What is a short sale?
A short sale is when the lender will accept less than the full amount due on a mortgage when a property is sold. Usually, the lender will accept the short sale to avoid the time and expense of a foreclosure.
When a borrower is in default on a mortgage they not only owe back payments but also may owe late fees, attorney fees, etc. These items may become very costly and may erase any equity the owner had in the property. The lender may foreclose on the property if the borrower is not able to bring their account current. Foreclosures are very costly to the lender and generally more expensive to the lender due to the extra costs such as: attorney fees, court costs, lost interest, eviction costs, property maintenance costs, and selling costs. Foreclosing on a property often takes as long as two years in certain states. With this being said, oftentimes it is in the best interest of the lender to accept the short sale.
It also can be in the best interest of the borrower. The advantage to the borrower is they will not have to endure the time and stress of a foreclosure and their credit may not be as adversely affected as it would with a foreclosure. It is quicker and easier and saves the borrower the embarassment of a foreclosure.
The mechanics of a short sale?
The first step a borrower should take if he can no longer afford the property is to contact his lender. Lenders do not want to foreclose on the property. Lenders typically have people that will work with a borrower that is in default and will work to with the borrower to remedy the situation. If you are unable to resolve the default with your lender than request to talk to someone that handles short sales with the mortgage company.
The borrower will be required to provide the following information to the lender:
· W-2s or other documentation verifying the borrowers income
· Statement's confirming the borrowers' assets
· Hardship letter - this letter will basically address what led up to the borrower's default. Provide as much information in this letter to help the lender understand what is going on. For example, were there medical reasons or other uncontrollable events that led up to this situation.
· The lender will need to obtain the value of the property. Oftentimes an appraiser will be used or they may accept a CMA (Comparative Market Analysis) from a Realtor.
· A net sheet. This will outline all the expenses relating to the sale and show the amount of the shortage.
· Listing agreement and purchase agreement when they are available.
After all the above is reviewed the lender will make the decision to approve or deny the short sale. Without the approval, the lender will begin to foreclose on the property. If they do approve the short sale the borrower will be allowed to close on the property and the lender will take the loss.
Is the borrower now able to just walk away with no obligation?
It depends. The lender does have the option to take the necessary steps to collect on the shortage. Sometimes the lender will require the borrower to sign a note agreeing to pay back the shortage. Other options the lender may take include filing a collection for the amount of the shortage. The borrower really should consult his attorney for advice in this area.
If the shorage is forgiven and not required to be repaid the borrower will often times be responsible for taxes on the amount of the shortage. The IRS will be notified by the lender if this happens. Please be sure to contact your Accountant or Tax Advisor for your specific situation.
