A Realtor recently asked me an excellent question: As a Realtor, I'm representing a seller of a home with a first mortgage and a second mortgage. While both mortgages are current, the sum of both mortgages exceed the value of the property. Will lenders consider a short sale when the mortgages are current?
The short answer is a resounding "yes". The lender will consider a short sale even if the borrower is current, the question is how will that impact the final terms of the short sale.
A very important and early disclosure is warranted here. Short sale Realtors and buyers should never counsel sellers to stop making their payments. That is a decision sellers need to make wholly on their own or upon consultation with a lawyer.
If the borrower has the financial strength to make the payments, the lender will be more likely to require the borrowers to stay obligated on the shortage.
If the borrower anticipates being unable to sustain the payments in the future, they should clearly state that in their hardship letter.
I have lost count how many loans and short sales I have negotiated, somewhere over 200 by now. I have never encountered a lender denying a short sale because the loan was still current. This is contrary to blogs and articles that state that lenders won't consider a short sale unless the borrower is in arrears.
Once you notify the lender that your client has to sell but can't sell for enough to cover the loan payoff, they will open up a file in their loss mitigation department to evaluate the short sale. After they receive the seller's financials and hardship letter, they will send an appraiser. The appraiser will report back to the lender his/her opinion of value and the lender will then decide at what price to let the house go rather than drag themselves through a costly full foreclosure.
If the seller's financials are strong, the lender may release the mortgage from the house and require the borrower to stay obligated on some or all of the shortage.
If the seller's financials cannot support future payments, the lender will usually forgive the shortage. Some lenders automatically demand the seller to stay obligated on the shortage. If the seller does not have the ability to pay, the Realtor should vigorously appeal the lender's demand.
Whether the lender requires the borrower to stay obligated or forgives the shortage, both cases are still defined as short sales. The lender may take months to issue their final terms. The Realtor needs to be acutely aware of the final terms, as sometimes they are hidden by the lender with vague language. The sellers need to be given control of the final decision if the short sale terms are acceptable to them.
I am attaching a link to an article that provides a good summary of the considerations regarding staying current on the payments during a short sale negotiation. http://homebuying.about.com/od/shortsale/f/11508_Stop-Pay.htm
Dave Halpern, Broker
Louisville Realtors recognize us as a "get it done" short sale expert and refer many short sale clients to us.