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A Personal Short Sale Story from Bellingham, WA

     I was recently contacted by a young couple who were our clients in the purchase of their first home in Bellingham in 2006.  They have decided it would be best for them to move for him to be closer to his job, and to do that, they need to sell their house.  By the time we looked at the current value, we all realized that they don’t have enough equity to pay off their loan and their closing costs.  If they sell, it will have to be a short sale, because they don’t have enough money to make up the difference.

     A point of clarification here:  these are people with a good job, who have been paying extra on their mortgage, with great credit.  They fully qualified for their initial loan – it was not at a low teaser rate and they didn’t overstate their income.  They are simply caught between declining real estate prices and increasingly strict downpayment requirements that make it impossible for them to sell or refinance.

     They are currently exploring their options, and they have agreed to share the process in the hope that it will help someone else deal with the shock of finding they have a debt they can’t pay.  At our meeting, we talked about sources of help and I made some suggestions as to people with whom they should talk.  They had already talked with their original loan officer, who didn’t give them much hope.  The first person I sent them to was an attorney, “Steve”.  What follows, in their own words, is the first phase of their search for information and help. 

Steve was very helpful. He also called a “short sale negotiator” to get a second opinion for us. They agree that Bank of America, especially, will not even talk to us about short sale or anything else as long as we are able to continue making our payments. He also said that there is great potential that we would still be required to pay off the second mortgage should the short sale go through. And any debt that is forgiven is being reported on 1099s as income to the seller. (But he said there is/was a law to protect homeowners that may be renewed and we would need to check with a good accountant for that.) He also told me that most short sales are being negotiated without a lawyer, and he doesn’t necessarily recommend using a lawyer for it. Then he suggested that I check out the web site for the White House on mortgage help.
 
I went to the web site and found a free counseling hotline number, which I called. They are nonprofit representatives of the federal government who are counseling people in our situation to help them know if they qualify for Obama’s helps. Even though the B of A rep told us we do not qualify for MHA, the counselor seemed to think his reasoning was wrong. In fact, once “John” is home again (next week, we hope), we are supposed to call back and have an hour counseling session with them wherein they will help us determine the best options available and even conference in our lender to get the process started under their supervision. It hinges a great deal on our income-to-expense ratio, and not as much on our assets. We qualify for counseling simply because we are in an ARM that will adjust soon. I am hopeful that this will lead either to a loan modification, or guidance as to a short sale.
 
I do have one question about the short sale which Steve did not answer for me. How on earth do we cover listing fees and closing costs on our sale in the event of a short sale? Can we roll them into the sale and just have the bank accept even less? (I admit that sounds like a pipe dream.) Some people we have talked to have made a short sale sound relatively painless. Others have made it sound worse than bankruptcy. And Steve mentioned that most people who short sell and have to retain part of their mortgage end up declaring bankrupcy and getting the debt forgiven in order to “start over.” I know people who’ve gone through bankrupcy, and we want to avoid that if at all possible. It would be our LAST resort!
 
Anyway, if you could answer my question about how closing costs are covered in a short sell, I’d really appreciate it. Otherwise, I’ll let you know what counseling turns up for us. Maybe what we find out will be something you can use to help guide any others in our situation.
 
Thanks, again, for all your help. I do feel like we are getting to some real answers, and hopefully some real solutions.
As they learn more, I will post the information here.  In answer to “Mary’s” question, yes, closing costs can be rolled into the sale.  If you would like a refresher on what some of these terms mean, an earlier post provides some definitions and explanations, including the potential impacts of short sales and foreclosures on both sellers and buyers.

If you have a story, please share it.  This is a huge problem that we are going to continue to see for quite some time, and your experience, like theirs, might help someone else who never thought this could happen to them. 

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