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If you are a homeowner who has fallen behind on mortgage payments and you don’t see any way to avoid
foreclosure, a short sale may offer you the least painful way to resolve the situation.
The ideal scenario would be that you catch up on your mortgage payments and keep your home. But for many
American families, it’s not a realistic possibility. Your next best option is to make things work to your advantage by
taking an active role. That’s what a short sale is all about. Resolving the problem, as opposed to simply hiding from your
lender and hoping the issue will go away or, worse, walking away from the property.
As a seller, there are negative aspects to a short sale. You do lose your home. But that will happen anyway when the
bank forecloses. You will also walk away without a cent in profit from the sale. And, your credit score will take a hit.
However, because you are making a good faith effort, the lender may look more favorably on you, and perhaps be
willing to help minimize the damage to your credit score. You are also spared the stress and embarrassment of a long
drawn-out foreclosure process. That alone may allow you to feel more in control and give you a |
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feeling that you had a
more direct role in paying off at least part of the debt. Remember, every short sale is a negotiated agreement between the
owner and the lender. In a foreclosure, the lender can always pursue the seller for a deficiency judgment to recoup the
difference between what it was owed and what it actually collected. In a short sale often the lender will accept the sale as “payment in full” and not pursue a deficiency judgment. The lender might agree to that release in return for the seller
showing the home, maintaining it as well as possible and not trashing it on the way out. |
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There are two possible short-sale killers. So, before you even start considering getting involved in a short sale, there
are two situations in which an attempt at a short sale is likely to fail. |
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An attempt at a short sale is likely to fail if: |
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No default on loan |
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Lenders often will not accept short sale offers or requests for short sales unless the borrower is far behind in payments and a
notice of default has been issued. |
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Bankruptcy |
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If the seller has filed for bankruptcy, forget it. Few, if any, lenders will consider a short sale when the seller has filed for bankruptcy,
because negotiating a short sale is considered a collection activity and collection activities are prohibited in bankruptcies. |
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| What’s the lender’s motivation to accept less than a full payoff? |
| Why would your lender let you walk away from the home and forgive the shortfall on your loan? Basically, to save time and money. Foreclosure is an expensive
and time-consuming process for lenders. Once the lender realizes that a foreclosure is inevitable, a short sale may seem like the lesser of two evils. Plus, short sales
help the lender look good on paper because the property was never listed as an actual foreclosure, which helps the lender’s numbers. On some loans, like FHA and
mortgages with PMI insurance, the lender can avoid losses and be made whole by the insuring entity. |
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| In a January of ‘08 a survey of senior loan officers conducted by the Federal Reserve Board found that more than 65 percent of those surveyed said they anticipate
steps such as short sales or deed-in-lieu of foreclosures to be at least somewhat significant loss-mitigation steps at their banks for 2008. |
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| Convincing the lender |
| There’s no guarantee, but if you have evidence to back you up, a lender may agree to a short sale. |
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| But don’t think it’s going to be easy. It’s going to take a lot of proof and convincing evidence. To make your case,
you, the buyer and any agents should work together to assemble the following package. |
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| Finding a buyer |
Before you even thought about a short sale, you probably had your home on the market, hoping
to sell it for even a small profit, pay off the mortgage and stave off foreclosure. But that hasn’t worked. Possibly because you’re “upside down”... you owe more
than the house is actually worth today. |
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Now you may be anxious enough to look at a short sale. Bottom line, you’re still seeking the same thing, a buyer. You may hope to get a tentative OK from the
lender before seeking a buyer, but this usually doesn’t happen. The lender won’t tell you it will accept any less than what it is owed and may not even want to
discuss it with you until you’re 30 or 90 days behind in your payments. Lenders are more likely to agree to a concession if a buyer is already in place and you have
a legitimate, signed offer with a sizable deposit. |
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Don’t consider a short sale transaction as a do-it-yourself project. Seriously consider getting a real estate agent who has a track record with short sales, foreclosures
and bank-owned properties. Most real estate agents have a contact list of investors and buyers in the area. Ideally, you will want to find a buyer who has at least a
basic familiarity with short sales and/or works with a broker who does. |
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In addition to writing up the hardship letter and documenting the property’s shortcomings, you should do everything else in your power to help convince the lender
that the property would be difficult to sell via normal channels. Gather up any repair receipts and/or estimates. Take pictures (or allow the buyer to do so) of any
problems or defects. Allow the buyer and their broker/appraiser to access the property (inside and out) when necessary. |
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| Important details |
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In some cases, the lender may send you a 1099 tax form, which will list the “shortfall” (the amount the lender has forgiven) as income to the seller.
Don’t be alarmed: |
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The Mortgage Forgiveness Debt Relief Act of 2007 gave short sellers a big tax break by changing the way the forgiven amount was viewed for tax
purposes. Prior to passage of the act, that amount was considered as income for the borrower and was subject to tax. However, the new law removed
that tax liability. |
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If you have more than one mortgage or more than one lender, remember they all have to approve the short sale. Make sure your sales contract includes
all lenders’ approval in writing. Lenders holding second or third mortgages probably will get nothing if the property is foreclosed, so at least in a short
sale they have a chance of recouping some of their investment. |
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Some states allow deficiency judgments, in which a lender can pursue the borrower for any remaining balance of the loan. This usually only applies to
cases where the home is sold at auction or as an REO, a real estate owned property, by the lender. In a typical short sale agreement, the lender often will
agree to waive this right. Make certain you’re protected from this in the short-sale agreement. |
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The
information provided here is just to inform you that a short
sale is one of many options you may want to look into if late
or missed payments are a recurring event for you. We work
with families in all different kinds of situations and if
you feel you’d like our assistance you can schedule
a meeting with one of our team’s short sale specialists
by calling Dan Gregor at 614-548-0531
- Toll free at 800-362-4918. Or,
take a few minutes to fill out the information below. It will
permit us to pull up neighborhood sales information and courthouse
info on your property allowing us to be more helpful when
we discuss your property with you. |
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