In our last post, we talked about options for loans (particularly VA loans) when military borrowers are concerned they will go into default or have already defaulted. One of the methods we covered briefly, which is also one of the more confusing and nuanced options, is the short sale. Today, in collaboration with episode six of the Hope Now podcast series, we’re going to take a look at the process and how service members can determine if it’s the right move for them while also tackling any of the short sale’s associated challenges.
One of the Last Resorts
As we mentioned previously, short sales are one of the last resort options for a home. Our guest speaker this week, Robin Stout Migala, a consultant to the financial services and nonprofit sectors, introduces some helpful naming conventions that better define the list of available options. Programs such as a repayment plan, forbearance and modification are called “retention options.” Retention is most commonly an internal business term, so it describes the fact that the bank servicer will be able to retain you as a customer.
On the other side, there is a group of “liquidation options.” This means the mortgage agreement will more or less dissolve and each party can become free of it. Of course, in these cases the lender and servicer lose you as a client, but they also attempt to do so in the way that is most favorable to them and allows them to recoup some of their investments. These liquidation options most commonly include foreclosure, short sale and deed in lieu of foreclosure. In terms of how your credit is impacted, it’s largely agreed upon that the short sale and deed in lieu of foreclosure have slightly less negative impact on your credit and should typically be pursued instead of foreclosure.
How to Apply
By law, your servicer must present all of the retention options to you before entertaining the idea of a short sale. On top of this, you will need to have a documented hardship to qualify for a liquidation option, meaning that a short sale is not a quick fix method for consumers.
One you meet the initial criteria and the retention options aren’t viable, you’ll want to identify your mortgage investor. Remember, this is different than the servicer to whom you send payments. Most investors allow short sales, but you will need to double check. It’s likely that your mortgage investor is Fannie Mae or Freddie Mac, as they invest in an overwhelming majority of mortgages. You can check on their websites: Fannie Mae – Freddie Mac, or call the Fannie Mae military hotline at 1-877-MIL4566 and the Freddie Mac military hotline at 1-800-Freddie (option 2, then option 1). If they are not the investor on your mortgage, you should contact your servicer to identify the investor.
You will then need to provide proof of your hardship, which makes you eligible for the short sale. You might be wondering, “What classifies as a hardship?” Some examples Robin gives us are medical bills, divorce, other major financial events and PCS (Permanent Change of Station). This is significant, as PCS affects many who serve and just became listed as an official hardship in June of 2012 after an announcement from the Federal Housing Finance Agency (FHFA).
Aside from just whether they allow short sales, determining your investor matters for several reasons. First, investors put parameters around how the home is sold. Most short sales are required to be “arm’s length,” which means the buyer can’t be related to a seller, be a business associate of the seller, etc. This helps prevent fraud and house flipping issues.
Another difference is in the cost. The servicer and the PMI company (if applicable) will do final approval of the sale at closing. In some situations, they will ask the seller to cover some closing costs with cash or an interest-free note. Luckily, mortgages funded by Fannie Mae and Freddie Mac are not subject to this. Also, this generally doesn’t impact those who bought their home before June 30, 2012.
Lastly, Fannie Mae and Freddie Mac won’t seek deficiency judgments for those who purchased on or before June 30, 2012 and then experienced a hardship based on PCS.
Selling the home in this scenario requires some attention to detail. First, you will want to choose a quality realtor. You can research on sites like Zillow and Trulia to find realtors who have sold properties in your area within the last six to 12 months. You can also use referrals and ask friends and family for recommendations.
You might want to prioritize realtors who have experience with short sales, specifically, as doing so can make the process smoother. And, the most important thing is to set a reasonable price for the home, which a realtor can help determine.
Look out for Scammers
You need to be wary of scammers during this process. Short sales are like any real estate transaction in the sense that there are multiple scams that target sellers. Review any documentation, offers or other correspondence with your realtor to help verify it. Also, consider a HUD-approved housing counseling agency to help you.
Provide Security and Maintenance
As for security and maintenance, you don’t want a potential deal to fall through the cracks because of a break in or other damage to the home. If you don’t still live in the home (perhaps due to PCS), you will want to have someone actively checking in to keep an eye on the property while it is listed for sale.
Stay in Close Contact with All Parties
The short sale can be completed in just a few months, but they have also been known to take six months or longer. To help your chances of a smooth process, you need to stay in close contact with your servicer, realtor and any other parties involved. Try to respond to mail and phone calls in a timely manner so that you don’t slow down the process.
Need More Help?
Carrying through a short sale is certainly not an ideal situation, but it’s preferable to foreclosure. A short sale mark on your credit will at least show that you made an effort to sell the home and that you were capable of working with servicers and other parties. What this says about your responsibility and the character of your credit is extremely important. If you need more help with your housing concerns, we encourage you to review our foreclosure prevention counseling service. And if you’d like general help with money management for military personnel, be sure to check out the free resources in our Reconnect program.