More about Short Sales...
What the is a Short Sale?
A short sale is a situation where the property a seller needs to sell however the proceeds of the sale are not sufficient to pay the existing mortgage. It is an alternative to foreclosure. The term short sale refers to a process when the lender agrees to accept a payoff that doesn't cover the outstanding loan in order for the sale to take place. The seller receives nothing, except possible debt relief and not having a foreclosure on their credit record.
Why do lenders accept short sales?
Lenders almost always lose money when they foreclose on property. In many cases, they will lose less money through a short sale than they would by foreclosing on the home and selling it as a bank-owned property.
What does the lender require to do a short sale?
Each lender follows their own corporate guidelines however, the following are typical steps you will experience through a short sale process.
The borrower must experience a genuine financial hardship. If this fits, call the lender and talk to customer service or the collection department. Communicate with the lender and keep a detailed communication log for your records.
Eventually, you will have to document the hardship and your inability to deal with it financially by disclosing all your assets. Bank statements, stocks, bonds, tax returns, pay stubs -- the lender will want to see everything that may document that you are not hiding assets or income.
The lender will not make a commitment based solely on your hardship. You will be required put your home on the market and it will ultimately need to be sold.
When the property is listed, your real estate agent prepares a comparative market analysis. You're going to need that and you will need to supply a copy to the lender, along with your hardship letter, the documents mentioned above, a copy of the purchase agreement, and a "net sheet" showing how much you will net (or lose) from the sale of the home.
It may be that you actually want your real estate agent or some other professional to negotiate with your lender. If so, you need to prepare an authorization letter. That letter includes your name, property address, loan number, your representative's name, the date and your signature (some require your signature to be notarized). Your agent will know almost all of this and have the proper format.
Then your agent submits it all to your lender and...you wait.
Because obtaining a short sale is necessary for you to be able to sale the property, it becomes what is called an "Adverse Material Fact". This disclosure must be made to prospective purchasers.
Once an offer to purchase is obtained, you will again, need to disclose to the Buyer in writing that your acceptance of the offer is subject to the short sale. The offer will then be submitted to your lender and you have to supply additional documentation. Now you get to wait again. Keep in mind that your lender may not be able to make the decision to accept a short sale on their own. The mortgage insurance and/or investor will need to accept also.
If the deal "makes sense", they believe your hardship is genuine, and you do not own any other property -- you may get a "yes" decision. Your chances go up markedly if you have someone experienced negotiating for you.
Oh yes. If your lender does forgive part of your debt, there is something you should also know that "Debt forgiveness" taxable income. The IRS will require you to pay taxes on that income.
Beware there are no guarantees with a short sale! You may invest money during this process such as the appraisal and/or inspection but the lender may not agree to reduce the payoff.
Many short sales fail because the lender's representative is unfamiliar with the local market and responds with an unrealistic proposal. When buying a short sale property, don't expect a quick answer, don't expect the mortgage company to respond logically and know that your inspection fees will be lost if the transaction fails to close
They will seek any additional assets the homeowner may have and they will may also demand the brokers reduce their commissions even though short sales require much more work than the typical transaction. They may demand the seller to sign a personal note to pay back the shortfall. Remember, the mortgage company wants to recover as much of the loan as possible and if the property goes to foreclosure, well that's another department's problem.
Additionally, many loans have PMI (Private Mortgage Insurance) that will cover a portion of their loss so the mortgager's motivation to reach an agreement may be less because they're covered regardless. You may have to start negotiating with the PMI company, adding additional time to the sale process. Unless you have considerable experience with short sales, foreclosures and working with lenders' loss mitigation departments, be very cautious in submitting an offer on a property in a short sale situation.
Buyers, rely on your real estate agent to tell you of the pros and cons of buying a short sale property. As about an escape provision, if the process takes longer than you want or if a more suitable property becomes available and do not expect the Seller to be motivated to make any repairs on the property prior to closing. Remember they are not allowed to make a dime on the property! Never purchase a short sale without obtaining a Professional Home Inspection. Consider it insurance.
Sellers and Buyers, be realistic when involved in a short sale process.
Sellers should consult with your accountant and your attorney on the tax and legal ramifications of a short sale. You may have to be willing to undergo an asset evaluation and even be willing to walk away and let the lender have the property.
