Ask any underwater homeowner to tell you their biggest fear about selling their home and moving on and you get two answers:
- “I will never buy again.”
- “I will not find a home to rent because rents are too expensive.”
First, selling your home as a short sale does not mean you won’t buy again.
Some lenders will allow you to buy a home immediately after a short sale in certain circumstances and others will give you a mortgage two to three years after a short sale.
Included in those loans could be a low down payment, low fixed-rate Federal Housing Administration (FHA) mortgage.
The unable-to-find-a-rental-home fear arises from the impact a short sale can have on your credit report.
The possibility of becoming homeless after a short sale does exist, but only for a small minority of short sellers.
Virtually all short sellers find a rental home, even with the short sale blemish on their credit report.
Enter, the short sale lease back option
But there is a third option – a Short Sale Lease Back program (SSLB), which allows you to sell your upside-down home and remain there for up to three years while paying a fair market rent. If the renter is successful, he or she should be able to buy anew at then end of the rental term.
The SSLB is the brainchild of Bob Irish, a Riverside, CA real estate broker at Lake Hills Realty and CEO of National Short Sales, the SSLB program facilitator.
Lenders have been lukewarm about the program, but some homeowners have benefited from the program and more lenders are likely to participate.
Many lenders see the program as an escape mechanism for sellers who want to exit their underwater mortgage with no consequences and sell to a company that allows them to stay in their home.
They also question the program as a potential conflict of interest, say, in the event of a buy-back or other move without the lender’s consent.
Does it really matter to whom the homeowner sells their home, as long as it’s a legitimate sale, there is a real hardship, and the owner can sell at fair market value?
Probably not, but in this crazy housing crisis, reality and common sense have not always led the way.
Short sale lease back program
Here’s how the program works.
Qualifying – You must be a homeowner who has missed payments or is in danger of missing payments and face default to qualify for the SSLB program.
Your financial documentation must show that you really face a hardship, but you’ll also have to demonstrate you have the financial ability to pay a fair market rent.
If you are approved, the SSLB program would submit an offer to your lender at a fair market price and disclose that you would remain in the home under a lease back agreement.
Full disclosure is key. It’s fraud to fabricate information or withhold information from your lender or make arrangements apart from the contract for the program.
The sale and lease back – If your lender agrees to the offer and its terms, your sale would proceed as a short sale with closing expected in three to four months or longer if the lender requires it.
After escrow closes the former owner becomes a tenant in the home for up to three years. The non-profit HomeStrong USA acquires the property and becomes the landlord.
Chances are the rent paid will be less than the previous mortgage payment and the tenant can save the difference toward another home purchase later.
For example, a home with a $3,500 mortgage payment that rents for $2,000 a month could save you $1,500 per month. If you diligently save the difference, at the end of three years you will have saved $54,000 plus interest.
You could then use that amount for a down-payment and closing costs on a new home purchase, but not the same house. Of course, the onus to save is on you. You must be able to endure three years of saving or some level of savings you can use to buy a home, if your goal is to buy again.
Short sale short comings
The program isn’t bullet proof.
You’ll have to find a lender willing to participate. Your property must qualify. You must work with one of some 150 SSLB certified agents nationwide.
Be aware, in a short sale, you could be saddled with a capital gains tax bill and pay taxes on the amount the lender forgives.
The Mortgage Debt Forgiveness Act of 2007 could exempt you from these taxes on the federal level, if you qualify. The law’s current extension expires Dec. 31 2013.
California’s version of the federal law expired Dec. 31, 2012, but legislation is a afoot to reinstate the state’s version and extend it through Dec. 31, 2013.
In a short sale, in many locations, the lender can also choose to come after you for the difference between the short sale’s sale price and the mortgage debt.
Not so in California where law mandates that lenders who agree to a short sale must accept the agreed upon short sale payment as payment in full for the outstanding balance of all loans, including the first and second mortgages.
As with any transaction that comes with a tax or legal consequence, always speak to a qualified certified public accountant, enrolled agent, tax attorney or other appropriate professional to determine your liability.
Along with the SSLB program, several other competing organizations are forming to provide similar programs.
Successful, unique programs almost always spawn fraudulent spinoffs.