Underwater and Distressed Situation Frequently Asked Questions

Even though the real estate market has been pretty rough lately there are a lot of questions people have about it. What does it mean? How did we get here? How can we get out? We’ll explore every aspect of the current real estate market that may relate to you and we’ll spell it all out for you. Despite the way the market is, your home is still your most important investment and we’re here to give you as much knowledge as possible to protect it.

Remember to speak to an attorney or accountant before making any decisions as each individual’s situation is unique. This article is meant to provide information – not to replace a professional’s advice.

What does underwater mean? Am I underwater?

If you're having trouble making your mortgage payments, McGlothlin Properties may be able to help

Underwater is simply a term to refer to anybody who owes MORE on their mortgage than their home is currently worth. Underwater doesn’t necessarily mean that you’re distressed or that you are in a bad situation. All it means is that if you try to sell your home you will most likely get less than what you owe on your mortgage.

There are a couple of different values for your home. One is assessed value. This value is what your local government assigns to your property in order for them to tax you. Assessed value has very little bearing on your property’s market value. In fact, the assessed value of your home is usually lower than the value of your home when the economy is doing well and higher than the value of your home when the economy is doing poorly. This is because it takes a long time for an assessment to change. You can list your property for whatever amount you want, but an assessment takes a little more effort and planning on the behalf of the government.

Market value is how much your home is worth if it were listed today. Market value is typically determined by using comparables (homes that are most similar to your property) that are currently listed or that have sold recently. Properties that have sold recently tell you how much people are paying for homes in your area right now – whether it’s perceived worth on buyer’s behalf or if that’s what a seller is willing to take for their home. Market price on the other hand is what somebody actually pays for your home. Market value and market price could be the same number or they can be different. Remember that in any market, the buyer determines the price of your home so it’s important to list your property at a price that agrees with your buyers’ mindsets.

How can I find out if I’m underwater?

To find out if you are underwater you will need to find out the current value of your home. This can be done several ways.

One, you can go around your neighborhood and find homes that are for sale and find out what they are selling for. Since these homes are closest to your house they have a strong influence on your property’s value – even if they aren’t exactly similar. This is because a buyer will use these properties as a negotiating tool. For example: “Yes seller, your home is a little bit bigger but the property down the street is not much smaller and priced way lower than your home.”

Two, you can have a real estate agent perform a comparative market analysis or CMA. Real estate agents perform CMAs all the time for their clients. For their sellers, they can keep current with properties that are competing with their listing so they can adjust according. For buyers, it helps give them negotiating leverage and keeps them informed of properties coming on the market that suit their needs. A CMA uses properties that are most like your property (usually 3 that are currently listed, and 3 that have sold in the past 3-6 months) even if they aren’t in your neighborhood. The emphasis is on finding properties that are most like your home. A good agent will still consider properties in your neighborhood even if they aren’t completely alike because they can still affect your home’s market value. You should be able to get a CMA for free. If you are in the Northern Virginia area, McGlothlin Properties will perform a CMA for you for free, just click here to get started.

Three, you can have your home appraised. An appraisal is a more formal version of a CMA that is conducted by an appraiser. The process is nearly identical to the way a real estate agent estimates the value of your home but an appraiser has more experience, training, and has state and federal qualifications that make their estimates more official. Appraisals are used by buyers to help prevent them from paying too much on a property. Banks use appraisals to help determine loan-to-value ratios, how much to approve a loan for, if a property qualifies for re-financing, and more. Appraisals can cost a couple of hundred dollars. In most cases a real estate agent’s CMA can give you a good enough idea if you’re underwater without you having to pay anything for it.

But remember just because you are underwater doesn’t necessarily mean you’re distressed.

What does it mean to be distressed? Am I distressed?

You are not the only one having trouble making your payments. Don't let embarassment keep you from finding a solution!

Distressed is a termed coined by the industry to identify people who are having trouble paying their mortgage (and other bills) because of a hardship. Distressed in it of itself is a subjective term. What you determine to be a distressed situation may not be seen as a distressed situation to the bank.

Lenders typically see hardships as uncontrollable situations that reduce your income or negatively affect your ability to pay. Losing your job, quitting your job to be a stay-at-home parent for a new baby, illness, and natural disasters are examples of hardships that banks recognize. Having a baby and high credit card debt are not typically enough for a bank to recognize a hardship and award you a loan modification, a short sale agreement, or re-finance to extend the terms of your loan. Every bank is different and if you have multiple hardships occurring at the same time the bank will usually be more willing to work with you. The important step to take is to contact your bank and find out what your options are. Not knowing is probably the worse situation you can be in.

How did the housing market become how it is? How did my home’s value become so low so fast?

During the high points of the market, home equity was being created out of thin air. This artificial or unearned equity is where the term bubble came from.

This is a question many homeowners and experts are still asking themselves. It’s complicated and there were lots of variables at play.

To start let’s lay some groundwork. From about 1930 to 2000 a typical home in Northern Virginia would appreciate up to 6% a year in value. This is a practical amount of growth. From 2000-2006 home prices were growing rapidly – up to 30% a year. This amount was not only unrealistic – it was dangerous.

How is it dangerous? Well consider the definition of equity. Equity is the value you have in your home after debt is taken out. If you owe $30,000 on your home and your home could be sold today for $100,000 – then you have $70,000 in equity. Now imagine that your home’s value grows by 30% in one year. You still owe $30,000 but now your home is worth $130,000 – you have $100,000 in equity. This rapid growth in prices was dangerous because homeowners, investors, and lenders began to rely on this growth as a reason to buy and lend. Instead of being suspicious of the growth, many people fed into it believing they could make quick money or own a fantastic home. (More on this later…)

So what caused values to jump so quickly? Well to explain this we have to consider the mentality of Americans in general. From TV commercials, to video games, to school economics we as a society are taught to consume and to spend – not to save. We are taught that status symbols mean something – big houses, fancy cars, brand name purses – and we as a society are taught that those status symbols and brand names are worth inflated prices so we spend and spend until we don’t have money anymore – then we borrow and spend beyond what we can actually afford. Why are we taught to spend? The American economy is measured chiefly on spending (spending by individuals, businesses, and the government) – that means even if we all save a bunch of money and each of us has a million dollars in the bank, if we aren’t spending a penny the economy is technically not growing.

So going on that our mindset as a community is to spend the money we have, instead of saving it, then it makes it a little easier to explain how prices got out of control. When a buyer is looking for a house they go through pre-qualification for a loan. Let’s say that they were originally thinking they could comfortably afford a home for $150,000 – but the bank pre-qualifies (in other words will lend) them for $200,000. In many cases, they would go ahead and purchase a home for $200,000. Sellers, being aware of this, would increase their homes’ prices to take advantage of the growing market, which then lead to comparables increasing in value. Which leads to another reason house prices increased so much – the easy availability of money.

Lending was not as restricted as it is now. There were fewer obstacles to gaining a loan and sub-prime loans were popular. Sub-prime loans are loans made to people who don’t qualify for a conventional loan for various reasons such as low income or poor credit. Since so many buyers had access to money sellers could ask for higher prices – after all if the buyer didn’t like the price there were plenty of other buyers available who would pay that much.

So why would somebody want to lend to applicants who would not pay back the loan? Why was money so easily available? Well with house prices rising as quickly as they were lenders saw the housing industry the same way as buyers. If a buyer defaulted on a home, the bank would easily foreclose on the home and sell the home and make that 30% return from the growth in equity instead of the homeowner. To lenders it was a win-win situation.

The combined problem of the consumer mentality and easy access to money created the feeling that the economy would never burst and decline. Buyers were buying “investment” properties hoping that they would increase in value only to turn around and sell it off right away – when they didn’t have any business buying a second property at all. Banks were lending out money as quickly as they could hoping to make that similar return. In addition, predatory lending (a term coined that identifies lenders who would loan money to people who could not afford it) and the proliferation of sub-prime mortgages – which targeted consumers who were very likely to go into default – continued to inflate the prices.

Meanwhile, individuals were taking on more debt (consumer mentality again) by using

Spending money and taking on more debt became a way of life for us. If we ever became too leveraged we could count on our home's skyrocketing value to pay off everything. Then the bubble burst.

home equity loans to purchase consumer goods, like cars and other luxuries, or pay off other bills, such as medical bills. Home equity loans were created so that homeowners could use equity in their homes to apply it their homes in the form of renovations and repairs – and home equity loans should always be used as a last resort. When you get a home equity loan you are essentially starting your equity over at $0. For example: You owe $30,000 on your home mortgage, you get a home equity loan for $70,000, and your home can sell today for $100,000 – in the end you have $0 equity until you pay off some of your debt. With the rising house prices, equity was being created literally out of thin air – which is extremely dangerous. But since house prices were rising so fast many people figured that they could sell their home and pay off their mortgage and their home equity loan and still have some profit leftover – again relying on something that doesn’t really exist, hence the term bubble.

Then the bubble burst. Heavily leveraged people (people with a lot of debt) were getting foreclosed on and evicted. At first the bank’s priority was to unload the asset as holding onto it results in expenses (property management, lawn care, utilities, taxes, HOA fees, etc.) so they would under price the property to sell it quickly. This in turn resulted in a comparable for your home being sold for a low list price. From there it was a chain reaction house after house. The final result was that many people lost all the equity in their homes – including the equity they earned from paying their mortgage and the unearned equity from appreciation. This meant people with home equity loans had double the payments on their home with no way to get out. Individuals without home equity loans found those loans suddenly unattainable (since all the equity disappeared) and people couldn’t sell their homes without having to pay the difference in cash or perform a short sale.

Then money became harder to resulting in fewer buyers. The opposite effect then took place – buyers were getting bargains because there were fewer buyers to compete for the same property. After all, if the seller didn’t accept this offer who knows when the next buyer would come along?

Please keep in mind that this is a simplified version of the story and things are changing for the better. All parties (individuals, banks, businesses, and the government) are taking steps to resolve the economy crisis together. The most important point to pull away is that the bank is willing to work with you to help you with your distressed situation. It’s also important that we as a country get into the mindset that we save during prosperous times (which includes not buying big budget items like homes and not getting home equity loans) so we have money to spend when the economy is in a decline. The economy is a cycle and even though it may not be easy to predict when it will go up or down we know that it will – and the best way to always protect yourself is through careful spending.

Robert McGlothlin, VA Licensed Broker of McGlothlin Properties and Certified Distressed Property Expert

Do foreclosures and short sales in my neighborhood devalue my home?

As long as a foreclosed home is in average condition it shouldn't affect your home's value since bank's are making an effort to price home's more appropriately. Short sales are usually priced competitively to make a strong case to the lender when a contract comes in.

Today this is not necessarily the case. While bank’s still have a high priority to unload the property from their assets they are taking more rigorous steps to make sure the property is valued appropriately. Banks hire real estate agents to perform BPOs and appraisers to appraise the property. The bank earns more money this way for the property and prevents other properties from being devalued.

However, the condition of the house has to be taken into consideration. Many foreclosed properties have damage on the inside for various reasons and the homes must be priced as such. This can affect your property’s value the same way a run down home in your neighborhood will affect your home’s property value. To help reduce the impact, continue to clean and maintain your property. A run down house will not be a comparable to your home if you keep it beautiful.

Short sales are priced the same way as regular sales so they should have less impact on your home’s property value than a foreclosure would. In the case of a short sale, the seller wants to get as much as he can for the property in order to make a strong case for the bank to approve the short sale. It is actually not in the seller’s best interest to sell the property for very little.

If I am underwater and in a distressed situation but I want to stay in my home, what are my options?

If you can budget and find a way to stay in your home you'll avoid headache, stress, and credit ramifications.

The first thing you should determine is if you can stay in your home and continue to afford living there. Also consider how much you make per month and how much you have in savings. The bank will ask to see everything related to expenses and income. If the bank determines that you can continue to afford your payments they will most likely reject any request for a short sale and other foreclosure solution options. If you can continue living where you are your home will eventually gain value again and you will continue to work towards gaining equity in your home.

If you are already behind on your payments you may have received a letter from your lender stating that you are in default and that the total amount of your mortgage is due along with any late fees. However, being in default and foreclosure are not the same thing. While you are in default you still have options to delay the foreclosure and eventually resolve it without going to foreclosure.

One solution is reinstatement. This is a very costly solution as it requires you to pay all of your late fees and the total amount of the mortgage owed up to date. This basically gets you back into the same position as you were before you stopped making payments (or full payments). This is a viable solution if you are no longer in a distressed situation, but for most homeowners this is not a possible solution.

The next solution is called forbearance also known as a repayment plan. You work with your lender to increase your mortgage payments to cover back payments owed. It’s similar to reinstatement in that you’re paying what you owe up to date but you get to pay it over time. However, lenders qualify you for forbearance – basically it’s up to the bank whether you can go on a repayment plan. Of course, because it increases your mortgage payment this is also only a viable solution if you’re no longer in a distressed situation.

Avoid working with or hiring companies or individuals who ask you to pay an upfront fee to perform a short sale or assist with a loan modification. Real estate agents get paid out of the proceeds of the short sale. In most states, requiring fees to perform these kind of consultation services is illegal. Learn more about short sale or loan modification scams at www.loanscamalert.org.

Mortgage or Loan Modification
Mortgage or loan modification is a possible solution. When a loan is modified it usually reduces some part of the loan (interest rate, principal balance, term, or a combination) to lower the monthly payment resulting in a more affordable mortgage. While this may sound like an attractive solution, you should be aware that most loan modifications are not approved even with the government regulation and assistance from programs like HAMP (Home Affordable Mortgage Program). HAMP was intended to lower mortgage payments for 7-8 million homeowners but only around 500,000 homeowners actually got a loan modification (as of March 2011 – according to the national taxpayers union).

In addition, people looking for loan modifications have been targets for scammers. We cover short sale and loan modification scams further down the page.

Finally, since loan modifications are at the lender’s discretion (meaning the lender has to approve it) you may not qualify for it. Be very careful about going on a “trial basis” for your loan modification. Some lenders will let you try the loan modification for a few months. While you are TRYING it you are actually making payments BELOW your actual mortgage – remember the loan modification is NOT PERMANENT while you are on the trial period.

If the loan modification is denied, then not only do you owe the difference of the payments during each of the payments made during the trial period, but your credit could also be damaged because it is seen as your payments were late, missed, or insufficient. This is especially important for individuals whose credit has not yet been damaged or who aren’t behind on their payments yet. If you decide to go on a trial basis loan modification make sure you get from the lender a signed document stating that if the modification does not go through they will not report it to the credit bureaus as late or missed payments. If they say yes and provide signed documentation then your credit should be safe. If they say no, then you have a pretty good idea of what you can expect from the loan modification trial period.

Refinancing is a popular solution as it allows you to completely change your mortgage. Technically speaking, refinancing replaces your debt obligation with a new one with different terms. Refinance can be a very viable solution if you have multiple loans out on your house – such as a home mortgage and a home equity loan. By consolidating the loans, you end up with one payment, which is hopefully less than the sum of the two individual payments.

Since refinancing is just like getting a loan you are required to qualify for it, which means you need a decent credit score and your home has to appraise – which may not be possible if your home is underwater. Be sure to ask the lender for what value your home has to appraise in order to qualify for a refinance. Once you have that figure you can ask a real estate agent to provide a free CMA (comparative market anaylsis) for your home or a list of all properties listed and sold in the past 3-6 months in your neighborhood. That way you have a pretty good idea if you will qualify for the refinance before paying for the appraisal. Refinancing may require non-refundable fees and charges upfront to begin the process making this solution expensive – especially if you are already in a distressed situation. If you don’t have sufficient equity in your home, your home is underwater, or if you’ve refinanced recently then refinancing may not be a viable solution.

What are other foreclosure alternatives?

If staying in your home is not an option for any reason there are other solutions to foreclosure.

Renting can be a good alternative to foreclosure especially if you want to keep the house. Be sure you understand all the risks involved with renting before you decide to rent your house.

Renting the property is a very popular solution. If you are able to rent the property for at least the mortgage payment then you can keep the property indefinitely – or for as long as the renters live there. It’s a great way to keep the home for future use.

However, there are many issues associated with renting:

First, where will you live? Can you live somewhere rent-free? Can you rent somewhere that was less than your mortgage?

Second, what happens when the renters leave? Most renters will rent for a year but many renters who are in distressed situations themselves consider agreeing to leases for 2 or even 3 years – of course they often ask for a lower rent. But if the renters leave in a year, how quickly will it rent again? Will you have to pay a month’s mortgage in addition to your current rent? What about two or even three months?

Third, is market rent the same as your current mortgage? If not you will have to make up the difference. Can you afford this difference along with your current rent?

Fourth, how will you handle repairs? Fortunately, if something breaks in the place you are renting to live in the landlord has to replace it – conversely, that means if something breaks in your home you’re renting you have to replace it. You can put into the terms of the lease that if something breaks the renters have to pay the first $50 or split the costs with you on a certain percentage. Of course if they can’t pay it, the home belongs to you so it’s your burden to actually repair – and if it is necessary for suitable living (no running water, no heat in winter) then as a landlord you’re legally required to fix it regardless of the terms of the lease.

Although finding good renters is a worry of many landlords, having a competent real estate agent is a good way to find good qualified renters. They will help you look into the renters’ backgrounds and check their sources. Despite this, there is always that risk when renting your home – but a competent real estate agent greatly reduces that risk.

Deed in Lieu of Foreclosure
A deed in lieu, also known as a friendly foreclosure, is when you sign the deed over to the bank. It allows you to avoid a messy foreclosure, going to court proceedings, and deeds in lieu often allow you to avoid a deficiency judgment. A deficiency judgment is when the bank comes after you for what you owe them regardless if you live in the property or not. A deed in lieu can still be reported on your credit as a foreclosure so the same detrimental effects can apply. Before signing anything, make absolutely sure that bank agrees to not file a deficiency judgment and that they will not report the deed in lieu as a foreclosure to the credit bureaus. If the lender won’t agree, make sure you completely understand how that will affect your situation before signing anything.

Look for real estate agents with the CDPE designation and make sure you ask to see their certificate directly from the CDPE site (don't settle for just a print out). When banks initiate a short sale they look for agents with a CDPE designation. Learn more about the CDPE designation at www.cdpe.com.

Short Sale
A short sale is a popular alternative to foreclosure. A short sale is when a homeowner sells their home for less than what they owe to the bank. This could be any loan on your house including your mortgage or a home equity loan. During a short sale, you list, price, and market your home as you would like a regular sale. When the buyer makes an offer you then submit it to your lenders’ short sale department along with your short sale package, which proves your distressed situation and financial hardship. The bank will most likely counter the buyer for more money, just like you would see in a regular sale transaction. Once the bank and buyer agree to a price, the bank issues a short sale approval letter, and the closing proceeds as normal.

Now this is very simplified version. In reality short sales can take up to a year since so many people are performing short sales and banks are dealing with defaults and foreclosures but the process is becoming faster and faster everyday. An experienced agent can also streamline the process by helping you assemble your short sale package correctly as well as competently communicating with the bank. Even though short sales can take up to a year, the most important part of performing a short sale is that during the short sale process it temporarily halts the foreclosure giving you time to complete the short sale and find a new place to live.

Be aware that short sales still negatively affect your credit score and can prevent you from qualifying for a loan for up to 2 years. That’s still better than foreclosure or bankruptcy which can prevent you from qualifying for a loan for up to 5 to 7 years, and stay on your credit report forever. There’s no check box on a loan application that says, “Have you ever performed a short sale?”

For more information about short sales visit our short sales help page.
For even more information about short sales and foreclosure alternatives visit our sister site at www.NoVAHomeHelp.com.


What are some options for my distressed situation that I should not consider?

Protect yourself and your home by researching all alternatives to foreclosure and speaking with reputable and qualified professionals. If something sounds too good to be true or odd, trust your gut and double check that piece of information.

You definitely don’t want to stop making your payments, or stop making them all together. If you can pay anything, even if it isn’t the full amount, continue to do so. If the bank sees you making an earnest effort they tend to be more willing to work with you. Also, if you stop making your payments you will affect your credit which in turn will affect your ability to rent or borrow.

You definitely don’t want to let your property go to foreclosure. A foreclosure is massively detrimental to your credit and will affect your credit and ability to borrow for about 5 years.

Bankruptcy will not allow you to walk away from your mortgage, but this is different from state-to-state and only in certain situations. In short, if you file bankruptcy your home can still be foreclosed on. That being said, bankruptcy can clear up consumer debt, like credit cards and lines-of-credit, allowing you to redirect money being used to pay those bills to paying your mortgage. Bankruptcy can also delay, but not completely avoid or prevent, the foreclosure. So unless you are able to start paying your mortgage payments after declaring bankruptcy the bank will start the foreclosure process again.

Bankruptcy is a very serious and costly process. It affects your credit for at least 7 years preventing you from qualifying for a loan. Also, you can only declare bankruptcy every 7 years. Bankruptcy can be an alternative to foreclosure if most of your debt is credit card debt (for example) which the payments you making on those bills, when discharged, can be redirected to pay your mortgage instead. Home equity loans may or may not be discharged in a bankruptcy. Make sure to speak with a qualified and reputable bankruptcy attorney to see if bankruptcy can help you.

There’s a lot of information available online about foreclosure solutions. How can I protect myself from scams?

This is a very sad but serious matter. Be very careful about people who guarantee that they can stop or halt a foreclosure, get you a loan modification, or get a short sale approved. Nobody can guarantee any of these. Short sales can temporarily halt a foreclosure, but if the short sale falls through the foreclosure proceedings continue. A loan modification is at the discretion of the bank, so no third party has any ability to influence the bank’s decision anymore than you as the borrower can. Likewise, a short sale is at the discretion of the bank who can deny the short sale at any time or even deny you a short sale without any negotiation.

Also be wary of anybody who asks for a fee up front to perform, assist, or consult with any foreclosure alternative – be they real estate agent, attorney, or accountant – especially when it is coupled with the above “guarantee.” Real estate agents, and you as the buyer, are not charged to initiate a short sale. In fact, in many states it is illegal for an agent to require a seller to pay a fee. It also doesn’t cost them anymore to list the property as short sale than it does to list it as a regular sale. There are plenty of agents, including McGlothlin Properties’ agents, who perform a short sale for free. These agents don’t get paid until the property closes, just like a regular sale, so they are as motivated as you are to make sure the short sale goes through.

While there are government programs that help prevent or offer an alternative to foreclosure, your lender can inform you if you qualify. HAMP, the home affordable modification program is government-sponsored program that helps with the loan modification process. HAFA, the home affordable foreclosure alternatives program is a government-sponsored program that encourages deeds in lieu and short sales. As mentioned, you have to qualify for the program which your lender can confirm. Keep in mind, HAMP and HAFA are government-sponsored programs and are free to benefit from if you qualify. In other words, nobody should be charging you a fee to enroll you in these programs.

As real estate agents we cannot comment on attorneys or accountants who charge a fee upfront to assist with foreclosure avoidance. In those cases, you are paying for professional counseling and expertise. Just keep in mind you are completely capable to negotiate a loan modification directly with the bank on your own. If the bank denies you a loan modification, it’s highly unlikely a third party could have any influence to get your loan modification approved. If you do speak to an attorney or accountant, the conversation should focus on how foreclosure alternatives will affect your credit and your future – not how to get approved or how to make the process go faster.

Always confirm the credibility of the company and/or individual including any of their designations. You can also confirm their credibility by asking their industry peers. You should only deal with companies and individuals who are licensed (like a licensed real estate agent) or approved by HUD (the department housing and urban development). Real estate agents’ licenses in VA are available on Virginia’s website through DPOR (the Department of Professional and Occupational Regulation) at http://www.dpor.virginia.gov/regulantlookup/selection_input.cfm?CFID=8370755&CFTOKEN=84298311. Attorneys in Virginia have their licenses available on the Virginia State Bar website at http://www.vsb.org/site/regulation. Accountants’ licenses can be found on the Virginia Board of Accountacy’s website at http://www.boa.virginia.gov/Consumers/index.shtml.

A helpful website to refer to for more information about loan modification scams is www.loanscamalert.org. Many of the tips on their website can apply to all foreclosure alternatives and is a helpful resource for any homeowner.

What happens to me during a foreclosure?

Foreclosures are trying for homeowners, expensive for banks, and can be detrimental to neighborhoods. Banks tend to prefer to work out an alternative with homeowners.

Here’s how the foreclosure process goes in general following Virginia law. Depending on your state’s laws the process may be different.

After a borrower misses a payment or payments the lender sends the borrower a letter notifying them they are in default. A borrower may have received letters prior to the default letter alerting them they have missed a payment and the fees associated for missing a payment.

Once the borrower goes into default the bank then contacts the trustee attorney to begin the foreclosure process. The state of Virginia is a Deed of Trust state where the deed is held by a third party or trustee. This trustee is the trustee attorney and holds the deed to your property from the day you close on your property. When the mortgage is fully paid, the bank clears the title on your home by recording a Deed of Reconveyance removing their interest in your home. Title is the right you have in your home, and any liens or other interests in your home are called clouds on title.

The trustee attorney starts filling out and sending the paperwork to carry out the foreclosure. These forms go to the clerk of the court that has jurisdiction in your area – in Virginia it is the county’s court for example. This is called filing a notice of default.

After the notice of default has been filed the bank hires a third party, such as a real estate agent or appraiser, to evaluate the property to determine its value. These individuals will come to the property to take pictures. It is not uncommon for 3-4 different people to come take pictures of the property.

Meanwhile, the borrower will receive a notice in the mail and a certified letter telling them when and where the foreclosure will take place. This information is also advertised in a well-circulated newspaper in the property’s area. It is advertised multiple times – once a week for two weeks.

On the date of the foreclosure, the trustee attorney will have a foreclosure auction at the courthouse in a public area and the bank’s representative will bid to what is owed to them. Because the auction is public, anybody can bid on the property and the individual who bids the highest will buy the property at the foreclosure sale – even if it isn’t the bank.

After the foreclosure process the eviction process takes place next. This explanation will proceed as if the bank won the property during the foreclosure auction.

After the foreclosure auction, the bank begins to proceed with taking possession of the property. They may hire real estate agents to perform exterior BPOs where the agent estimates the value of the property based on the outside of the property. They may also ask the agent to perform an occupancy check – if the borrower has moved out then it is much easier to take possession of the property. If the borrower is still living there, banks often ask their real estate agent to offer the borrower money in exchange for moving out. This is called cash for keys or relocation assistance. The amounts offered vary and the cash for keys offer is completely negotiable. If the borrower refuses the cash for keys offer the eviction process continues.

If the court allows the bank to evict the borrower and the borrower has not pursued legal action, the court schedules a date for the eviction. On the date of the eviction the county sheriff comes to the property along with the bank’s representative, either an attorney or a real estate agent, and a locksmith. The locksmith changes all the locks on the property and the sheriff posts contact information for the borrower regarding the lockout. The borrower then has to contact the sheriff or the bank’s representative to make arrangements to get their personal property – typically the window is 24 hours. If no notice is made to remove the personal property, the bank then hires contractors to trash out the property which is where the contractors throw out all of the personal property. In more drastic cases, on the date of the eviction contractors hired by the bank can remove all of the personal property from the home and place it on the nearest public easement like a sidewalk.

That is the entire foreclosure process, including eviction, from start to finish. While the foreclosure process can happen relatively quickly (in a few months) the eviction process can take longer. Both processes are very expensive for the bank, especially when the legal fees are added in, so the bank tries to save money where it can – such as negotiating cash for keys. In addition because of the high number of foreclosures the courts get backed up with paperwork delaying the eviction hearing. However, you should never count either of the processes taking a long time – while it is common for it take a while the foreclosure and the eviction can also happen relatively quickly.

At anytime before foreclosure sale the borrower can delay or temporarily halt the foreclosure by working with the bank (through the loss mitigation or similarly named department) to find an alternative to foreclosure or initiating a short sale. Anytime before the date of the eviction, the borrower can accept or renegotiate the cash for keys offer but be aware as an offer it is at the bank’s discretion to accept or refuse it.


Are short sales always the answer?

Before making any decisions make sure you speak to a qualified professional, such as an attorney or accountant, in addition to speaking with a CDPE certified real estate agent.

Short sales, and many foreclosure alternatives, negatively affect your credit. If you have a job that has security clearance, having a bad credit score could affect your job security. Be sure to speak to a financial adviser or legal counsel before making any decisions on any of the foreclosure alternatives if your job requires security clearance.

Short sales, as well as many of the foreclosure alternatives, can be more difficult to conduct if you have more than one home or property – such as investment properties like a rental. This is not always the case if you are currently renting yourself and using renting out the property as a foreclosure alternative. In the case of a second home, vacation home, or investment property you can expect a more difficult transaction – but it is still possible. The worse thing you can do is not try.

Some lenders may say that you are required to try a loan modification before you can perform a short sale. This can be true of lender-initiated short sales who are participating in HAMP (home affordable modification program) and HAFA (home affordable foreclosure alternatives). HAFA requires that borrowers go through HAMP before using HAFA. However, you are able to initiate a short sale as a borrower at anytime.

The difference between a lender-initiated short sale and a borrower-initiated short sale is who starts the process. The below question and answer covers the difference and the process in more detail.

What are the steps to performing a short sale?

There are different ways to go about initiating a short sale. Sometimes you can call your lender to ask them if they have a short sale department or loss mitigation department that helps with initiating a short sale. In a bank-initiated short sale, the bank finds a qualified real estate agent to refer to you to assist with the short sale. The bank also has you provide the short sale package up front so you know if you qualify for a short sale right away. This also speeds up the short sale process since the bank already has your information and knows you qualify for the short sale.

If your bank does not perform bank-initiated short sales then you can initiate a short sale on your own. The first step is to find a qualified real estate agent, preferably with a CDPE certification, to help perform the short sale. McGlothlin Properties is CDPE certified.

Next you list the property as normal. Your agent will find comparables to price your property appropriately. Then the sale continues as normal until you find a buyer. The buyer submits an offer and you accept. It is imperative you price the property right and get an offer right away. Some lenders will put the foreclosure process on hold only if you have an offer to submit to them for review. You should still call your lender to let them know you are initiating a short sale – they will appreciate being kept in the loop, may assist you, and may halt the foreclosure process.

Meanwhile, you as the borrower should begin compiling your short sale package. To see all of the paperwork that is typical in a short sale package click here. Keep in mind that many pieces of the short sale package you may not receive until after you have submitted the buyer’s offer. You may be able to receive this paperwork ahead of time by calling the bank to let them know you are conducting a short sale.

Once you have the offer ratified, or signed by both parties, and you have your short sale package complete your real estate agent will send the offer and package to the lender. The lender will then communicate with your agent negotiating the short sale, asking for additional paperwork, or negotiating additional terms. Additional terms can vary greatly but in our experience many lenders will ask the borrower to accept a much smaller note to pay over time. Recently during a short sale we performed, the lender asked the borrower to accept a $6000 note at 0% interest for 5 years in addition to completing the short sale. This is just an example – your experience will most likely be different.

Once the bank reviews your short sale package and verifies that you qualify for a short sale they will then counter the buyer’s offer – almost always asking for more money. This is typical and should be expected for any offer. If the buyer’s agent is experienced in short sales they will be expecting this. The buyer can then counter the bank back or accept the counteroffer. Once the bank approves the offer they send a short sale approval letter to your agent which allows you to close on the transaction.

I have multiple loans on my property. Can I still perform a short sale?

Having more than one loan on your home may make your short sale transaction a little more complicated, but it is still possible to perform a short sale on a home with more than one loan.

Yes! A property with more than one loan is very common. This includes properties that were purchased with two loans and properties with a mortgage and a home equity loan.

The process may take longer when there are multiple trusts involved since each trust has to issue a short sale approval letter. That being said, it is actually relatively easy to get an approval letter from your second trust, also called a junior lien. This is because as a junior lien they automatically expect to get paid next-to-nothing (if anything) during a foreclosure and anything they can get during a short sale is better than nothing. In addition, second trusts know exactly how much they can expect from a short sale so they can issue the approval letter much faster. That being said, the first trust – who has the legal right to be paid in full before any junior liens – can actually negotiate how much the second trust can receive. It is not in the first trust’s best interest to not let the second trust get anything since their approval is just as necessary for the sale to go through.

Is it common for buyers to walk away from a contract on a short sale? Do lenders reject short sales?

In the past, this was true. However, as short sales are getting processed faster and faster buyers are walking away from short sale transactions less often. There is a short sale addendum that has a contingency built in for short sale deadlines. Essentially this contingency states that if the seller doesn’t get the short sale approval by that date the buyers have a right to void the contract.

Agents are better educating their clients about the short sale process now so buyers are going into these transactions more willing to wait for the approval. In other words, there are more buyers who are okay with the long wait writing on short sales than before.

Be aware that your lender can also cancel or reject your short sale, which will essentially void the contract as well. Depending on the terms of the rejection you may be able to still perform a short sale. For example: A short sale we performed was rejected because the sales price was too low. We brought another contract with a higher price and it was accepted. Conversely, if your short sale is rejected because you are determined not to have a distressed situation then another contract will not allow it to go through.

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