Thursday, January 3, 2008

What is a "Short Sale" and "Sub Prime Loan"

In 2007 we met with the inevitable rewriting of the "Variable Interest Mortgages" which were most often written for one, three or five years. The term "sub prime loan" comes from the mortgages that were written to persons having less than perfect credit, or no verification of income along with some other categories that put the borrowers at risk of not being able to pay back the note or mortgage even at the rate that was first quoted.

Now that the term of these notes is over the rates have gone up, many from 4% to 7% or higher if the borrow has had any late payments. If they have late payments they may not even be able to write a new note at any interest rate and of course are unable to pay the entire balance of the loan. The difference between a $300,000.00 loan at 4% and a $300,000.00 loan at 7% is approximately $565.00 per month.

With property values going down over the past two years many of the borrowers are faced with the fact that the home they purchased is now worth less than when the acquired it three years to five years ago in a hot investors market.

This brings us right to the "Short Sale". When faced with an inability to make mortgage payments or to rewrite the loan people are forced to sell their property for less money than they bought it for. Banks are well aware that these situations exist and are not anxious to own real estate in a declining financial market. The government is requiring strict lending guides and programs to get people out of the current debt. With this in mind bank and mortgage companies will take less to pay off the note then is owed.

Some of these require a note to pay the difference over time and some are a clean walk a way but credit is affected.

The use of a Realtor and legal council to negotiate this with the bank is absolute. The average person, even those with some knowledge of fiance should not attempt this negotiation on their own. Be sure that the professionals you work with in this instance have done this before and are confident with their relationship with the bank or mortgage company. For anyone this is stepping into the deep end of the pool and we need the best life jacket we can find.

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