Determine the Source of the Hardship
There has been a lot of information in the news lately about strategic default. Strategic default is the decision of a borrower to stop making payments (to default) on a debt despite having the financial ability to continue making those payments. Whatever your opinion might be about participating in a strategic default, it would be difficult to deny that it’s pretty darn stinky to see your property value decline significantly—especially if you have made a large down payment!
Many individuals question whether strategic default is ethical. Certainly it’s a lot more socially acceptable now than ever before.
A question that I am commonly asked is whether an individual who has financial means can sell his or her home in a short sale. It’s a great question, and the decision about whether to approve a short sale is solely determined by the seller’s lien holders. So, one mortgage lender may approve a short sale without a hardship, and another lender may not. It all depends upon the lender’s guidelines.
That being said, most lien holders request a hardship letter as part of the short sale package.
The hardship letter is a letter written by the seller(s) that outlines their hardship. It does not have to be long, but it does need to point out what has changed in the seller’s situation since the purchase of the property.
Here is an example of a hardship (totally fictitious):
I am a Realtor®. When I purchased my home in 2005, I had closed 42 transactions that year and my total income was over $400,000. This year I have closed only six transactions, which is why I cannot afford to keep my home any longer.
The harsh reality of a seller’s situation can be extremely tragic, and this is a perfect example how to convey information in the body of the hardship letter.
Here are some examples of common hardships: job loss, loan adjustment, illness, death, divorce, military deployment, incarceration, and job transfer.
Typically if the seller (borrower) has experienced one of the hardships listed above and can document that hardship, then the bank will have no trouble approving the short sale.
The topic of strategic default vs. harsh reality in our current economic climate is a tough one. When working short sales, it is important to always pre-qualify your sellers. After all, you want to get the job done and see a successful settlement, don’t you? And . . . you certainly do not want to be in the same position as the writer of the hardship letter shown above!
[...] to receive some offers. That said, the borrower must take the plunge into credit score ruin and stop making their payments. No bank will grant a short sale to a borrower who is making their payments! Yet again, some banks [...]
This is a really tough question. I deal primarily with buyers so I haven’t found myself facing the client who is considering a “strategic default”. Personally I don’t think I could intentionally default on a loan just because the value of the collateral had dropped. When the bank loaned me money to buy my home I signed a note promising to repay my debt, and the note wasn’t conditional on home prices continuing to rise. I’m not an attorney but I would almost think that intentional or “strategic” default could be considered fraud if the defaulter represented they had a hardship when in fact they did not.
Short sales I have done also required a financial statement for the seller. Mine always had no savings, $50,000+ in credit card debt and insignificant income. By the time the owner decided to consider selling, they were in such bad shape that the short sale did not solve anything. It just got them out of the house. I think all the debt resolution advertising on the radio is convincing people that it is OK to bail on painful debt. That is not the way I was raised. I think I would try to find my way out without defaulting. Of course no one wants to pay 50% more for something than it is worth. This goes back to the point where they bought the house. Did they really think that 3br 1800 sq. ft. house was worth $250.00 a sq. ft.?
Thank you for your webinar and this post.
Here is the situation: Owner died. She had a reverse Mortgage. Todays BOP is about 210000. The Reverse mortgage was for @$400,000. The son is going to probate court today to get permission to list the property. Can we do a shor sale on this?
Mel