If you are facing foreclosure after the COVID19 recession, it is time to have a serious conversation about a short sale. Short sales are the best method to reduce the credit hit, keep your equity, and get back to normal after foreclosure. This article is based on a presentation I’ve given to North American Title Company agents regarding the unique challenges Illinois homeowners face in addressing Short Sales.
During the COVID-19 Recession, our estimates are that over 605,000 Illinoisians are struggling with foreclosure and eviction. As I’m writing this article, CNBC released an estimate that 30% of all homeowners missed their June mortgage or rental payment. If you are struggling right now, you’re not alone. You are part of a community of people who see the economic hardship and want to help. We’ve provided this article as a means to educate Chicago on how to deal with the hardship, repair the damage, and get back to normal as quickly as possible. So, if you’re having problems, read on to see what we can do for you!
A Brief Overview of Illinois Short Sale Policy
Short sales are a unique transaction that allows us to really assist our community. Our Philosophy is that members of our Chicagoland community should control their own destiny when facing financial hardship. If you choose to leave your home while in foreclosure, you should leave on your own terms and when you’re ready. Nothing will help you more than a short sale to get that ball rolling.
Short sales also have a special benefit to foreclosure sellers. They empower the seller to exit foreclosure with a minimal credit hit and with most of their equity intact. If you have $30,000 of equity in your property, a short sale or foreclosure sale will help you leave with that $30,000. Further, Short Sales avoid the worst possible outcome in foreclosure. You cannot have a deficiency judgment (leave the foreclosure owing more than the house) if you complete a short sale.
2020 Foreclosure and Short Sale Estimates
As I’ve said in other articles, the Plaintiff’s bar in Illinois believes we will see 605,000 Foreclosures and Evictions in 2020. The last time we saw anything like this was the 2013 little recession that hit Chicago particularly hard. In 2013, we saw 50,000 foreclosures in Cook County, 22,000 in DuPage, and 20,000 in Kane. Thousands more never made it to the courtroom because of consent foreclosure and short sales. These numbers are real, and they’re scary!
However, as a foreclosure and short sale attorney, I want to frame this with risk and reward. Although each lender is different, every lender I’ve dealt with has a program to help you get out from under a bad mortgage. On the typical short sale, the lender knows you have to hire a Realtor, and an attorney, and that you’ll have other bills. They will, nearly without exception, leave you money for your closing professionals. So, you will likely have 6% of the purchase price (in this case 6% of the LTV) set aside for commissions and a small stipend for your closing attorney and title. Everybody can work together and you won’t need to worry about coming out of pocket to pay your teammates!
Title Issues in Short Sale Transactions
Let’s face it, in a Short Sale the hardest obstacle to completing the transaction is the Bank. You, the homeowner, will not have full control over the offer sheet or the final contract. Moreover, the Lender is just as much your Realtor’s client as you are. The Lender, your bank, must approve the final closing statement and issue you a release for you to close the sale. So, what are you going to do?
Well, the best thing to do is to hire a firm with great knowledge of processing these transactions. A number of great realtors in the Chicagoland area do amazing work with Short Sales, and a great many of those realtors are bilingual. They can help you negotiate against the BPO agent to get a better deal than the first offer. In fact, oftentimes the Bank has a totally unrealistic idea of what the home is worth! Your professional team, hopefully including me, can work with the Bank to get a better short sale appraisal and sell the home closer to its true value. All of these factors go into whether the Title Company will ever be able to clear the defect in the home loan.
How We Calculate if We Can Help You
Finally, Banks have a clear bottom line to meet before they let the debt go free. Normally this number is between 84% and 88% of your outstanding debt against the value of the home. Earlier, when I spoke about LTV, this is the number we’re talking about. LTV is the percentage of the mortgage loan debt divided by the appraisal amount. So, if the Bank may be willing to reduce debt to 88%, that helps dramatically in keeping your LTV within the acceptable risk. If we can simultaneously challenge the appraisal amount, that also cuts the number. Our big goal is to get LTV under 90% if it at all possible!
Qualifying Hardships and the 129 Affidavit
When you apply for a short sale, the very first step is to inform the Bank why you got behind. Normally, your processor takes care of writing this letter for you. As you’d expect, we make it as gushy and sympathetic as possible to try and appeal to the (little) humanity in the lending industry. So, we try to tell your story about how the circumstances that happened just aren’t your fault and why you need a second chance.
Standard Qualifying Hardships
The best qualifying hardships, in our experience, include:
- Loss of your job.
- Death or medical disability of yourself or a close family member.
- Reduction in the amount of hours at your job.
- Change in your usual salary.
- Transfer from your old job to somewhere new.
- Divorce or marital separation.
- A change in the interest rate on your loan, if the loan was adjustable.
- Being called to military service.
- Damage caused to your property or your livelihood by natural disaster.
Right now, specifically, we are trying to target COVID-19 as a natural disaster in many of our hardship letters. The recession that COVID-19 caused has put about 15% of Americans out of work as I’m writing this article. Millions more have had a substantial reduction in their pay and work hours. If you have been affected by the COVID-19 Recession or if your job never came back, let us know and we might be able to help rescue your credit!
Illinois Foreclosure and Short Sale Timeline
Day 1-46, Your Missed Payment and Preforeclosure
When you first miss your payment, not much really changes in your day-to-day housing. The Bank sends you a notice that they saw you missed your payment. Maybe they even let you go a month or two without sending you anything particularly nasty. But, sooner or later, the Bank sends you a Grace Period Notice and tells you that the past-due balance has to be paid right now. Then, they send you a Notice of Intent to Accelerate, telling you that the hundreds of thousands of dollars you borrowed for the home are due in 30 days! This is terrifying! What can you do?
Well, it’s at this stage that short sales have the greatest amount of success. Our team can help you work with your Bank before the property gets to a foreclosure courtroom. Then, we won’t have to deal with the Bank’s lawyers trying to get paid on a case. This accomplishes two things. First, the Bank will have fewer fees it can charge to you for the attorneys working your case. And, secondly, the Bank will be more willing to work on your proactive timeline instead of on the Court’s schedule. This is the best time to call an attorney and work something out with your Lender!
Day 47-90, Foreclosure Complaint and Lis Pendens
In Illinois, your foreclosure court case will last a minimum of 7 months, giving you some time to sell the property. However, we do not recommend waiting out that timeline. When the Bank files your foreclosure complaint, they also file a Notice of Lis Pendens. You won’t get a copy of that document in the mail, but it is completely vital to the short sale process. The Lis Pendens is a notice to anyone who might choose to buy your home that you can’t sell it right now due to pending foreclosure. Nobody would ever miss a Lis Pendens, and it basically destroys whatever chance you had of selling your home conventionally. That’s why it’s so important to start as soon as possible on a Short Sale.
Further, when you get a foreclosure complaint, the Court in Illinois is putting a responsibility to you to act. Many homeowners do not know this, but if you receive a foreclosure complaint and you want more time, you must appear in Court and respond. Illinois law, specifically 735 ILCS 5/15-1504 and 1506 allows the Bank to take dozens of shortcuts in foreclosing on you if you do not respond to the Complaint. They don’t even have to show your non-payment if you don’t respond! So, if you take any litigation advice from this column, please be sure that you act quickly and appropriately if the Sheriff ever gives you a Complaint!
After Day 210 – Judgment
After your three missed payments, and after the Notice of Default and after you get the Complaint, you may face a foreclosure judgment. Don’t Panic!
In Illinois, Foreclosure Judgments do not end your rights in your home. We are perhaps the only State in America where that is true. Once you have a foreclosure judgment against you, the Bank still can’t do anything to you for at least 90 days. This is the Homeowner’s Right of Redemption. During this time, you can pay off your loan to remove the foreclosure. How might you do that? Well, with a short sale! Sell the asset for an agreed-upon amount to pay off the Foreclosure and vacate the judgment.
During this time, you will have a minimum of 42 days left to sell the home. It is possible to get extensions if you appear in Court and properly ask the Judge for one. At this stage in proceedings, the Bank typically wants to see 84% LTV of the property paid in the sale. This is our last-ditch attempt to finish the Short Sale. But, the Bank will not make it easy. If you are “post-judgment” in a foreclosure proceeding, you will need a good team on your side to sell your home!
Too Late: Sheriff’s Sale
It pains me to type this into this article. In Illinois, if the Sheriff(Collar Counties) or by the Judicial Sales Corporation (Chicago) has sold your home, you can no longer get a short sale. In fact, if the Sheriff’s Sale will happen within the next 30 days, we are probably already out of time. The rules that protect you as a homeowner from a total loss disappear in the last month before your sale. It is so important to act early!
How will a Short Sale Affect my Credit
As you can see from the graph above, a short sale is a fantastic way to minimize the credit hit from a foreclosure event. Of course, if you’re losing a home, your credit score will take a substantial hit. But, you can minimize the credit hit’s impact and duration if you deal with the problem proactively and responsibly. A short sale is your absolute best choice in nearly all circumstances.
How Long Will A Short Sale Affect my Credit?
Now, I’ll begin by saying this chart is very optimistic. This chart assumes that there are no other credit failings on your behalf once you get out of your foreclosure. For obvious reasons, that circumstance is unlikely as many homeowners going through foreclosure are struggling due to an unmanageable hardship. But, we can help you minimize your credit hit. With careful credit repair advice, we can help you shorten the duration of the report to just a few years.
Just last week, Fannie Mae released its newest credit guidelines for Foreclosure Events. Fannie Mae states that with credit counseling, Short Sales and Deed-in-Lieu borrowers can be qualified for a new loan in only two years. This, of course, assumes no other defaults. Similarly, Fannie Mae verified that Foreclosures will last for 7 years on your credit report if you do nothing, just as I presented here. If you have had a foreclosure before and are reading this article to reinvest, consider our article on the Post-COVID credit requirements.
To be clear, there is a separate policy for homes with both foreclosure and bankruptcy. When this happens, the return to normal on your credit will take at least 7 years, but usually 10. Lenders consider the bankruptcy to be a second negative credit event and treat you like you defaulted twice. It is often best to avoid Bankruptcy at all costs.
What Can You Do for Me?
The firm responsible for this blog, Abdilla & Associates, does many short sales all over the Chicago area. We partner with Realtors in Kane County, DuPage County, Cook County, Will County and Kendall County that can help get your debt erased and your home sold quickly. While we aren’t always able to beat the clock, for the majority of our clients we relieve thousands of dollars of debt and get stop a total loss from occurring. If you ever want to have a conversation about your financial difficulties or just meet up to discuss your options, send me an email and we’ll get working!