Short Sales in Texas

What Financial Information is Required?

An owner's financial statement can be constructed very simply with a list of assets and liabilities.

Assets

• Real Estate
• Stocks, bonds, mutual funds
• Bank accounts
• Personal property
• Retirement accounts

Liabilities

• Real estate loan(s)
• Personal loans
• Credit card debt
• IRS liens
• Judgments
• Lawsuits

Lenders will want the amount of all the monthly expenses in addition to the assets and liabilities.  These would include:

• Credit card bills
• Utility bills
• Car payments
• Insurance costs
• food and clothing
• Medical bills
• Child support
• Tuition expenses

Supporting Financial Information

These items are typically the same required by a borrower when applying for a loan.  The lender will let you know how far back (2 months, 3 months, 12 months) the seller needs to go in supplying this information.

• Pay stubs:  Pay stubs allow the lender to see if the monthly take-home pay would cover the loan payments plus all the other monthly expenses.  If the owner is unemployed, there will be no pay stubs to include.
• W-2's and / or tax returns:  The lender is trying to get a complete picture of the owner's financial situation.  Is the income going up?  Is the income going down?  Will the borrower be able to make payments if the lender agrees to a repayment program?
• Bank statements and credit reports:  Again, the lender wants to be sure the borrower is truly unable to make the payments and these support that.  The bank will order a credit report on the borrower but if they have oe available attaching it is a benefit.

What is a Hardship Letter?

The goal of the hardship letter is to have the seller explain their situation to the bank.  The hardship letter should communicate three key points.

1.  "I'm sorry"

2.  "Here are my circumstances (such as job loss, medical issues, divorce, health issues, damage to the property not covered by insurance, etc...)"

3.  "I have exhausted all of my options and the only next step is letting the property go to foreclosure."

In order to make the most impact with your financial hardship letter, you will need to write it yourself, but there are rules to follow to ensure the greatest level of success and impact with the lender.  Following these rules increases the chance of approval and every lender requires a hardship letter.

1.  Tell the truth:  The lender will find out the facts so it is important to make sure to outline what happened.

2.  Paint a bleak picture:  Make sure it is clear in the letter that there is no way that you will be able to become current, or you would have.

3.  Clearly state financial condition:  There are some very serious reasons why you aren't able to make your payments.  Some of the reasons that are more valid than others are as follows and should be used:

a.  Job Loss:  State if one borrower who was originally on the loan has lost their job and been unable to find replacement work.

b.  Health Reasons:  State if there has been medical bills or other debt that has forced the home owner to stop making payments.

c.  Loss of Overtime:  If you were originally getting overtime but can no longer get the required hourse, state that.

d.  Any large event:  If there was some sort of disaster or other major life event state that so that the lender can take that into consideration.

e.  Show the human side:  Make sure that you state in your letter how you never wanted to be in this situation and wish that things could change and that this is not what you had ever wanted to do.

See below for a sample Hardship Letter to use as a guideline.

=====================

(Date)

Loan #:

Dear (Lender Name) Representative:

Per your request, I am writing this letter to explain the circumstances that led to me falling behind in my mortgage payments.  I never thought that I would be asking for help because I couldn't make the payments on my primary residence.

There were not one, but several factors that led to my inability to be able to pay my mortgage on time.

First, while I signed the paperwork, I was unaware that the original loan that I signed would start adjusting after only having the home for six months.  This was the home that my family wanted to be in for the rest of our lives.  We were shocked when the payment started to adjust.

We tried to refinance the property but values in our neighborhood declined to the point where no lender was able to refinance our loan to a payment that was less than we were currently paying.

My wife took a second job and I worked overtime to pay for the new change in payments.  My wife eventually lost the second job and lost her original job as well.  After exhausting all of our credit cards and savings, we were unable to make payments and began to fall behind.

My wife continues to look for work, but has been unable to find a job and we are unable to make our payments anymore.  We feel that our best choice is a short sale and appreciate your understanding in this very trying time.

Respectfully,

John D. Homeowner

What's in a 'Short Sale Package'?

While short sale packages vary between lenders, required documentation may include:

• Short sale proposal letter (cover letter)
• Seller's signed short sale payoff application
• Seller's hardship letter
• Seller's financial information
• Supporting financial information
• Supporting hardship information
• Repair estimate for the property, if repairs are required
• CMA with supporting sales history
• Marketing history, showings and feedback
• Purchase contract signed by both the buyer and the seller
• Written proof of the buyer's ability to purchase the property (pre-approval letter)
• Preliminary HUD-1 Settlement Statement

What is the Impact of a Short Sale on My Credit?

Short sales are considered preferable to foreclosures because short sales (1) lessen the impact a foreclosure can have on the surrounding community and (2) won't damage the distressed homeowner's credit as much as a foreclosure.  For example, if the borrower is still current with other payments, a short sale may lower the borrower's credit score by as little as 50 points.

After a short sale, the lender can report the mortgage debt as either:

1) Paid in full - paid as agreed
2) Paid - settled
3) Paid - unrated

A foreclosure, however, can lower a credit score by 200 points or more.  It will remain a public record and in your credit history for 7 years.

Mortgage Debt Relief and Emergency Economic Stabilization Act of 2008

Prior to the Mortgage Debt Relief and Emergency Economic Stabilization Act of 2008 being put into effect, money forgiven by a lender in a short sale was considered taxable income.  In many circumstances, the new law no longer requires taxpayers to pay federal income tax on the forgiven debt, provided the property is their primary residence only.

Taxpayers may exclude debt forgiven on their principal residence if the loan balance was less than $2 million.  The limit is $1 million for a married person filing a separate return.  The law applies to debt forgiven in 2007, 2008 and 2009, and the Economic Stabilization Act of 2008 has extended this forgiveness through 2012.  It includes debt reduced through mortgage restructuring, refinancing, home equity lines of credit, short sales as well as mortgage debt forgiven in connection with foreclosures.  As a reminder, this is debt that was used to buy, build, or improve a personal residence ONLY.

Common Results from Short Sales

From a lender's perspective, there are many ways a short sale transaction may close:

• The lender releases the lien and requires the seller to carry remaining debt on a payment plan
• The lender releases the lien and requires the seller to liquidate other asses to pay some or all of the remaining balance
• The lender releases the lien and forgives the remaining indebtedness

Why Do Some Short Sales Fail?

There are many reasons why some short sales fail, including, but not limited to the following:

• Incomplete short sale package
• No reasonable chance of closing
• Inexperienced listing agent
• Release of deficiency
• No hardship
• Junior liens
• Lender

Speak With Other Consultants

Homeowners in distress need to engage the services of qualified finance, tax, and legal professionals.  However, homeowners who are in mortgage default or facing foreclosure may argue that they cannt afford to pay them. 

• Attorneys who work with distressed owners may take into consideration the owners' current financial realities and allow for ways to navigate the process with little or perhaps no attorney fees upfront.
• Consider the US Foreclosure Network (USFN) as a possible source for locating attorneys who specialize in bankruptcy and foreclosure:  www.usfn.org
• In many cases, the foreclosure attorney fees are considered part of closing costs

Sellers should be scrupulous in selecting a foreclosure attorney.  Questions sellers should ask include:

• How many short sales have you done?
• How many were successful?
• What will I owe if the short sale is not accepted?
• Do you charge billable hours or a flat fee?

If attorneys charge by billable hours, real estate professionals should request permission of the seller before contacting the attorney.

What is a Valid Hardship?

Many panicked homeowners seeking a short sale solution may be unclear on what constitutes a valid hardship - and event or events that change a homeowner's ability to keep current in mortgage payments.  Loss of equity, for example, is not considered a hardship.  However, lending institutions may entertain short sales for homeowners who have experienced any of the following:

• Job loss
• Business failure
• Illness and medical costs
• Divorce or death of a spouse
• Natural disasters

If the seller has liquid assets, the lender will want the seller to contribute some of the assets at closing.

Foreclosure Alternatives Program

In May 2009, the Obama Administration announced the development of Foreclosure Alternatives, another program of the Making Home Affordable Initiative.  Under this program, borrowers and mortgage servicers are provided incentives and documentation is standardized to help facilitate short sales or deeds-in-lieu-of-foreclosure if short sales are not successful.

Incentives Are:

• $1,000 for servicers for successful short sale or deed-in-lieu-of-foreclosure
• $1,500 for borrowers/homeowners to help with relocation expenses
• Up to $1,000 toward cost of paying junior lien holders to release liens

Features of this program include, but are not limited to:

• Depending on market conditions, 90 days up to one year to market and sell the property
• No foreclosures may occur during the marketing period specified in the Short Sale Agreement.
• Mortgage servicers cannot charge fees to borrowers for participating in Foreclosure Alternatives
• Mortgage servicers cannot negotiate lower commission after an offer has been received.

If you need more details regarding refinance or modification programs go to http://makinghomeaffordable.gov