I am currently going through a collaborative divorce and need to understand my options regarding a short sale. My spouse's name is on the 1st mortgage alone and I am on the 2nd alone. We are both on the deed, but did the mortgages this way to free up credit if we wanted to buy investment properties.
Now we are getting divorced and owe probably around 45% more than the home is currently worth, so we are looking at our options. We live in FL if it makes any difference.
I have around a 750 credit score and hers is around 800 I am guessing, and I want us to pursue the way which will least impact our credit both in short term and the long run, as I have an executive level job and credit is an important requirement in my field.
A real estate company owner suggested we do a short sale, stating that our divorce is enough to qualify us for a hardship approval. Here's the catch.....between us we have enough money to pay off the 2nd mortgage, but it will take a significant hit to our savings. But, given that we are getting divorced we are splitting that account up, and frankly both need the money to secure a new home after divorce.
Additionally, if we do a short sale, is there a way the 1st lender would consider a payment of say 80-90% so the 2nd lienholder would be more likely to approve and any hits to our credit could be spread out evenly vs me taking the brunt if lienholder 1 says they want the entire 100% of the 1st balance?
If we short sale the house, can we get approval through the divorce alone as the hardship to where they will not pursue our savings account funds? And if approved, given that we have never and will never be a day late on the payment, can our credit be spared without a major hit? This is important to me because I need the mortgage interest deduction given my income and would want to immediately buy again, something I heard I could do if we have 0 mortgage lates prior to completion of the short sale.
Lots of complex issues here, but I would appreciate any feedback I can get.
Hi, and welcome to the forums.
Was the 2nd mortgage a purchase money mortgage, or was the money used for other purposes? I understand that it is very difficult to get a 2nd mortgage holder to approve a short sale.
I believe you need to research issues as to whether you live in a community property state, or if you are in a state where the bank can go after the difference (recourse vs. nonrecourse).
I'm not an expert in this area. Getting the bank to approve a short sale if you have the cash to make up the difference might be a challenge. I believe that any time you settle a debt for less than the amount due that it will negatively impact your credit.
Have you attempted to talk with a real estate attorney who may have some expertise in this area?
1st lien will not release unless paid in full unless the short sale total is less than they are owed.
Your best bet is to use whatever funds you have to sell the house and bring cash to the table. It depends upon the loan program, but most loan programs will not allow you to purchase another property right away after the short sale, and the hit to your cerdit score alone will probably prevent it. You will probably be looking at 100-150+ pt FICO drop (that depends on alot of factors, but the higher your initial score, the larger the initial drop usually) for each party that ends up with a short sale on the home.
Last, bank will require full financial disclosure before even considering a short sale. If you have assets as a couple, they will want them liquidated (except retirement accounts) before accepting less than owed. Especially the 2nd lender as they are likely to get little to zero it appears.
If the 2nd mortgage was cash out mortgage and not like an 80/20 purchase loan then you are unlikely to get agreement on a short sale in any case.
So to simplify, if you have the ability to just sell the house and pay cash to settle, do so. Both of your credit and future borrowing endeavors will be rocky if you do a short sale (including probable AA on cc accounts leading to card closures, limit decreases, and/or rate hikes). To top it off, no bank is going to agree to a short sale when you have cash avaialable. They require at least 2 months of releveant bank statements and a full asset disclosure which will kill this deal right away if you are sitting on a lump of cash or liquid (non retirement) investments. Bottom line is that divorce is not a legitimate reason for short sale or loan modification, etc. unless accompanied by a financial hardship due to the divorce. If neither of you has lost large amounts of income and you are sitting on a nest egg the chances of a succesful SS while retianing that $ is extremely unlikely.
To clarify, some programs will allow you to buy right away after a short sale, but usually the credit damage is to severe to do so for at least 6 months and more liely a year. This is even more likely if CC's get closed/limits slashed, etc as that lowers FICO as well. There is no way to know if your card companies will do this, but it is very common right now.
As far as if you got an approval can they come after your savings for the default amount, that is not done in a short sale as they agree to take less and write off the loss. Now, if it went into foreclosure then it becomes a matter of local law. That said, it is a likely mute point as the banks are not going to allow a ss with those savings intact.
You may want to read the new regulations under HAFA. A realtor specialized in Short Sales and Foreclosures can advise you as to what may happen to the first and second loan.
HAFA will become effective April 5, 2010. Here an extract from a blog in a blog in realtorsfr.com. You shoud talk to a realtor and study the consequences of a short sale in your case, preferably with an attorney.
"Under HAFA guidelines, which by the way is fourty- five pages, the lender must notify borrowers that they may be eligible for HAFA within 30 days of ineligibility of a modification. The borrower then has 14 days to respond to the lender. If the borrower agrees to participate in HAFA, the lender will then assess the current value of the property, review information provided by the borrower, such as credit report ,the loan file, or other sources to indetify subordinate leins and other claims on title to determine if the borrower will be able to deliver marketable title to the prespective purchaser.
The lender may, but is not required to, negotiate with subordinate lein holders on behalf of the borrower. If the lender chooses not to negotiate with the lein holders the responsibility of extinguishing Second and Third Leins will fall into the laps of the DISTRESSED borrower.
Now, the already DISTRESSED borrower will have to negotiate with Lein holders to accept the provided incentive, which is $3000.00. The Lein holder has to agree to completely extinguish the debt of the borrower and accept the incentative as payment in full. Better sharpen up them negotiating skills, SFR's.
The Lender must release the first mortgage lein within 10 days after receipt of sale proceeds from a short sale. Additionally, the investor must waive all rights to seek a deficiency judgement and may NOT require the borrower to sign a promissory note for the deficiency.
Further, for loans with PMI, the servicer must obtain approval from the PMI for HAFA foreclosure alternatives. The loan will not qualify for HAFA unless the insurer waives the right to collect from the borrower such as in the form of any cash contribution or promissary note.
On the positive side, upon successful closing of a short sale under HAFA the borrower shall be entitled to an incentative payment of $1500.00 to assist with relocation expenses.
Prior to completion of the HAFA transaction, the lender will report to the Credit Reporting Agencies with the Special Reporting Code "AU" ( Account paid in full for less than the full balance.)
The short sale agreement that the borrower is required to submit is 11 pages. Included in these 11 pages is a worksheet that determines the NET to the lender that the borrower is required to fiil out and sign.
HAFA will not be for the faint of heart!"
One thing I forgot to mention. The reason we have a large sum of cash is due to a settlement we were awarded for our special needs son. We submitted a letter with the short sale package to that effect, which stated that the funds were to be for things needed to raise him until he is 18 like housing, medical bills, prescriptions, etc.
Any thoughts on the lenders accepting this letter as a hardship and allow us to keep the money given his needs that are undetermined?