Underwater & Considering a Short Sale or Loan Modification?

If you are like many Americans and are “underwater” with your home – that is, owing more than it’s worth – you may be considering whether or not a short sale or loan modification is for you.

Realtors cannot (should not) advise you whether a short sale is in your best interest. You have many choices and should go over them with tax and legal professionals.

One thing to consider before trying a short sale or attempting a loan modification, though, is the veracity of your original loan application.  Some home buyers here in Silicon Valley submitted loan apps that were for “no doc” loans or “stated income” loans.  If what you stated then does not line up with what you submit now, you could find yourself in a load of hot water.

Unhappy lenders are using short sale and loan modification applications as a reason to audit your original loan application.  If you fudged or misrepresented anything back when you applied for financing, you may find yourself the unhappy recipient of a loan fraud lawsuit now.

Your mother was right: honesty is the best policy.  If your loan papers were truthful, you should have nothing to fear by an audit. If you think they fall short, be sure to weigh that in when you factor what is your best course of action now.




What is a Short Sale, and Who Qualifies For One?

Recently I have received a number of emails and calls from San Jose and Silicon Valley homeowners who are “upside down” in their homes and want to sell that property and “move up” into a bigger house, better neighborhood, or higher performing school district. They contact me to see if they can do a short sale and get out from under their loan, and several seem to think that they can pull equity out from that property to purchase the next home.

It doesn’t work that way.

There are a lot of misconceptions about short selling a home, and what a short sale is, and who qualifies for a short sale, so this post is aimed at clarifying what it’s all about.

short sale signsA “short sale” is a sale of the property in which the lender (or lenders) accepts a “short payoff” to get the home conveyed to the new owner. The “short” in short sale refers to the lender not getting paid back what was promised by the borrower/homeowner.

Why would a lender agree to taking less than what is owed? The answer is simple: only if it’s the lesser of two evils, the other being a foreclosure (which would cause a greater loss to the lender in most cases).

Under what circumstances will a lender agree to a short sale? There are a few conditions which absolutely must be met if a seller will even consider a short payoff:

  1. The homeowner has some sort of significant hardship (such as the death of a spouse and loss of that spouse’s income, divorce, job loss, serious medical illness with large medical expenses)
  2. The monthly payments can no longer be made (in part or in full)
  3. The owners or property does not qualify for a loan modification
  4. The property owner has no other assets which could be sold to make up the difference between sale price and loan balance (such as a vacation home, stocks, etc.)
  5. In many cases, lenders will not consider a short sale unless payments or parts of payments have been missed (the owner is in or near default status)

A few very significant ramifications occur when there is a short sale: