SHORT SALE VS. FORECLOSURE
Here are some of the advantages of short sale versus foreclosure in Washington State. Please note that Washington State has different rules than other states in the foreclosure process, so what goes on here may not apply elsewhere.
If you have only a first loan (deed of trust) then a foreclosure will occur and erase any debt you have when the property is foreclosed. But if you have a 2nd loan (deed of trust) then with a foreclosure your first debt will be forgiven but your loan in second position will not be, and the lender can and usually will come after you for the difference between what they received at the foreclosure sale and what you owe...and usually there is no money given to the 2nd at the sale, so you might owe the whole amount, which they can collect from you through a variety of methods including garnishment of wages.
If you sell your home via short sale, then you can negotiate with the lenders (both the first and the 2nd) to erase the debt you owe them. This is not guaranteed, but usually will happen if done properly. In this way the first and the second will negotiate between themselves and split the proceeds.
If you lose your home at a foreclosure sale, you will not owe any money to the IRS. But if you sell short, the difference between what you owe and what the lenders receive may be considered income by the IRS.
Your credit score will be hurt far less with a short sale than with a foreclosure, and a credit score will be used for a variety of reasons such as insurance rates and even qualifying for rentals.
A foreclosure on your record will hurt your ability to buy another home for 7 years, while a short sale will hurt your ability to purchase another home for 2 years.
Sometimes when your home is foreclosed upon an agent will be allowed to offer you some money in a process known as "cash for keys", which lenders (banks) use to insure that whomever is in the home will leave quickly without destroying the home and leaving the place a mess. I personally have been authorized to give one thousand bucks to a fellow several years ago in a cash for keys arrangement. I cannot guarantee that if your home is foreclosed upon you will be offered cash for keys, but it might happen.
SELLING A SHORT SALE?
Are you considering selling your Bellingham, WA or Whatcom County, WA home as a short sale? When selling a short sale you must be prepared to provide your mortgagor (your lender) with a list of documents necessary for the process to be considered. Typically this includes:
1. Hardship Letter (Why you cannot make the payments)
2. Listing agreement with your real estate broker
3. Bank statements (last 90 days)
4. Recent wage or earning statements
5. Letter of authorization (To allow your real estate broker access to necessary
6. (2) Years most recent tax returns
7. Debt/Asset financial statement
Once you receive an offer that you accept, you'll typically need to send in:
1. The entire purchase and sale agreement
2. A HUD-1 statement, showing net proceeds to the lender
In short, your job is to convince your lender that you can no longer make your loan payments and that the only option left is to sell your home, whereas the proceeds your sale will generate will simply not cover your debt that is secured by your home's worth. Your lender's job is to try to recoup as much as what is owed as possible.
If you have more than one lender, perhaps a line of credit (heloc) or a second or even a third deed of trust or mortgage on your home, then the process becomes more difficult indeed. These additional lenders will see even less of a percentage of what they lent you come back to them. They may wonder..."why is the first mortgage getting 85% of what is owed and the second only getting 20% of what is owed?" These lenders will also need to be contacted. They will need to be reconciled with the process.
If you are behind on payments, your lender(s) may have already sent someone out to value your property, through either a Broker's Price Opinion (BPO) or through an appraisal. This value will need to jive somewhat with what you are receiving (sales price) on the open market...
An example; You borrowed 200k 4 yrs ago on your home. Today your principle is 197k, but with penalties, late fees, missed payments, etc, you owe around 205k. Your home might be worth 190k. After factoring in the price to sell, taxes, etc, the lender will receive less than what is owed. The lender has had 2 BPO's on the property, with an average value given as 190k. After listing your home, an offer comes in at 175k. The lender will probably not accept this lower amount. They might counter this offer. Maybe an arrived upon price will be 185k. Lender approves. Buyer approves. Seller approves. We then can move on to closing. Game over...for part one.
The short sale process is very complex. Who pays for repairs? Escrow? Title? Commissions? Please contact me for more info, I'd be glad to help!
BUYING A SHORT SALE?
When buying a Bellingham, WA or Whatcom County, WA short sale, this can be a very rewarding avenue towards finding great values in our local real estate market. However, be prepared to be frustrated with the process. This laborious process can and usually does take months from start to finish, and those not prepared for this in advance oftentimes lack the staying power to see the finality of the process...The closed sale!
In addition to the "normal" real estate sales process, a third party (the lender) must sign off on a sale that will net less than what the mortgagor (borrower) owes. Oftentimes this takes a very long (up to 6 months) time, primarily due to a lack of the lenders personnel resources. And there is very little the buyer or I, the realty agent, can do about it!
Contact me at (360) 319-1938 for more information, as the topic is a huge one!