Let’s face it, some homeowners have gotten in way over their head on their property and just need to get rid of it. There’s just not a lot of buyers out there and they can’t sell it for what they paid for it. That leaves them with two options: Short Sale or Foreclosure. Most people who are underwater on their loans opt for Foreclosure – defaulting on the loan and giving the property back to the bank. Often people have not fully explored all their options with their lender and are unaware of the Short Sale option. In simple terms, a Short Sale is asking the lender to take less than what is owed on the loan. This allows a homeowner to lower the selling price of their home to a price point that will get it sold and prevents them from defaulting on the loan. Here are some major differences between a short sale and foreclosure.

1) Credit Score – Defaulting on a loan and going into Foreclosure will result in a 200-400 point hit on your credit score. That’s big and it will affect not only your ability to get another home loan but any credit card limits, car loans and any other purchases made from credit. A Short Sale typically will reduce your credit score from 50-130 points – a much more manageable hit.

2) Future Home Purchase – A Foreclosure on your record will prevent you from obtaining a loan anywhere from 5 to 7 years. However, if you are not behind on payments and opt for a Short Sale, you are eligible to purchase another home under Fannie Mae in 2 years. The wait for an FHA loan is 3 years.

3) Deficiency Judgement – Another more immediate cost associated with Foreclosures and Short Sales is the deficiency judgement. This is the lender asking for you to pay them the difference between the sales price of the home and the value of the loan. The government and the lender see this as income and could have tax implications along with the fact that the lender still wants money from you. Typically, with Short Sales these days, the lender is willing to forgive that difference. With a Foreclosure, the lender is less forgiving and usually goes ahead and issues a deficiency judgement for that difference.

Although neither is a good alternative to hanging in there and making the payments, pursuing a Short Sale has much less of a financial impact than a Foreclosure.  Here’s a link to some resources for preventing Foreclosure.

As many have been predicting, mortgage rates are starting to rise, reports the Wall Street Journal: rates were up last week to 5.07%, from 5.02% two weeks ago. Some see big jumps coming, reads the headline.

“To lock in the average 5.07% rate, borrowers had to pay fees equivalent to around 1.1% of the loan with a 20% down payment,” reports WSJ. “While rates have been low for most of the year—particularly since falling below 5% in September for the second time this year—one big question looming is what happens to those rates once the Federal Reserve slows, and ultimately stops, its debt purchases from Fannie Mae and Freddie Mac.”

After our blog on the subject, the Austin-American Statesman published an AP article about the current problems in home appraisals, yesterday. Here are a couple excerpts.

Home sales stabilizing, but prices still falling

By Alan Zibel
ASSOCIATED PRESS
Wednesday, June 24, 2009

WASHINGTON — Nationwide home sales may have finally hit bottom, new data show, but a host of thorny problems are hindering a recovery.

Sales of previously occupied homes rose by 2.4 percent from April to May — the third monthly increase this year — but the results missed analysts’ expectations.

Home sellers are still competing against a growing number of bargain-priced foreclosures, buyers are paying higher mortgage rates, and new rules for property appraisers are delaying or scuttling many deals.

“We have just been flooded with e-mails, telephone calls on the appraisal problems,” said Lawrence Yun, the Realtors’ chief economist.

…New rules designed to tackle conflicts of interests in the property appraisal process have caused many transactions to fall apart or be delayed.

Responding to widespread complaints about inflated appraisals during the real estate boom, New York Attorney General Andrew Cuomo reached a pact last year with mortgage companies Fannie Mae and Freddie Mac on a new code of conduct for the industry.

Since the rules took effect May 1, real estate agents and mortgage brokers say a number of appraisals are coming in surprisingly low.

The National Association of Realtors is pressing regulators to put an 18-month hold on the code, arguing in a letter Monday to regulators that the code is “hampering the housing market’s recovery.”

Although the new rules are not ideal, appraisers are not to blame for a market in which prices are falling rapidly, said Bill Garber, director of governmental relations at the Appraisal Institute.

He defended the industry, saying, “The appraisers only report what’s going on in the market.”

The Neal Spelce Austin Letter from June 19 outlined a new problem trending in home sales in Austin and Travis County. That problem is surrounding the home appraisal process.

For anyone unfamiliar with the real estate process: a Home Seller and a Home Buyer negotiate, then agree on a price for a home. The Home Buyer is pre-approved for a loan, from the bank. The home is then inspected. If it passes inspection, the Home Seller and Home Buyer agree to make the deal. The lender requires third party appraisal. Where does that appraisal come from? 

It used to be that loan officers, mortgage brokers, real estate brokers or real estate agents could help select an appraiser. But as of May 1, 2009, a new National Home Valuation Code of Conduct was put into place. The new policy states that any mortgage to be owned or guaranteed by Freddie Mac or Fannie Mae cannot allow those parties (loan officers, mortgage brokers and licensed Realtors) any role in selecting the appraiser.

This agreement, struck back in March 2008 between Freddie Mac/Fannie Mae, the Federal Housing Finance Agency and the Attorney General seems like it may be in the interest of fairness. But the result is that many lenders are now outsourcing to appraisal management agencies. These agencies take part of the appraisal fee, from 30% – 50%. (With these cuts to their fees, experienced appraisers are turning down these agency offered jobs.)  There’s also a “quantity over quality” mentality, as the agencies often impose a 48 hour deadline for the appraisals. These quick appraisals are often done by out-of-area appraisers. 

The result of the “faster, quicker, cheaper” mindset? Less accuracy and less certainty of a home’s value. Further, if there isn’t a comparable sale, an in-area appraiser has a better and surer understanding of intricacies from neighborhood to neighborhood, and street to street.  

What can a Home Seller expect to see, then? Their appraisal may be outrageously incorrect, although there are cases of these appraisals being challenged.