What is Loss Mitigation?
Loss mitigation is made up of two primary components:
- Limiting actual costs and expenses incurred by the lender on “at risk loans”
- Reducing the lenders exposure to risks that are tied to real estate ownership
Every lender or bank approaches loss mitigation with their own set of goals and priorities. Some will move aggressively to cut losses and limit risk by pushing short sale files to close quickly. Others will proceed with caution on short sales, placing higher priority on approving only the files with desperate financial circumstances. The timing and process depends on how a particular lender views their needs to mitigate losses.
In addition, each lender or bank has a different structure with varying policies and protocols. They may have departments, staff and third party companies assist in the management of short sales and foreclosures. You may be assigned one case manager, or end up working with multiple parties in a department of case managers. Each operation preference has advantages and disadvantages, but either way you will have to work with someone in a position of authority to determine the outcome of your short sale.
A short sale can be a good alternative if:
- You cannot refinance or secure a loan modification on your mortgage
- You have lost your job or are facing a long-term hardship
- You are, or may soon be behind on your mortgage payments
- You need to move or relocate and you owe more than your home is worth
- You have been trying to sell your home at a price that covers what you owe but cannot find a buyer to pay that price point
- You can no longer afford your home
Advantages to short selling over foreclosure for both the homeowner and the bank:
- A foreclosure takes more time and requires a bank to follow long, required processes
A short sale is an option banks and homeowners participate in lieu of a foreclosure.
- A bank has the benefit of a homeowner taking care of the property during the sale versus the full burden, and cost of maintenance
- Foreclosures can be more costly than a short sale
- Short sales take more time than a regular transaction but a buyer is more likely to remain throughout the sale because of the purchase price benefits
- Unlike a foreclosure, a short sale is considered a responsible choice by the seller and minimizes the impact on their credit score
The bank will begin foreclosure proceedings if a seller defaults on mortgage payments or is not able to secure a modified loan, recover from the monies owed, or opt to short sell.
The Short Sale Process
A short sale transaction is similar to a normal real estate transaction. You will still work with your REALTOR® to list, market and sell your home. They will guide you every step of the way through disclosure requirements, home preparation and negotiations. However, you will also work with the lender or bank that is owed the monies on the home. They will work with you and your REALTOR® to:
- Set the list price
- Collect financial information and negotiate with any second or third lien holders if applicable
- Review any acceptable offers to determine if a transaction can move forward
- Agree to terms of the sale and discuss deal points throughout the transaction or negotiations of the sale
- Work with the buyer and the buyer’s lender to finalize all details
There are occasions where a seller may be eligible for relocation assistance to use toward moving expenses and make the transition smoother. You may also have the option of a Deed-in-Lieu of Foreclosure, or a Mortgage Release, where you choose to voluntarily deliver title to the lender instead of a short sale. These and other options can be explored with the lender.
Short sales take time. The transaction usually lasts a lot longer than a regular sale due to the number of parties involved and the processes a bank requires. You should be prepared for a longer time to close and consult with your REALTOR®, Attorney and Tax Accountant regarding current tax implications and credit score impacts from a short sale.