Posted on Aug 21, 2010 by Paul Kaplan
More and more people these days are facing the harsh reality that they are upside down on what they owe on their homes. A short sale for some, is a viable option that helps them with their situation and doesn’t damage their credit quite as bad as a foreclosure. (See attached) Here are a few tips from About.com regarding writing the “Hardship Letter” which is a requirement when submitting your short sale package to the bank for approval.*
Tips for Putting Your Hardship Into Words
By Elizabeth Weintraub, About.com Guide
Before a bank will approve a short sale or a loan modification, the bank will ask to see your hardship letter. What is a hardship letter and how do you write it? Don’t panic. If you can write a letter to your mom, you can write a hardship letter.
What Constitutes a Hardship?
Lots of people think a hardship is based solely on financial matters, and that’s not necessarily true. Just about anything that makes it difficult for you to continue making a mortgage payment might qualify you for a hardship.The one thing that a bank does not want to see is a homeowner who wants to walk away simply because the home is no longer worth the amount the owner paid for it. While being upside-down is one of the qualifications for a short sale, a bank is under no obligation to grant the short sale solely on that basis.
Think back to when you took out the loan and what your life was like then. Has it changed since then? If your situation is unchanged, the bank might say you can afford to stay in your home at your present payment level. If your situation has changed, here are some examples that may qualify for a hardship:
- Unemployment
- Reduced income (furloughs, new job, partner’s loss of job, pay cut)
- Illness or medical emergency
- Job transfer (voluntary or involuntary)
- Divorce, separation or marital difficulties
- Exotic mortgage terms (an adjustable-rate loan)
- Military service
- Death in the family
- Incarceration
- Increased expenses and excessive debt
- Unexpected repairs or home maintenance
The Basics Behind a Hardship Letter
When I initially interview sellers who want to sell on a short sale in Sacramento, I ask the sellers to describe their hardship. Agents who do a lot of short sales can sometimes become a little insensitive because we are focused on the statistics. For example, when a seller says she is getting divorced, it’s possible that my eyes might light up and I’ll blurt out, “That’s fabulous.” But then I realize how that comes across, which is not at all in the way I intended it. It’s good to be getting a divorce and trying to do a short sale or loan mod because relationship difficulties generally meet bank guidelines. It’s not fabulous that the parties are splitting up.In your hardship letter, you want to explain 3 things:
- How you got into your present situation
- What you have done to try to get out this situation
- Why this situation is permanent because nothing you can do will change it
Hardship Letter Mistakes
Writing a hardship letter is not a lot of fun. In fact, it can be downright depressing. Many people have no idea how bad their lives have become until they start to write a hardship letter. Sometimes, seeing all those awful things in black and white is startling. Don’t be surprised if you cry. But don’t take a 90-degree turn and talk about how your life will improve.
Your life won’t improve. In fact, it will only get worse. If there is hope on the horizon, if there is a chance for recovery, for you to become whole again, trust me, the bank will not hesitate to grab a knife and plunge it into your heart. If the bank senses vulnerability, responsibility or anything else that shows the bank you might have the financial means at some point in the future to repay part of that debt, the bank will jump on it like hot fudge on a sundae. If the bank sees disposable income, it might ask for a seller contribution to grant a short sale or deny your loan modification.
Don’t share your hopes and dreams for the future with the bank. It’s none of the bank’s business. The bank doesn’t care about you or protecting your precious credit rating. In fact, if you’re on the brink of bankruptcy or headed to foreclosure, you’ve got a story the bank should hear. So, tell it. Be truthful.
What Else Goes Into a Hardship Letter?
You should put everything but the kitchen sink into a hardship letter and then, just for good measure, throw the sink in, too. Use numbers and percentages to explain loss of income or negative cash flow. Instead of saying you’re borrowing money to make the mortgage payments, disclose the dollar amount and source of that debt such as “I’ve borrowed $10,000 against my VISA card to make my payments over the past 6 months, and I have tapped my cards to the max.”
If your car needs maintenance or repair, if the cat has cancer and your vet bills are mounting, if your kids are starving to death on peanut butter sandwiches, and your fingernails are worn to the quick scrubbing other people’s floors for pennies a day because your mom has moved in with your family and needs round-the-clock medical care, put it into your hardship letter. Paint the worst picture that you honestly can and keep going downhill with it.
Use simple words geared toward the education of a 6th grader. If you don’t feel sorry for yourself by the time you have finished, maybe you didn’t do the job right.
*Always consult your appropriate legal and financial professionals when considering a short sale or foreclosure, for advice. As a realtor we cannot give you financial or legal advice.
Tags: Foreclosures, Short Sales
Posted on Dec 2, 2009 by Paul Kaplan
Originally posted on ActiveRain.com Via Boca Raton Florida Homes for Sale David Serle (RE/MAX Services):
Short Sales are seen more often these days in the real estate market. Its important for buyers and sellers to understand exactly what is involved with short sales. Here is some basic information to help answer some questions…..
What is a Short Sale?
A short sale is the process by which a homeowner can sell a house for less money than he actually owes on the mortgage(s). This is done by the buyer or investor providing proper documentation to the mortgage lenders to convince them to reduce the mortgage balance to allow the sale. The mortgage lender (or bank) actually takes a loss (or write-off) on the mortgage because the value of the home has fallen below the mortgage balance AND the homeowner is in a poor financial condition that will not allow him to continue to pay on time.
If the bank approves the discount on the mortgage, the home can be sold for a lower price without the seller having to come up with cash to cover the shortfall, and the mortgage is satisfied and the foreclosure process stops.
Note: Very few short sales are actually accepted by banks. Additionally, we strongly encourage sellers to consult their tax advisors regarding tax implications that may result from a short sale.
What type of situation is the short sale best for?
Short sales are done on properties in which the owner is “upside down”. This means they typically have negative equity or no equity in the home. In other words, the total balance owed on the mortgages is equal to or greater than the price at which the house can be sold. This situation unfortunately, has increased due to the risky loans within the last few years including 100% mortgages (no money down) as well as the recent decline in prices. This is particularly prevalent in the South Florida area, which has a large glut of homes for sale.
In addition, the homeowner must have some type of financial hardship that is preventing him from paying the mortgage. This is commonly job loss, medical bills, disability, or some other hardship.
How does a homeowner benefit from a short sale?
First and foremost, it relieves the stress of being in foreclosure or the worry about possibly going into foreclosure and being hounded by the mortgage lender; and it allows homeowners to get rid of their big mortgage payment and move on with their lives. If you have stopped making the payments on your mortgage, a short sale allows you to stop the foreclosure and get a fresh start. They are tremendously thankful to just relieve the burden that their home and mortgage have become.
A short sale also prevents additional damage to your credit. Having some late payments and a foreclosure filed has already done damage to your credit. However, a completed foreclosure will do much more damage and lower your credit score tremendously. Obviously, if you have to declare bankruptcy, that is a huge black mark on your credit. A short sale results in the mortgage actually being paid off, which reflects positively compared to a foreclosure.
Why would a bank or mortgage lender want to do a short sale?
A common saying is that banks are in the business of lending money and do not want to own real estate. When a bank takes a property back via foreclosure, it is a long and expensive process and often results in holding the property in their inventory as a non-performing asset. Banks have a limit to the amount of non-performing assets they want to hold. Once this limit is exceeded, they have a strong incentive to get rid of the properties at discount prices.
For a lender, doing a short sale avoids many of the costs associated with the foreclosure process. Attorney fees, delays from borrower bankruptcy, damage to the property, costs associated with resale, property tax, insurance, etc. all must be paid by the bank during a foreclosure. In a short sale scenario, the lender is able to cut its losses by getting rid of the property faster.
Note that banks are very slow in processing short sale requests.
Will a short sale “save my house”?
In the sense that you will be able to continue to live in the house, unfortunately the honest answer is no. A short sale is only done involving a legitimate sale of the home from the foreclosed owner to another unrelated party.
Will a short sale “save my credit”?
The short answer is yes and no, a short sale can save you from the worst credit disasters.
By defaulting on mortgage payments or having a foreclosure filed against your property, you have already done damage to your credit. Your credit score has declined and those negatives will stay on your credit report for some time. However, it will get much worse if you allow the foreclosure to continue and do not try to short sale the property.
Once a foreclosed property is sold at auction, your credit score is further reduced and when the foreclosure is completed via eviction and repossession of the home, your credit will be even further damaged. If you can complete the short sale BEFORE either of these takes place, then you can prevent that further damage to your credit. In addition, when the short sale is completed, it shows up on your credit as a “Paid” mortgage and a canceled foreclosure, which shows future creditors that you did take care of your obligations.
If your situation eventually winds up in bankruptcy, then that is the worst item that could appear on your credit report and it will remain there for years and cause numerous difficulties in getting future credit. A short sale can help avoid this, but the key is not to wait.
What other options might I have at this point?
When faced with a foreclosure, some things you may be able to do are:
1.Sell your home through the normal channels
2.Bring your mortgage current by making the missed payments and paying the penalties
3.Refinance your mortgage with another lender
4.Foreclosure Defense
5.File for bankruptcy
If you can do any of the first 4, then you probably should!
However, if your situation is such that your house cannot be sold for the amount owed, and you have no money to bring the payments current, and you have no equity to qualify for a refinance, then you should consider a short sale before considering option #5.
Again, I encourage you to educate yourself as much as possible about your situation and seek advice from any attorney, CPA, or Real Estate Agent you have access to about your choices. I do caution you against paying for the advice of so-called “foreclosure work-out specialists” or other such advisers unless it is by personal recommendation.
What is “Financial Hardship” and why is it so important?
“Financial Hardship” is a critical part of the short sale equation. No matter what you hear about banks “not in the business of owning real estate”, etc., they DO NOT give homeowners a break easily. They require GOOD REASON to give a discount for a short sale. They have entire departments called “Loss Mitigation”, which means their entire job is to reduce the loss the bank takes on a bad loan. Giving big discounts to investors increases the loss on a bad loan, so they don’t take it lightly.
The ONLY reason a lender will agree to a short sale is if they determine that the short sale will net them more money than proceeding with the foreclosure.
Understanding the homeowner’s financial hardship is a big part of the lender estimating whether they will be paid in full for the mortgage.
What do I do about my back property taxes when I do a short sale?
Just as in a normal home sale, property taxes are the responsibility of the homeowner until the date the sale is closed. Then they become the responsibility of the buyer or investor.
If your property taxes have not been paid this will affect the negotiations between the buyer and the bank, so you must inform us or any buyer of those taxes owed.
Can I short sale my own house?
No, this would be illegal. A short sale must be an “arms length” transaction. You cannot short sale your own house nor can close members of your family or friends do one for you either.
In a short sale, the lender is agreeing to discount the mortgage amount due to legitimate hardships; but not so that the homeowner can make a profit. No money from a short sale transaction can be paid to the homeowner (seller). Lenders will not approve any short sale in which they suspect the foreclosed homeowner will profit.
My house is already listed for sale on the MLS but isn’t selling; can I do a short sale?
Yes, you can and it is relatively common. Some lenders even require that a house be listed for sale before approving a short sale in order to show that a discount is necessary.
Are short sales guaranteed to work?
No. All the criteria MUST be met for a bank to even consider a short sale. It is not easy to convince a bank that the market value of the home is lower than what they are owed. They do not like to take a loss on a loan.
Then the bank must be convinced to discount the mortgage enough to make it viable for an investor to make a profit for his work and risk. The discount must cover all repair costs, closing costs, broker commissions, taxes and still allow for a profit for the investor.
What if a bank doesn’t accept the short sale?
Again, if the bank doesn’t accept the short sale offer, there is no transaction and the home is still owned by the homeowner and the foreclosure process continues.
How long does a short sale take, I need to get out now!
A short sale takes approximately 60 to 90 days to complete and sometimes longer. This is very important. This complicated process takes time so to have the option of a short sale, you must act soon. If you wait until 1 week before eviction, no one can help you do a short sale. It is simply impossible. DO NOT WAIT.
What paperwork do I have to do to complete a short sale and what is the exact process?
There is some paperwork to do at the beginning that we can assist you with but most is handled by us:
1. The homeowner must fill out a Borrowers Authorization form for each mortgage allowing us to speak with the lenders about the short sale.
2 You will be asked to write a letter detailing the financial hardship that caused you to fall behind on your mortgage. Any other proof of your financial hardships such as bank statements, medical bills, pay stubs, termination letters, etc. should also be included.
1.After we have prepared and sent the entire short sale package to the lender, the lender will arrange a BPO, which is similar to an appraisal, to determine the value of the property. This can take a few weeks.
2 Based on the BPO, the bank will negotiate with us on the details of the short sale and after several weeks, they will either approve or deny the final offer.
3 If approved, a date will be selected to close the transaction just like any other real estate transaction.
Why do I have to sign a Borrower’s Authorization?
In order to both determine if your lender will consider a short sale and then to actually negotiate the short sale, we need be able to speak to your lender about the mortgage. The lender will only speak to people you have authorized them to speak with.
By signing a Borrower’s Authorization, you give the lender permission to speak to us about your loan. That is all it does, but it is necessary. An authorization must be filled out for each mortgage.
Updated Dec. 1, 2009 by Paul. Short Sales are EXTREMELY DIFFICULT TO PROCESS AND FRUSTRATING! Keep in mind, it is very difficult to get a bank to accept a short sale. In California, the current average as of May, I’m told, is 2 out of 10 short sales are being processed. That’s up from 1 out of 25, at the beginning of the year.
In my experience, that short sales can take over 4 months to get them processed…I have some that have been in process for over 6 months. If you’re trying to buy a short sale, you have to be extremetly patient….these are not good properties for anyone that has a timeline to move. Additionally, a buyer can wait over 4 months for a bank to respond to a short sale offer, and it may not be an acceptance.
Additionally, sometimes while waiting for a short sale to go thru, the property will go into foreclosure without the buyer knowing. There’s no guarantee the property will go back on the market either once it is foreclosed…. .
These are very tough transactions.
Tags: Foreclosures, Palm Springs Real Estate, Short Sales
