What is a Short Sale?

A short sale is where a homeowner is asking the bank to settle for less of a payoff than the balance of their current mortgage when selling their home.  Mortgage companies often work with homeowners in this situation to avoid the lengthy and costly foreclosure process.  An example might be where someone owes $200,000 on their mortgage but due to declining values on homes or borrowing more than the home was worth, they could only sell the home for $190,000.  In this case, the homeowner might ask the bank to take a “short” of $10,000 plus real estate commissions and fees.  This would allow the bank to avoid a foreclosure sitting on their books and the homeowner can avoid foreclosure and/or a large chunk of money out of pocket when they sell.  Most mortgage companies will not even consider a short sale unless they see the homeowner is currently past due on their monthly payments.

How FHA Short Sales are Different

When you, possibly with the help of a real estate agent, negotiate a short sale on an FHA mortgage with the mortgage company, the amount of the loss will be noted.  The amount of the loss that the mortgage company took is covered through FHA mortgage insurance, up to a certain amount.  The problem is that FHA has a central database called the FHA Connection that all losses are recorded.  Doesn’t seem so bad; so what they have my name on a database, but the lender allowed the loss, so I am ok.  Well, maybe so, but maybe not.  When you obtain FHA mortgage financing, the most lenient and minimal down payment A-paper mortgage available today, you must past what is called a CAIVRS authorization.  This searches the FHA database for several factors, one of which is whether you have had a FHA short sale in the past.  If so, the report shows a claim and that claim must be paid prior to obtaining an FHA mortgage.

So what can you do if a short sale is the only alternative?  Complete the short sale, and know that in the future you will have to pay off that claim to obtain an FHA mortgage in the future or you can just do Conventional type financing and not worry about it.  A short sale will likely look better than a foreclosure, but there will still be a time frame between when the short sale is completed and when you will be able to obtain A-paper mortgage financing.  This time frame is likely 3 years, although some exceptions are made and talking with a competent mortgage lender will help you in determining your specific situation.

Lending a hand,

Scott Wynn

The plan for most of these mortgage giants is to provide relief starting in December 15 and the following criteria must be met in order to qualify:

• 90 days or more past due on mortgage payments
• Owe 90% or more on their home
• Occupy the property as their primary residence
• Additional details to be released by Fannie Mae and Freddie Mac

If a homeowner meets this criteria, they may be eligible to modify their current mortgage.  The idea is to create a payment that can be made by the homeowner through a reduced interest rate, longer term or even defer payments.  The plan would help to modify their current mortgage to a housing payment no more than 38% of the gross monthly income of the borrowers.

This plan may help some homeowners but my thoughts are mixed.  This morning on Good Morning America I heard a homeowner who is, as GMA put it “under water”, meaning they owe more than the home is worth.  The homeowner stated that they were told by someone to stop making payments to allow themselves to be eligible for special rescue plans, such as the one describe above.  My fear is that the rescue plan will end up helping people it was not meant to help.  This plan is for those that are unable to make, and currently not making, their mortgage payments.  It is not meant for those who want to reduce their payment, because they can, and therefore people stop making payments to get a lower rate and/or payment.  I guess we will see how it plays out.

So why would the mortgage industry want to do such a plan?  To be nice to those who are in over their head and facing foreclosure?  Maybe, but I think it is all about business.  If the mortgage companies can avoid the foreclosure on a home, they avoid unnecessary court, home maintenance and home sale costs which would save these companies millions.  This plan may also create some hope in homeowners to turn the market and increase demand within the housing market, therefore increasing prices and stimulating the economy, which is something I think everyone agrees we need.

Lending a hand,

Scott Wynn