Arming Rural Homes With Internet: A Reader Story

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THE UGLY TRUTH ABOUT SHORT SALES and WHY IT’S THE BIGGEST LIE IN REAL ESTATE
By Nick Bergiadis

You are falling further and further behind on your mortgage with each passing month. You owe more on your home than what it is worth. You look around and you see ads in the newspaper and on billboards by real estate agents touting the benefits of a short sale. Some real estate agents even claim to be “Short Sale Experts” or a “Pre-Foreclosure Specialist.” You ask yourself; what is a short sale? (Answer: A short sale is when you sell your home for less than what you owe on it.)

So you decide to contact one of these agents that claim’s to be a short sales expert. The agent tells you what a great decision you have made to sell your home through a short sale instead of letting it go into foreclosure. The agent also tells you that the short sale will save your credit so that you can get a fresh start. The agent goes on tell you that once you get back on your feet you can buy another house because you will not have the negative effects of a foreclosure on your credit report - this is not entirely true.

Although the real estate agent may not be lying to you when they tell you that a ‘foreclosure’ will not appear on your credit report by selling your home through a short sale, they just may not be telling you the whole truth. Or simply, the real estate agent may not know how mortgage lenders are treating short sales when it comes to underwriting a new mortgage loan.

If you decide to sell your home through a short sale your lender will continue to report late payments (if you are not making your monthly payment) to the credit bureau’s until your home is sold. Each reported late payment will drive down your credit score. Once your home is sold your mortgage company will report ‘Settled for Less than Full Amount’ on your credit report to the credit bureaus.

The facts are that once your mortgage lender reports a 120 day late payment to any of the 3 major credit bureaus, it will be treated the same as a foreclosure when applying for a new home loan by most mortgage lenders. Also, for the purposes of underwriting a new mortgage most lenders are treating all of the following the same as if a foreclosure was reported on your credit report: Short-Sale, Short-Refinance, Settled for Less than Full Amount, Notice of Default (NOD), and Restructured Mortgage Loan (loan modification).

The reason that mortgage lenders are treating a short sale and other similar circumstances the same as a foreclosure is because the mortgage lenders are trying to increase the quality of the loans that they originate and sell to Fannie Mae, Freddie Mac and FHA. These are additional guidelines that the lenders place on top of the regular underwriting guidelines that Fannie Mae, Freddie Mac, and FHA have in place and are commonly referred to as ‘credit overlays.’ Unless there are extenuating circumstances, most mortgage lenders require at least four (4) years seasoning (elapsed time) before you may qualify for a new mortgage after a short sale. This is the same time frame as a regular foreclosure.

Another important point to take into consideration when contemplating a short sale is; what liability will you have after the close of escrow on your short sale? Some lenders will reserve the right to pursue collection of the remaining balance due on the promissory note for the mortgage loan. The lender may pursue you for the difference between the amount owed and what the lender netted through the short sale, not what you sold it for. As a condition of the short sale some lenders will require the seller to execute a new promissory note for the difference between the amount owed and what the lender netted through the short sale. Also, nearly every lender will demand that the seller shall not receive any proceeds from the sale of the property.

And then there’s the timing. Short sales can be just as agonizing as a foreclosure. It may take your mortgage company several weeks or even months to approve the short sale. Meanwhile, as the homeowner you will continue to get collection letters and phone calls. Most lenders will not approve a short sale until the home owner has a written purchase offer. Once the mortgage company approves a short sale they will often include a ‘bank addendum’ that states the mortgage company’s conditions for approval of the short sale.

The point of this editorial is not to scare you away from selling your home through a short sale, but instead to educate you on how to sell your home properly through a short sale and what to ask your mortgage company for when negotiating your short sale.

There is a lot at stake when selling your home through a short sale. You need to go into it with your eyes wide open and know what to expect at the close of escrow and how it will affect your credit report but more importantly your financial future. You don’t need to walk away empty handed at the close of escrow on your short sale.

So when selecting a real estate agent for your short sale, choose an agent that understands not just real estate sales, but also mortgage underwriting guidelines, home valuations, credit risk analysis, and credit reporting. But most importantly choose a real estate agent that knows what to ask your mortgage company for other than just a simple principle reduction on the amount that you owe.

About the Author
Nick Bergiadis is a licensed real estate broker by the California Department of Real Estate, license #01727452. Mr. Bergiadis has worked for two national banks as a mortgage banker and is currently the CEO at TheMortgageAuction.com. Mr. Bergiadis is a member of the National Association of Realtors. Mr. Bergiadis has over 8 years experience in mortgage banking and residential real estate. You may reach him at Nick@TheMortgageAuction.com or (909) 762-6561. LinkedIN Profile - http://www.linkedin.com/pub/nick-bergiadis/5/8bb/463