A short sale occurs when a home owner sells their home for less than the principal balance that is owed to the lender. The lender then agrees to accept the amount, even though it is less than what is owed, and the home owner is able to avoid having the devasting consequences of a foreclosure on their financial record. Short sales are ideal for people who have been trying to sell their homes for a length of time with little success. Short sales are also allow homeowners avoid foreclosure without having to file for bankruptcy.
In the event of a short sale, even though the proceeds from the real estate fall short of what the borrower owes, the lender will accept the amount because initiating the foreclosure process will be costly and time consuming to the lender. During a short sale, the borrower and the lender will have to work closely to negotiate terms so that both parties are satisfied with the outcome of the sale. Not every lender will agree to a short sale, especially if the lender feels that they can make more money by foreclosing and re-selling the property. Additionally, not all borrowers or properties will qualify for a short sale, which means that it is critical that potential clients must understand eligibility requirements before pursuing this option. The best way a potential client can get a solid understanding of short sales and individual qualifications is by working with an experienced real estate attorney.
Here are the typical steps of a short sale:
Seller signs a listing agreement with a real estate agent subject to selling as a short sale with third-party approval.
The agent finds a buyer who makes an offer for less than the amount of the mortgage.
Seller accepts the buyer's purchase offer.
Seller's lender accepts the buyer's purchase offer.
Transaction closes when the buyer delivers the funds, the lender releases the lien and the seller delivers the deed.
This is a very condensed version of unfortunately, what has proven to be a very difficult process.
Qualifications for a Short Sale
Before you eagerly climb aboard the short sale bandwagon, consider the following to determine whether you may qualify for a short sale. If you cannot answer yes to all four requirements, you may not qualify for a short sale.
The Home's Market Value Has Dropped.
Hard comparable sales must substantiate that the home is worth less than the unpaid balance due the lender. This unpaid balance may include a prepayment penalty.
The Mortgage is in or Near Default Status.
It used to be that lenders would not consider a short sale if the payments were current, but that is no longer the case. Realizing that other factors contribute to a potential default, many lenders are eager to head off future problems prior to default.
The Seller Has Fallen on Hard Times.
The seller must submit a letter of hardship that explains why the seller can not pay the difference due upon sale, including why the seller has or will stop making the monthly payments.
A few examples that do NOT constitute a hardship are:
Bad purchase decisions. Blowing your paycheck on a home theater system with surround sound does not qualify as a hardship.
Unhappy with the neighbors. Even if every home on your block has turned into a "crack den", that will not qualify as a hardship.
Buying another home. The lender will not care if you have decided the home is no longer suitable for you or your family.
Pregnancy. Increasing the size of your family or starting a family is not considered a hardship.
Moving into an apartment. If you decide to move out of your home, that is a lifestyle decision and not a very good reason to abandon your home.
Examples of hardship are:
Unemployment
Divorce
Medical emergency / sudden illness
Bankruptcy
Death
The Seller Has No Assets
The lender will probably want to see a copy of the seller's tax returns and / or a financial statement. If the lender discovers assets, the lender may not grant the short sale because the lender will feel that the seller has the ability to pay the shorted difference. Sellers with assets may still be granted a short sale but could be required to pay back the shortfall.
For example, if the seller has cash in a savings account, owns other real estate, stocks, bonds or even IRA accounts, the lender will most likely determine that the seller has assets. However, the lender might discount the amount the seller is required to pay back.
Many entities profit from short sales, but there is no seller short sale profit.
Short Sale Consequences
A short sale is dependent on a buyer making an offer to purchase. If you do not receive an offer, you will not qualify for a short sale. So even if you meet all the other criteria, it is possible that no one will buy the short sale. It is also dependent on the lender accepting the buyer's offer. If the lender rejects the offer, a short sale will not take place.
Tax Consequences
If the lender agrees to the short sale, the lender may possess the right to issue you a 1099 for the shorted difference, due to a provision in the IRS code about debt forgiveness. Many situations are exempt from debt forgiveness, according to the Mortgage Foregiveness Debt Relief Act of 2007.
You should speak to a real estate lawyer and a tax accountant to determine the amount of short sale tax consequences, and whether you can afford to pay those taxes, if any.
Blemished Credit Report
A short sale will show up on your credit report. It's a pre-foreclosure that has been redeemed. Short sales affect your credit rating. While the damage to your credit report may not seem as significantly bad as a foreclosure to you, creditors may not make the distinction.
Always seek legal counsel before attempting to pursue a short sale. A real estate agent cannot give you legal advice.
SHORT SALE "STEPS"
It is strongly suggested that before you attemt to "short sell" your property, you engage professional help, either an experience real estate broker or real estate attorney, or both.
Although all lenders have varying requirements and may demand that a borrower submit a wide array of documentation, the following steps will give you a pretty good idea of what to expect.
Call the Lender You may need to make a half dozen phone calls before you find the person responsible for handling short sales. You do not want to talk to the "real estate short sale" or "work out" department, you want the supervisor's name, the name of the individual capable of making a decision. Moreover, many lenders have their own "short sale" package of forms that will need to be filled out.
Submit Letter of Authorization Lenders typically do not want to disclose any of your personal information without written authorization to do so. If you are working with a real estate agent, closing agent, title company or lawyer, you will receive better cooperation if you write a letter to the lender giving the lender permission to talk with those specific interested parties about your loan. The letter should include the following:
Property Address
Loan Reference Number
Your Name
The Date
Your Agent's Name & Contact Information
Preliminary Net Sheet/HUD-1 This is an estimated closing statement that shows the sales price you expect to receive and all the costs of sale, unpaid loan balances, outstanding payments due and late fees, including real estate commissions, if any. Your closing agent or lawyer should be able to prepare this for you, if you do not know how to calculate any of these fees. If the bottom line shows cash to the seller, you will probably will not qualify for a short sale.
Hardship Letter The sadder, the better. This statement of facts, which should be no more than 1 page, describes how you got into this financial bind and makes a plea to the lender to accept less than full payment. Lenders are not inhumane and can understand if you lost your job, were hospitalized or a divorce damaged your finances, but lenders are not particularly empathetic to situations involving dishonesty or criminal behavior.
Proof of Income and Assets It is best to be truthful and honest about your financial situation and disclose assets. Lenders will want to know if you have savings accounts, money market accounts, stocks or bonds, negotiable instruments, cash or other real estate or anything of tangible value. Lenders are not in the charity business and often require assurance that the debtor cannot pay back any of the debt that it is forgiving. Some lenders have their own specific financial statement, make sure to ask.
Copies of Bank Statements If your bank statements reflect unaccountable deposits, large cash withdrawals or an unusual number of checks, it's probably a good idea to explain each of those line items to the lender. In addition, the lender might want you to account for each and every deposit so it can determine whether deposits will continue.
Comparative Market Analysis Sometimes markets decline and property values fall. If this is part of the reason that you cannot sell your home for enough to pay off the lender, this fact should be substantiated for the lender through a comparative market analysis (CMA). Your real estate agent can prepare a CMA for you, which will show prices of similar homes:
Active on the market
Pending sales
Solds from the past six months.
Purchase Agreement/Contract of Sale & Listing Agreement
When you reach an agreement to sell with a prospective purchaser, the lender will want a copy of the offer, along with a copy of your listing agreement. Be prepared for the lender to renegotiate commissions and to refuse to pay for certain items such as home protection plans or termite inspections.
Now, if everything goes well, the lender will approve your short sale. As part of the negotiation, you might ask that the lender not report adverse credit to the credit reporting agencies, but realize that the lender is under no obligation to accommodate this request. Credit report status is not always negotiable.
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