating delays. Vacating prior to the actual foreclosure date, however, will preclude you from receiving any moving expenses should the lender pursue the cash for keys procedure. 4. Why should I cooperate with the bank, they didn t do much to help me during this crisis? Should you choose to not cooperate, you lose your opportunity to get financial assistance with your moving expenses and a sheriff s eviction takes place; not the most dignified exit to your home and neighborhood. 5. What will happen to my open credit lines? You will want to contact each of your creditors for those answers or consider seeking some credit repair strategies from a reputable credit repair counselor. Always get three referrals if possible and check with their references regarding their effectiveness. 6. If I have a loan that is subject to pursuit of deficiency, when can I expect to hear from the bank? The lien holder has 90 days to file a complaint seeking a judgment against you for any unpaid balances. It is important that when you receive such a notice in the mail or on your door, you need to respond within the time limit given, usually thirty days. Your response prevents the lien holder from getting a default judgment against you for that unpaid balance, and sometimes your response is enough to make a creditor cease any further action against you, depending upon the amount of recovery they are seeking weighted against how much it will cost them to continue with the litigation. Don t ignore any mail on these issues. Your lack of attention to these issues could make matters worse. 7. Will I escape any tax consequences now that the foreclosure is completed? A1099 IRS form for forgiven debt is required by Federal law. The lender will file that with the IRS, in the year following the final sale either at trustee sale or to the end buyers as an REO property. That forgiven debt is the amount of the loss that lender experienced after all proceeds and costs of sale are tallied. It is important that your lender maintains your current address, as you are responsible for dealing with this 1099, whether you receive it or not. Now is the time for you to get back in touch with your tax preparer and seek their advice as you move forward. 8. Are the consequences different with a deed in lieu of foreclosure? They may be, and they are available in very specific situations, so it is wise to check with your lender before a foreclosure occurs, no later than 45 days before the schedule trustee sale to see 24

28 Credit Implications

29 Credit Implications Now more and more homeowners are in a quandary. They are not behind on their mortgage nor in any stage of foreclosure, yet they have to sell their home which has dropped in value and would end up being a short sale. Although some banks are accepting short sales that are not in default, it is hit or miss. An impending foreclosure really motivates the bank. The thought of yet another non-performing asset does not bode well with the balance sheet so the bank really doesn t want to become a homeowner. So as a homeowner in this situation what are your options? Well for one, keep paying as agreed and wait for the market to turn around. If that isn t an option because of an up-coming ARM reset, forced relocation, or other outside circumstance out of your control, then you have some tough choices to make. You have to look at your monthly expenses and arrange them according to priority and see if paying your mortgage makes logical and economical sense. For example, if your refrigerator is empty and you have ¼ tank of gas, and your choice is to pay your mortgage or eat and be able to get to work, only you can make that decision. We would never advise anyone to miss loan payments for the sole purpose of gaining leverage for negotiating a short sale. If you can t make your payments, you need to seek help. Voluntarily stopping making payments as a strategy for some other reason is not advisable. Owners of investment property may have a tougher time, but it really depends on the individual s finances. If the investor has a portfolio of investment properties and wants to short sell one because it is under performing, good luck. On the other hand, the small time investor with one or two properties may have a fighting chance if you present a good case, demonstrating insolvency. See IRS Form 982 for filing purposes and consult a trusted accountant. As with any financial transaction there are certain credit score implications that come attached. When one gets involved in homeownership or investment property, you hope to build your credit score in the hopes of moving on to bigger and better things in the future. The caveat is if something goes amiss the opposite effect is the result. 2 Years vs. 10 Years Your credit will be marred whether you decide to let the bank foreclose or the property is sold via a short sale. However, you can begin effective credit rating recovery 2 years following a short sale, from the date of satisfaction reporting to credit bureaus, 3 years for an FHA loan. A foreclosure will adversely affect your credit score for up to 5-10 years. Often times, after a foreclosure, the homeowner has to file for bankruptcy, the proverbial double whammy. Lifetime-YES There are only two things that follow you for the rest of your life, a felony conviction and a foreclosure. True, after 10 years it may drop off your credit report, however almost every lending institution has the magic question Have you ever had a foreclosure? If you ve had one you must answer Yes, answering No could be considered fraud and that would open you up to a hose of other legal problems. Credit Report Monitoring Unlike a foreclosure, or a bankruptcy there is no credit reporting designation for short sale. Lenders may report that the loan is satisfied as agreed, or for less than the full amount or in some rare instances as satisfied in full. Foreclosure Deficiency After a foreclosure the bank will sell the property to recoup their losses. The proceeds of the sale will be subtracted from what was owed plus ALL expenses (Holding costs, attorney s fees, repair costs, etc.). If the bank is unable to recoup all their losses, and the property does not meet the ARS33-814g criteria as outlined on page nine, they have the right to file suit against the former owner for the shortfall, in the form of a deficiency judgment. So just because they took back the property, all is not said and done. The foreclosure can haunt you for years to come. For a free confidential consultation or for more information on foreclosures or short sales, contact your Fidelity National Title Representative today. More banks are accepting short sales that are not in default. You should always seek the advice of professionals. A real estate attorney, tax accountant and REALTOR team is irreplaceable 26

30 Frequently Asked Questions We have already received a foreclosure Notice of Sale. Is it too late to do a short sale? No! In some cases a foreclosure can be postponed. Do lenders approve all short sales? No, approval depends on a variety of factors. I have more than one mortgage on my property. Is that a problem? Not necessarily. What if I have 2 mortgages held by different lenders? It is more beneficial when you have 2 loans with the same lender, as there is no need to negotiate with another lender. When the two loans are with different lenders, the process is a little longer, but the second lender is the one who has more to lose if they don t reach a settlement. This is because if the property goes to foreclosure, the first loan is the first one to be paid and the second usually nets nothing. Do I have to be past due to my mortgage to be able to get the benefit of a short sale? No, in the current market conditions, it is possible that a bank would accept a short sale, even when the borrower is current. What is a BPO? A Broker Price Opinion (BPO) is when the lender contacts their own Broker/Real Estate Agency and pays them to render an opinion of value based upon the condition and time on the market. What is a hardship letter? This is a letter that explains the borrower s current financial circumstances and how they may have changed from when the house was purchased and why the mortgage payments can no longer be made. How long does it take to complete a short sale? The time frame for the lender to receive and evaluate the short sale proposal could be up to 8 weeks or more from the time the offer and Short Sale Package are received. Buyers and Sellers need to realize that this can be a lengthy process. This is why it is very important to work with a Short Sale Specialist who knows how to manage the transaction. The buyer may get cold feet at the end, and the transaction may fall through. Why does the bank accept less than they are due? They lose less on a short sale. On average, lenders lose 35% less on a short sale versus a full foreclosure. How is my credit affected? Everyone is different since everyone maintains different levels of debt. Most people can recover from a short sale in months provided you maintain your other obligations. How long can we stay in our home? A short sale could take as long as 3-6 months. Many people stay in their homes until the short sale is complete. How much is my house worth? Contact Fidelity National Title Today at info-fntarizona@fnf.com for more information about determining your homes value. 27

31 Arizona Association of Realtors Short Sale Forms

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