Short sales saving more locals from foreclosure
Real estate news from the we buy houses team
An alternative to foreclosure for some homeowners called a short sale (1-888-444-BUYER)is becoming more common in southern New Jersey, according to attorneys who handle such transactions. Short sales are for homeowners who owe more on their mortgage than the property is worth and need to sell the house to get their finances in order.
For it to work, the lender must agree to accept as payment for the loan what the property is currently worth rather than the higher amount borrowed to buy it.
Lenders such as banks are free to insist on getting full repayment of the loan and many do, said attorney Jeffrey P. Barnes, of Stefankiewicz and Barnes in North Wildwood.
“But it sometimes makes sense to take the market value because the bank will be putting the property up for sale anyway if it goes through foreclosure after paying thousands in attorney’s fees,” Barnes said Friday.
As an example, Barnes told of a Pennsylvania couple who bought a second home in the Wildwoods. As a result of falling real estate values, they wound up owing $50,000 more for the condo than it was worth.
The couple had hoped to rent it out but couldn’t at a price that would cover their mortgage costs, he said. And they had taken out a home equity loan for the down payment on the second home and now couldn’t keep up with all the payments.
“They got quite emotional about it. They had always paid their bills, and they didn’t know what to do. They tried whatever they could to keep it going,” Barnes said.
When their savings were depleted, they looked for a solution and pursued a short sale. Their bank allowed it and in a couple of months, they got out of the second home, he said.
Doug Stanger, an attorney in Flaster Greenberg’s Linwood office, said another typical short-sale client is one who bought a house with a no-principal-payment mortgage or with an introductory interest rate that bounced up the next year.
“Now they can’t afford the payment. They had expected to refinance, and they can’t,” he said.
Or one spouse has lost a job and now they can’t afford the house and need to move into something smaller, he said, but can’t sell because they owe more than the house is now worth.
Stanger and Barnes both said short sales in the region are up significantly from last year.
The perfect candidate for a short sale is someone whose financial condition is neither too good nor too bad.
If someone has significant assets or income, the lender will want it used to pay off the balance of the loan above the current market sale price.
“A lot of people with second homes are rejected because they own another home with a lot of equity in it,” Stanger said.
If the mortgage problem is accompanied by credit-card debt, car loans and other unpaid bills adding up to obligations far exceeding the ability to pay, that case belongs in bankruptcy, he said.
Short sales have other advantages for homeowners, Barnes said.
Mortgage market maker Fannie Mae requires bankruptcy filers wait four years before becoming eligible again for a mortgage, while short sellers need wait only two years, he said.
And in some cases, short sellers see less damage to their credit rating than those forced to go through foreclosure, he said.
Buyers of properties under distress prefer short sales because they can get in and inspect the place, Barnes said, and have time to set up the financing for the purchase.
One problem is that there are no rules governing short sales, so each financial institution sets its own procedures or doesn’t do short sales at all, Stanger said.
“But it seems that more banks are coming around to more tailored procedures,” he said. “They’re recognizing it’s better for them to get the property sold sooner rather than later.”