Top Questions Answered:

1. Will I be able to get another home with bad credit?
2. Will it affect my credit?
3. Will there be a tax burden?
4. Will I have to move out right away and be on the street?
5. Will it be a big hassle?

Minnesota Short Sale Homes

What is the difference between a real estate short sale vs. foreclosure home and what does it mean and how does it work? This is a popular and important question in today’s national economy. I will define a short sale for you later in this article, but first I want to tell you why their seem to be so many short sales going on right now, so I will get into the definition of short sale in just one moment, but first please let me go over some of the common reasons and situations on how a homeowner gets into the situation and then on how to save your home from foreclosure through what’s known as the short sale process. I believe some of the most common situations that the homeowner gets into resulting in pre-foreclosure, is that they get behind on payments, and soon they are facing foreclosure, they soon learn that due to the current real estate market and how home values are going down quickly It’s then, that the homeowner realizes they have little or no equity and therefore they can’t afford to even pay real estate commissions. If it’s an investor or burnt out landlord they may get into a situation where it needs too many repairs, of which they can’t afford, and then the property becomes a vacant house due to many reasons like a job transfer, or a sudden need to move. Here is where the homeowner needs help and at this point we will call upon a short sale specialist as we now have an owner with a mortgage with a lender like Countrywide or a bank like Wells Fargo with a short sale house situation.  We may have you talk to a real estate attorney about Minnesota Foreclosure short sale law.

The definition of a Real Estate Short Sale is: A lender’s agreement to accept less than is owed (short payoff), as an alternative to foreclosure.

A message to all of my readers, I am going to try to keep updating this article over a period of time as I learn new ideas and information to help homeowners, investors, buyers, and anyone related to real estate with this popular subject. Let me now get into some short sale information and see if I can help answer a lot of the questions about the process and how shortsales work in Minnesota, let’s go over why a lender would even do a short sale.

Why Would a Bank do a Short Sale?

Banks are not in the real estate business and what I mean by that is the banks do not want your house back through the foreclosure process, they don’t want to own the property, they want to only lend money. Banks are in the lending and interest business. The reason a bank is willing to do a short sale is that the entire foreclosure process in addition to other costs can equal $50,000+ easily by the time the bank sells the house they get back through foreclosure. The lender offering the property for less than the underlying debt, or anything under $50,000 discount could be worth it to them. For example, let’s say a home owner owes $200,000 on a house and it’s now worth only $175,000 and the seller found a buyer for the $175,000. In this scenario, there is $200,000 owing on the property, so therefore it would take a “short payoff” on the banks part, just to get the deal done. Sometimes lenders will even count the loan as paid in full even with the discounted difference, but not always, it’s a negotiable item. The Four parties that are involved in a short sale are:
1. The owner of the property that is being foreclosed upon
2. A buyer that is interested in the property; maybe an investor seeking a discount
3. The third party that is servicing the loan, the lender itself, or a servicing company
(Conventional, FHA, VA, Freddie Mac, Fannie Mae, etc.)
4. PMI- Private Mortgage Insurance company with the lender

What is the Timeline for Foreclosures in Minnesota?
Here is a diagram: http://mnrealtor.com/consumer/ForeclosureProcess.pdf

 

2: The Mortgage: After the promissory note is signed, the borrower then gives the bank a mortgage and he/she(buyer) becomes the mortgagor and the bank becomes the mortgagee. This mortgage document will contain the following provisions:

• Acceleration Clause upon default: this provision would give the lender the right to seize the property if the borrower were not to honor the terms of the promissory note. This right, that the borrower has, would end as soon as the borrower cures the default by catching up on any delinquent amount in the arrears, if the buyer refinances, or if the buyer sells the property and pays off the loan.
  

• Due On Sale Clause: this provision would give the bank the right to call the loan due upon the transfer or (conveyance) in the property. The lender does have the right to do this per the provision in writing, but doesn’t always enforce it.
  

• Mortgage Covenants: these covenants known as rules or (promises) force the borrower to do certain things such as: make sure the property is insured and keep the property in good repair, pay property taxes, essentially it’s in there to protect the lender.

What then is considered default status?

The mortgagor is required to make the agreed upon payments on a monthly basis; however, a typical real estate mortgage would include terms requiring the mortgagor (borrower) to do more than just make the agreed upon payments. Such as, the mortgagor is required to maintain property insurance on the property, pay all real estate taxes that become due, and maintain the property for the benefit of the mortgagor and the mortgagee (lender) which was just stated above. In addition, the mortgage may include a provision that would prohibit the sale of all or of any portion of the property without the prior written consent of the mortgagee. These provision, as mentioned above, would be the due on sale clause. If the mortgagor would fail to abide by any of the terms in the mortgage, he or she (by definition) is in default status. Most real estate mortgages would have a “Power of Sale Clause” that would give the mortgagee the ability to legally take possession of the property.

Under Minnesota law, there are two methods of foreclosing a real estate mortgage:

Foreclosure by Advertisement (Non Judicial) (most common method)

To initiate a foreclosure by advertisement in Minnesota, the creditor(lender) would need to prepare what is referred to as a “Notice of Mortgage Foreclosure Sale”. This notice must specify in writing, the name of the mortgagor, the mortgagee, as well as the original principal amount that is secured by the mortgage, the date the mortgage was originated, the amount the lender claims to be due on the mortgage including taxes paid by the mortgagee, when and where the mortgage was recorded, a description of the mortgaged property, the time and place the sale will take place, and the time that will be allowed by Minnesota law for redemption by the mortgagor. When this notice has been prepared by the creditor, it must be published in a “qualified” newspaper in the same county in which the foreclosing property is located for a period of at least six weeks prior to the sheriff sale. After the foreclosure notice has been prepared and the publication (advertisement) has now begun. The debtor may have the right to reinstate the mortgage. This right the borrower(debtor) has to reinstate is. to be guaranteed by actual Minnesota law even though the creditor/lender may have already accelerated the balance due under the mortgage prior to the initiation of foreclosure proceedings. For the borrower to reinstate the mortgage, the borrower must pay to the mortgagee the amount of the default at the time the mortgage foreclosure proceedings were first initiated plus all accrued costs of foreclosure up to the date of reinstatement, this would include half of any attorney’s fees allowed by law or $150, whichever is greater. If the borrower were to reinstates the mortgage that they are behind on, the foreclosure proceeding would stop at that point, but to reinstate the mortgage, the required back payments in arrears must be paid prior to the sheriff’s sale taking place. I wouldn’t recommend waiting until the last minute on this.

2) Foreclosure by Action (Judicial) (Very rare method in Minnesota)

To initiate a foreclosure by action in Minnesota, a summons and complaint would need to be served according to the “Minnesota Rules of Civil Procedure”. The complaint would name as it’s defendants, all current owners of the property, any other lien holders, and those with any right to possession of all or even a portion of the premises. If no party were to defend the action, then the mortgagee may obtain from the court that it be deemed a valid mortgage. If any of the defendants object, a trial may be necessary to establish the right of the mortgagee to whom will foreclose. Once the court has made its decision, the sheriff would then publish a notice of sale for a six-week period of time.

If the debtor (borrower) is a resident of the county in which the mortgaged property is located, a copy of this judgment of the court and in addition the sheriff’s notice of sale must be served to the the one in debt (borrower). After serving the notice of sale on this debtor, the sheriff must post the notice of sale for the six weeks. At the sheriff sale, the sheriff may sell the property only to cash bidders, except for the mortgagee, which can bid (pledge) its total mortgage and debt. Following this sheriff sale, the sheriff would report the sale to the court, which would then confirm the sale.

Once the court has confirmed this sale, at that point the statutory period of redemption for the debtor would then begin. The time periods for redemption of a foreclosure in Minnesota are the same as for foreclosure by Advertisement. Under either method of foreclosure in Minnesota, any junior lien holders may redeem at the foreclosure sale if the mortgagor fails to redeem. These junior lien holders may redeem if, before the expiration of the mortgagor’s redemption period, they have filed for record, a “notice of intention to redeem”.

The junior lien holders are each given a period of five days within which to redeem the property, and this is based on the priority of their claims or liens on the property (the recorded order) in most all cases, against the property. If the amount that is realized at the sale turns out to be less than the amount due on the underlying debt, the creditor may then be able to obtain a deficiency judgment against the mortgagor, but if the statutory redemption period is six months (very standard) a deficiency judgment can be obtained against the mortgagor “only” if foreclosure was by action. No deficiency judgment can be obtained against a mortgagor, if the “redemption period is six months”, and “foreclosure was by advertisement”. If the redemption period is twelve months, a deficiency judgment could be sought after the borrower.

The Redemption Period:
The redemption period is the time immediately following the Sheriff Sale. During the redemption period the mortgage on the home is no longer valid and the lender will not accept anything, but full payment of the loan. This leaves the homeowner with two options at this point: either sell the property or refinance the property. The mortgagor must redeem within six months of the date of the sale unless one or more of the following did apply, in which case the redemption period can be up to twelve months:

-The mortgage was executed prior to July 1, 1967. • The amount claimed due and owing as of the date of the notice of foreclosure sale is less than 66-2/3 percent of the original principal amount secured by the mortgage. • The mortgage was executed prior to July 1, 1987, and the mortgaged property, as of the date of the execution of the mortgage, exceeded ten acres in size.

-The mortgage was executed prior to August 1, 1994, and the mortgaged property, as of the date of the execution of the mortgage, exceeded ten acres but did not exceed 40 acres in size and was in agricultural use as defined by Minnesota statute. • The mortgaged property, as of the date of the execution of the mortgage, exceeded 40 acres in size. • The mortgage was executed on or after August 1, 1994, and the mortgaged property, as of the date of the execution of the mortgage, exceeded ten acres but did not exceed 40 acres in size and was in agricultural use, as defined by Minnesota statute.

What is the Authorization to Release Form?
View this Authorization to Release info form
This form would be 1 of many items in the Short Sale to Package.

Here is an example of the language you would see in a Authorization to Release info:

Borrower/Owner:

Social Security Number:

Property Address:

I/We hereby authorize______________________

and it’s agents to obtain any and all information with respect to the following items:

1. Any and all information on my existing loan, including but not limited to:

My mortgage loan with (Lender)_______________________________

Under Loan Number:________________________________________

2. Any and all information on any existing liens against the above named property, including but not limited to information for any lien holder/and or their attorneys

3. This document may be reproduced by the individual or company to obtain information from multiple sources as needed

Please provide________________________________________

with any and all information requested on our behalf

{Borrower’s Signatures}

{Co-Borrower’s Signatures}

How Does a Short Sale Hurt or Affect Your Credit Score or Report?

This is a very common question asked all the time as far as what effect it will have, how a short sale on your record will affect your credit score and credit report. A short sale in general will affect your credit report less than a full foreclosure or deed in lieu of foreclosure. You can have a “settlement paid in full” negotiated with the lender, and obviously this will show better than simply doing nothing. No one may know exactly to perfection what the difference is in points on how your credit score would be affected whether you do a short sale vs. a foreclosure. If you are behind in payments and you owe too much on the house, what choices do you really have anyways, you are over financed. If you have lots of money, assets, reserves, and a high net worth and you just don’t feel like making payments or feel like paying down your principle balance, your lender won’t want to do a short sale. They will first want to get financial info from you, and a written hardship letter. This will make it quite clear to the bank that your only option is some help from the lender. This is where you see a seller that has a property listed on the MLS reading as “subject to bank approval”. A full foreclosure can stay on your credit for up to 7 years. I recently heard that Freddie Mac was trying to pass some new laws for their company that would not allow some borrowers to finance a home for up to 5 years through them. This was more in the cases where people were just walking away, and didn’t have a true hardship case. Currently you can get a FHA loan where your last foreclosure was only 3 years ago. That’s how it is in the current market. You can always just go buy on a contract for deed, get into a rent to own, or rent a property while you are improving your credit. As a general rule you can still get loans with 30 day late payment on your record, it becomes less likely with a 60 day late, and very hard with 90 day late mortgage payment, etc. Also in today’s market you can get a lender and the loss mitigation department to agree to a short sale without being behind on payments. In the recent past you had to be behind up to 90 days. It’s slowly been easier and easier as the lenders want to solve this currently large problem with foreclosures. You will probably have many questions about credit, credit repair, bankruptcy, and how all of this affects you and works together, the guy you will want to talk to locally is: Todd Rooker 763-383-0959, he is the owner of Armor Financial Services Credit and Debt Specialists. He is good to talk to about credit repair, financial planning, and he can even refer you to a specialized bankruptcy attorney that understands short sales and a tax specialist on how the “short payoff”, 1099, or deficiency judgment could affect you as it relates to your taxes. There are situations where you, as the seller, are “insolvent” as the definition put forth by the IRS. Please consult a tax advisor on this. You should check out the new Fannie Mae guidelines for foreclosures and short sales.

How Does Bankruptcy and Short Sale Work Together

I am going to refer this over to our credit repair expert, many of them know attorneies that specialize and understand the affect of bankruptcy and the foreclosure process. As a general rule a bankruptcy doesn’t stop a foreclosure, and in some cases it can only slow it down. Situations where a bankruptcy is done before the sheriff sale could slow down, or postpone the sheriff sale, whereas if it happens during the redemption period it would just take place within that redemption window in many cases, their is more to it than this, so seek an experts advice.  Being in foreclosure prior to the sheriff sale and prior to the foreclosure being filed by the bank would be considered a pre-foreclosure. The lender must file a motion asking for the foreclosure to proceed. I would highly suggest that you go over this with a bankruptcy attorney who does this every day for a living. You will be getting a letter known as an “Affidavit of Abandonment for Real Estate & Asset”.

How Do I Buy a Short Sale?
As a buyer you want to know what is in mn for sale and when you find out you’ll ask how to make an offer to buy a short sale house? When buying a short sale home it’s recommended you work with a buyer’s agent or a listing agent that is working with the 3^rd party short sale negotiator, or directly talking with the loss mitigation department at the bank. They will be able to update you on what’s going on. You are probably wondering where to find them. Typically you are looking for an agent that is listing houses on the MLS stating in the agent remarks such as “subject to bank approval”, “subject to a short sale”, this is a “lender mediated transaction”, “subject to 3^rd party approval”. These are the types of phrases you are looking for. This agent could likely be in the business of negotiating short sales all of the time. When you call them just tell them you are a buyer looking for some help. After you look at some of the available properties they have on their short sale list. After you find the right property you like just like any other transaction, you will have the agent write up a short sale offer that will get submitted to the bank.

How Do I Work With a Short Sale Real Estate Agent
There are REALTORS® that do specialize in short sales and foreclosures. That is the type of real estate agent you should work with. They are going to understand the paperwork, the short sale process and all of the timelines that are involved. The agent will meet with the homeowner and they will go over the paperwork, have you sign it, collect it and get it into the negotiator, so that they can submit it with the package to the lender. The agent could put a sign in the yard if the seller agrees as well as get the property listed, and start getting showings on the property, make phone calls, return phone calls. The listing agent can review purchase agreements, write up purchase agreements, sometimes can even work with the buyer’s also. The listing agent works very hard along the way to keep the homeowner informed throughout the entire process. When these houses are listed on the MLS, it may read something like subject to 3rd party approval or subject to lender approval, since it requires the lender to lower the price to get it done.

After the sheriff’s sale during the redemption period?
Some questions that often get brought up are about the redemption period which takes place after the sheriff sale (This section will be updated soon, check back)

How Do I Get Additional Short Sale Classes and Training?

One of my favorite training classes I have taken is a Saturday class based on the program Secrets of the Short Sale created by Steve Dillon also presented by Curtis Brooks. This is a short sale course that these two came up with that they spent a lot of time and research on from their experiences, and someday I hope to check it out myself. There is a popular course out there by Tom Butler called Short Sale Magic. I see it advertised online everywhere. Either of these programs are perfect for those investors that want to get into the business and start there own short sale company. It’s important that you learn the proper requirements and procedures in the business, proper forms, laws, tips and how to properly service your clients after you have sent in the initial short sale full packet. Please remember when listing your properties for sale to put in the “agent remarks” online that the sale is “subject to a short sale”, so that the buyers know it’s not a conforming traditional sale. One of the things you will get from the many training books and classes out there is how to really be an expert at how to do negotiations with the bank and their loss mitigation department. Soon after doing many transaction and calls in which you have spoken to this department at the bank, after enough times you will be known as the loss mitigation specialist! When you first meet with your seller(clients) you will be collecting a lot of their personal information (this is listed at the bottom of this article) and after you gain all of this info and decide that you can move forward with their situation, you will be getting some contracts signed for the short sale. One of the many items you will need from the seller is what’s referred to as a “hardship letter”. This is best presented to the bank if it’s hand written by the seller describing their current situation and why they are not able to make the payments in the coming future. This will be one of many items in your package that you will send into the lender before you would get an approval later on. Your goal would be to eventually build up a lot of referrals and leads and create a very efficient short sale system.

 

How Does a Short Sale Affect Me With Taxes?

This is a very imporant question, and has a newer answer as of the end of 2007, in regards to a big tax rule that took place: http://www.irs.gov/individuals/article/0,,id=179414,00.html Being that I am not a tax advisor I will not get into this question and topic too deeply, and also I have attached numerous great articles from the IRS, and attorney’s below for further reading about short sale taxes and the 1099 the homeowner could receive in the future. We will want to make sure that the short sale expert negotiator does his/her best to help you out. I have listened to many experts and been to many short sale seminar and training, and they all seem to have a different view, or at the very least explain it in a different way. As a general rule in Minnesota, when you go through the foreclosure process, that lender who does go through a standard 6 month redemption by the way of advertisement has in effect relinquished their rights at coming after the borrower for a deficiency judgment on the short sale. However, you are looking to sell the property for less than what is owing before it would go back to the bank. Therefore with this situation, when the short sale negotiator talks to the bank they will need to get a letter approved by the lender to waive any future deficiency judgment against the seller and consider it a “full settlement paid in full”. Please keep in mind that lenders can still come after anyone that signed on the original promissory note that guaranteed and signed this note. In addition the other lien positions didn’t initiate the foreclosure, so they still have the right to come after the seller for a deficiency judgment. Also many lenders will do what’s called a “partial release” where they detach the lien (mortgage) from the property so that the property can be sold and clear title can be passed to the next buyer. Depending on the negotiations with the lender, this promissory note can become a judgment and the lender can later come after the homeowner for that amount they guaranteed. Also please keep in mind if you sell it on a short sale, or the bank ends up with it back, eventually their will be a “loss” showing to the lender of which the lender will take that difference (amount owing – amount sold for) and even if they don’t’ come after you for a deficiency judgment they can always pass that information onto the IRS, and at the timing and choice of the lender can 1099 the homeowner possibly 1, 2, or 3 years later when it would make sense for the IRS, to show it as a loss on their tax records for that year. This part of the transaction can get pretty complicated, so I think you should seek advice of a tax advisor, I would also recommend you talk to Todd Rooker on this as well as he can put you in touch with the right tax advisor.

 

LEAD INFO NEEDED FROM SELLER:

1^st Lender Info:
Lender Name:
Amount Owing:
Monthly Payment:
Payments Behind:
Reinstatement Amount:
Type of Loan: Conventional, FHA,VA
Do you pay PMI:
Account #:

2^nd Lender Info:
Lender Name:
Amount Owing:
Monthly Payment:
Payments Behind:
Reinstatement Amount:
Type of Loan: Conventional, FHA,VA
Do you pay PMI:
Account #:

Property Info:
Are you working with a real estate agent currently? MLS#?
Address: City: Zip: County:
Bed: Bath: Garage Stalls:
Property Style Type: Multi-Unit? Sq Ft? Year Built?
Estimated Market Value:
Does it need repairs: Estimated $:
List of repairs needed:
Sheriff Sale Date:
End of Redemption Date:
Is the property currently occupied or vacant?
Have you had a bankruptcy? Date When? Date Discharged: Chapter 7? Chapter 13?
Other liens on the property? Any judgments? Past due water bills? Past Due Taxes?

Short Sale Documents that we will need soon from the homeowner are:
1. Signed Authorization to Release form
2. Tax returns for the last 2 years (1040)
3. Pay stubs from last 2 months (+spouse)
4. Bank statements last 3 months+ (joint accounts)
5. Recent mortgage statements for all properties
6. Hardship letter (handwritten)
7. Financial form will be provided
8. P&L statement for Self Employed and Properties

Related IRS references:
Taxation of Forgiven Debt: The 1099C & You written Feb 24, 2006

Excerpts from IRS publications 544 and 507 Regarding Form 1099-C

Seller’s Legal and Tax Liability in Short Sales April 22, 2008

H.R. 3648 The Mortgage Forgiveness Debt Relief Act of 2007
Questions and Answers on Home Foreclosure and Debt Cancellation

The Taxpayer Relief Act of 1997
IRS Sales and Other Dispositions of Assets
IRS Section 1082 Basis Adjustment Reduction of Tax Attributes Due to Discharge of Indebtedness
IRS 1099-A
IRS 1099-C
IRS 1099 A & C
The recent reset chart of ARM loans about to adjust
Next Foreclosure Wave
Reset Adjusted Payment Chart