Short Sales , Are they Good for the Lender or the Homeowner?

Real Estate Agent with Berkshire Hathaway Fox & Roach Realtors PA176625


Short sale (real estate)


Kildares Pub - King of Prussia, PA - I see so much joy in Real Estate - last Friday I helped an older couple buy their first property. They had rented for 30 yrs, in an effort to send their 5 kids thru school, debt free. The biggest issue we had was their lack of credit.They paid cash for everything. Thankfully he had Veteran benefits and we were able to use a VA loan to get them financed in their new home in Abington. Just an example of some of the pleasure I have in helping clients.

On the flip side, I am lately more and more involved with people looking to get out of a BAD situation, they cannot make their monthly mortgage payment, for various reasons: divorce, job, over extended credit, illness, medical bills or life just gets in the way. I am becoming an expert in Short Sales. This is when the owner of a home is upside down in the mortgage. They owe more on the property than what the property is valued at. Lately, values have levelled off and some borrowers have been using their homes like an ATM - taking cash out of the property, to pay bills, invest in their business, take a vacation, etc. When values were appreciating at terrific rates, it seemed to not be an issue or to mask the real issue - that they were spending more than making.

In real estate, a short sale is when a bank or mortgage lender agrees to discount a loan balance due to an economic hardship on the part of the mortgagor. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender in full satisfaction of the debt. In such instances, the lender would have the right to approve or disapprove of a proposed sale.

Extenuating circumstances influence whether or not banks will discount a loan balance. These circumstances are usually related to the current real estate market climate and the individual borrower's financial situation.

A short sale typically is executed to prevent a home foreclosure. Often a bank will choose to allow a short sale (or pre-foreclosure) if they believe that it will result in a smaller financial loss than foreclosing. For the home owner, the advantages include avoidance of having a foreclosure on their credit history. Additionally, a short sale is typically faster and less expensive than a foreclosure.

[1 - GMAC example in Montgomeryville]

In short, a short sale is nothing more than negotiating with lien holders a payoff for less than what they are owed, or rather a sale of a debt, generally on a piece of real estate, short of the full debt amount.

Lenders have a department (typically called a loss mitigation department) which processes potential short sale transactions. Typically, lenders do not accept short sale offers or requests for short sales until a Notice of Default has been issued or recorded with the locality where the property is located.

Lenders have a varying tolerance for short sales and mitigated losses. The majority of lenders have a pre-determined criteria for such transactions. In fact, if you do not have a fully executed agreement of sale, submitted with a complete short sale package, including a Net Sheet for the lender and a Hardship Letter (outling the circumstance of the reason for owner default).

(2 - Blue Bell example)

Other distressed lenders may allow any reasonable offer subject to a loss mitigator's approval. "Red tape" is very common in short sales, similar to REO and HUD properties, requiring potentially multiple levels of approvals and conditions. Junior liens, such as second morgagees, HELOC lenders, and HOA (special assessment liens), may need to approve of the short sale.

While it is frequent if not common for a lender to forgive the balance of the loan in question, it is unlikely that a lien holder that is not a mortgagee will forgive any of their balance.

The Mortgage Forgiveness Debt Relief Act of 2007

When the lender decides to forgive all or a portion of a borrower's debt and accept less, the forgiven amount is considered as income for the borrower and is liable to be taxed.

However, after the signing of The Mortgage Forgiveness Debt Relief Act of 2007 by President Bush, amendments have been made to remove such tax liability and allow the borrower and lender to work freely together to find a common solution that is beneficial to both parties. This protection is limited to primary residences so consultation with a tax advisor is necessary ensure that a borrower qualifies.

A short sale does not adversely effect a person's credit report beyond documenting the short sale as "foreclosure proceedings started". But it does count against a person's credit to about the same degree as their number of 'lates' on the credit reporting bureaus - from not paying their mortgage as agreed.

Blog - posted by, by Tom Higgins

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