Tara O'Brien's Minneapolis Real Estate Update: July 2007

For a variety of reasons, it is possible that the total debt on your home may be more than what the home is worth. Most of the time, this isn't a problem because time is the solution. Depending on how much you owe, just wait it out and the value of your home goes up.
Problem solved. Unfortunately, this could take years.

This solution does not work for everyone though, because some folks are stuck in a situation where they absolutely have to sell their house.

This can happen for many reasons, some good and some not so good: relocation, financial hardship, divorce, death, illness, or anything at all. The result is that you may have to move, but you can't sell your house and make enough on the sale to pay the closing costs.

So what do you do?

One option is to do nothing and not make your mortgage payment. That's a worst-case scenario because it impacts your credit rating more severely than anything else possibly can.
Another option is something called a "short sale." This is when you fess up to the lender, let them know about your hardship and ask them to accept less money than you owe.
Of course, the lender doesn't want to do that, but they also don't want to pay all the costs of foreclosing on a home, repairing any defects, placing it on the market, and getting the best price they can in what may be a market already overstressed with excess inventory.
Lenders absolutely hate to foreclose, so they may be willing to consider a short sale.
Not always so don't get your hopes up.

A short sale involves a lot of paperwork, time and effort and it is best if you have a real estate agent or someone knowledgeable to help guide you through the process and give moral support. A lot of stress is involved.

The first step is to contact the Loan Service Department of your lender. That number will be in the documentation you receive about making your payment. Use the phone and the mail. Keep copies.

The lender will ask you to submit a financial statement. They want to know that you really don't have the financial assets to repay the loan after you sell the home.

That's just the beginning, assuming they give a tentative agreement.

Your real estate agent still has to put the home on the market, find a buyer, and get a bona fide offer. Once that has been accomplished, you submit all contracts and paperwork to your lender for a decision. This takes a while because there are several decision makers involved.

Your lender isn't usually your lender. They just service the loan for your actual lender, called the investor. Your paperwork is submitted to the investor for a decision.

Assuming you have mortgage insurance on the loan, they are another decision maker in the process. Mortgage insurance covers lenders in the case of loan defaults. That way they can justify making high LTV (loan-to-value) loans.

If the investor and the insurer both agree, your short sale is approved, and you can sell you home.

A short sale is basically a "forgiveness of debt." That counts as income and you have to declare it to the IRS.

Most buyers live in their new home an average of seven years or more. If that fits you, it almost always makes sense to buy rather than rent, in practically any market.

Why? First, if you are thinking about delaying a purchase because you want to "time the market" to get the very best deal, that is almost impossible to do with precision. Even if you are in an area with declining market prices, the most knowledgeable experts cannot reliably anticipate the "bottom" of a real estate market. Afterwards, they can look back and say, "The market began to turn in 1997," like it did in some areas of California that had a tough market in the nineties. Before the turn, though, no one knows.

Second, if you aren't an owner, you're a renter. Renting is just throwing money away. You don't get to reduce your income taxes by itemizing deductions like property taxes and mortgage interest.

As a renter, you are limited on what changes you can make to your living quarters. As an owner, you can paint your living room chartreuse if you want or put in an avocado green carpet. You can change light fixtures, garden and landscape. You can do whatever you want that makes your home a comfortable place for you and your family. It's your home, not a temporary place to sleep and eat until you do buy a home.

Third, interest rates are very low right now. If you wait, interest rates could be higher. That means your monthly payment could be higher, too. No one can predict rates that far in the future, of course, but rates are very low right now.

Plus, the easiest way to accumulate wealth is through home ownership. Three out of four people have more equity in their home than assets in retirement plans, stocks, mutual funds, and savings. Though no one can guarantee your property will appreciate, over time it generally does. Over the long term, you can generally count on it. In the last five years, the median price of homes all across America has increased in value approximately 10% per year. Usually, it's not quite that high.

Admittedly, there are some areas that had more rapid appreciation in recent years. Those markets may suffer from lower price-growth than the rest of the nation or region over the next couple of years.

How do you minimize the possibility of lower appreciation for your home?
Determine your price range. Then choose a neighborhood where your target price is in the lower tier of prices in that neighborhood. That way, your home has less vulnerability on the down side and the higher-priced homes will help pull you up during hot markets.
Also, try to steer away from homes on busy streets or homes that back to busy streets. Buy a house as close to the center of the tract as possible. Don't buy houses across the street from a park or a school. Try to buy in a homogeneous area, where all the homes are similar to one another. For example, if you are buying a single family home, you do not want to buy next to an apartment or condominium complex.

Finally, talk to a real estate agent and ask for advice. Ask them what the market is like in your area.

Best of all, there are LOTS of sellers out there right now. Inventory is high. If you make an offer, ask for incentives to buy that particular home.

If you are putting ten percent down or more, you can ask for up to six percent of the purchase price in incentives. These incentives cannot be rebates of cash or help with down payment, but you can ask the seller to pay your closing costs. You can also ask the seller to pay for a temporary interest rate "buydown" that lowers your payment over the first one to three years and still gets you the security of a fixed rate mortgage -- and fixed rates are very low right now.
If you're putting down five percent or less, you can still ask for incentives. The amount you can ask for is limited to three percent of the purchase price. The reason there are limits is because you are going to finance the purchase with a mortgage and lenders have guidelines on how much sellers can provide in incentives. Those guidelines help them limit loan fraud.
Talk to a real estate agent. Have that agent recommend a lender who will talk to you about incentives and explain what you can request.

Good luck.