What is a short sale?

A short sale is when a property is sold and nets less than what is owed to the lender. The bank not only takes less than what is actually owed to them, but may also pay the sellers costs to sell the property (excise taxes, escrow fees, title insurance and even the Realtor’s commission). Short sales occur when the market value of a property has dropped to less than the loan amount due on the property, or where the price the property can sell for plus the sellers closing costs exceeds any equity in the property. The seller would walk away with no proceeds in a short sale. In fact, banks often impose a deficiency judgment on the sellers who are required to pay back the funds owed above and beyond what they receive out of the proceeds of the sale. If they cannot agree to a deficiency judgment, the short sale will often not proceed. Furthermore, prior to considering engaging in a short sale, it is highly recommended that sellers consult with the lender as well as a competent tax advisor, as the short sale and loan forbearance may, depending on the type of loan involved, trigger unanticipated income tax consequences if the forgiveness is treated under federal or state tax laws as 'income' for that year.

Have you noticed that homes that are listed as a short sale are often priced lower than comparable homes in the neighborhood? Who is setting the price on these homes? While many buyers think the bank is setting the price, in fact, it is the listing agent. These Realtors have analyzed the market and selected what they believe will be a price to sell. If agents do not garner an offer within a few weeks, they will often lower the price since they must attempt to sell the home in a timely manner or the home goes into foreclosure and is taken off the market in preparation for that. The Realtor's goal is to get a number of offers in queue since in the greater Seattle area, up to 85% of short sales fail to close. Either the bank will not accept the offer the buyer makes (even if full price or over full price) or the buyer gets frustrated with the lack of response from the bank and walks away. It is typical for a short sale to take 9 months to process. By then, many buyers have found another home and moved on.

Why Pay Private Mortgage Insurance (PMI)?

Private Mortgage Insurance (PMI) is required by most lenders when a borrower puts less than 20% down on a purchase loan. Paid for by the borrower, PMI not only protects the lender from foreclosure, it also enables many buyers to qualify for loans and purchase real estate when they couldn't have otherwise. On January 1st, 2007, legislation went into effect making PMI tax deductible for new borrowers whose personal adjusted gross income is $100,000 or less. This has created additional opportunities for many buyers to finance a more expensive home or, in some cases, to obtain a lower monthly payment, while reducing annual income taxes.

An alternative financing option that borrowers may also consider involves taking out two home loans concurrently. The second loan, commonly referred to as a "piggyback loan", can take the form of a traditional home loan or a Home Equity Line of Credit (HELOC). It supplements the borrower's funds to help them achieve a 20% down payment, eliminating the need for PMI. However, in most cases PMI can be cancelled once the accumulated equity has reached 20% of the home's value, while a second home loan will have to be paid back in full regardless. Factor in the new PMI tax benefit, and a borrower's monthly payment may actually be lower with PMI versus a piggyback loan scenario.

If you need a recommendation for a lender who can help you with your finance options, let me know. I look forward to assisting you with all of your real estate needs.