In recent months I have experienced a wide range of response from sellers regarding "short sales". One end of the spectrum does not know what a short sale is while the other end knows a great deal about the process yet does not fully understand the process and what happens behind the scenes of a short sale. Today, I would like to discuss some of the key factors to be aware of during the short sale process.
What is a "Short Sale"?
A short sale occurs when the seller of a home owes more on the home than the current market will bring. For example: you owe $200K on your home yet the market value of your home is only $175K. You are now short $25K. Rather than going through the costs of a foreclosure, the lender may be willing to allow the buyer to purchase a home for less than what is owed.
Who is eligible for a "Short Sale"?
A short sale is designed for people who truly need to sell their home to avoid foreclosure. It is not an "easy out" to avoid credit issues or an option to reduce the price so that it will sell quickly. Short sales will negatively affect your credit scores; in fact, many lenders will not even consider a short sale unless you are several months behind on your mortgage payment and nearing foreclosure. Additionally, many lenders will require that your home be on the market for at least 3 months prior to considering any offers that have come in.
You should also be aware that you may be taxed on the shorted amount to the bank. The IRS may view the shorted amount to the bank as income. There are certain circumstances that are exempt from this as a result of the Mortgage Forgiveness Debt Relief Act of 2007 so I recommend you consult your accountant.
Surprises and Pitfalls:
Over the past year or so we have experienced a large number of foreclosures due to the drop in market value of homes across the country. As a result, lenders have both streamlined and become stricter about the short sale process. Lenders do not care if you made a bad purchase decision, became pregnant and can no longer work, or chose to move into an apartment. The latter concepts are considered "lifestyle" decisions that typically do not sway a bank's decision in your favor. Banks will consider unemployment, divorce, medical emergencies, Bankruptcy and death to be true "hardships".
Interestingly, there is no set formula to tell us whether or not a bank will accept a short sale. Not only do you have to prove to the bank that you are unable to pay, that they will likely see your home in foreclosure over the next few months, that this is the highest price that they will likely receive, etc. The bank will also analyze the negative and positive effects to their personal business while making the decision. For example: your loan is considered a negative asset if it is in default. In the past, banks did not want to maintain negative assets as they wanted to provide stronger portfolios to their investors. However, due to recent legislation, it is actually to the benefit of some banks to show negative assets as it can potentially position them to receive government bailout funds. There is absolutely no external way to forecast what a bank's decision will be on your short sale proposal.
What does this mean?
A short sale is something to consider if you are nearing foreclosure and have no other option to save your home. There are no guarantees that the bank will accept your short sale offer, however, you may save your home from the long term effects of a foreclosure.