Short Sales have been around for a long time, but recently they are being discussed and utilized more and more even though many people do not fully understand the entire process. Having been on both sides of a short sale- representing the bank in some situations and representing the homeowner in others- I felt a review would be helpful to you.
Basically a short sale is an agreement by the lender (or mortgage company) to allow the homeowner to sell the home for less than the mortgage owed on the house. This is not a decision mortgage companies take lightly, and is normally utilized to avoid foreclosure and even further losses.
Mortgage companies are in the lending business, not Real Estate, and foreclosure is one of the last recourses available to recover the funds they loaned. A short sale can provide reduced losses for the bank in many cases, and is the reason more short sales are occurring in todays heavy foreclosure market.
Let's review a hypothetical short sale situation:
A homeowner approaches a Realtor to try and sell their home to payoff the mortgage (or mortgages). Unfortunately, a sale of the home will not produce enough funds to fully payoff the loan. This can occur due to many different factors:
- The homeowners borrowed more than the property is worth
- A depressed market lowered the property value
- The property condition has deteriorated and lowered the property value
- The homeowner has been in the property for a short period of time and paid a minimal down payment during the purchase of the home.
In order to approve a short sale, the mortgage company will require specific information to determine whether a short sale is their best recourse (if foreclosure will provide for a higher net amount- don't expect a short sale to be approved). Each lender is different, but here are common examples of required information:
- Hardship Letter - States the reason for default, normally the sadder the situation the better
- Appraisal or CMA of property - Helps determine an accurate value of the proprty and prove it's not worth the loan balance
- Proposed HUD statement or settlement sheet - Provides the lender with an estimated net amount after the sale
- Authorization Letter - Allows your Realtor to discuss the details of your loan with the lender
- Bank statements and W2's - The bank will want to verify that the borrower is actually unable to re-pay the debt
- Listing agreement and any Purchase agreements - Be prepared for the lender to disallow certain items such as home warranties and they often try and reduce Realtor commissions and other fees
As you can see, a short sale can have significantly more paperwork than a normal Real Estate transaction and a homeowner would be well advised to seek the assistance of a
Realtor experienced with short sales.
Once an offer is accepted and the property is sold, there is normally a deficiency balance. Please contact an attorney regarding the implications of this balance- some states allow for the lender to seek legal action to continue to collection of this debt, while others may not.
There are also potential tax ramifications of a short sale. The IRS considers the forgiveness of a debt as income and the amount can be taxed. Seek advice from a professional CPA regarding your individual situation.
Another issue involves your credit after the sale- contact the lender to try and obtain the best possible credit rating after a short sale, but understand the lender is under no obligation to avoid reporting a negative credit rating.
While there are advantages to a short sale over a foreclosure, many homeowners do not understand all the requirements and potential loopholes. Another option to consider to avoid foreclosure is a "Deed in Lieu of Foreclosure" or "Quit Claim Deed". Look for a future post regarding the different aspects of this approach.
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