With homeowners defaulting on their mortgages at a record pace, many people are practically begging their lenders for some form of relief or assistance in order to prevent themselves from ending up on the street. While it is certainly disconcerting to receive collection letters and threats of impending foreclosure from a lender, those who are falling deeper into debt and enduring difficulty making their monthly mortgage payments need not despair. The “short sale” is one alternative worth considering as a viable means for resolving your debt with the lender and dealing with a home that is no longer affordable. Here are some basics you need to know before starting the short sale process.
What is a Short Sale?
A “short sale” occurs when the net proceeds from the sale of property is not sufficient to satisfy the outstanding mortgages on the property, and the seller does not have the financial ability to make up the difference. The lender is asked to take less than the full amount owed in order for the sale to be completed
What Causes A Short Sale?
Sometimes a short sale is brought about because the homeowner borrowed more than he/she could afford to pay back and miscalculated his/her financial status. Often, the short sale arises because of an unforeseen change in the homeowner’s life, such as a long-term illness, disability, divorce or loss of employment, which has dramatically affected the person’s income such that the mortgage payments are no longer affordable.
Why is the short sale a viable option for the seller?
A foreclosure can have a devastating impact on someone’s credit report that has a lasting effect for years to come. A short sale is typically reported on a credit report as a debt that is “settled for an amount less than what is due”. While this will cause a dip in credit score, it will be nowhere near as harsh as the reporting of a foreclosure.
Why would a lender agree to a short sale?
The answer is very simple: Lenders do not want to own houses. Lenders are in the business of loaning money, not in the business of stockpiling real estate. There have been numerous reports that banks can face fees of up to $50,000.00-$60,000.00 in actually foreclosing on a property. From a business standpoint, the lender will make out better if the property is put on the market and given an opportunity to attract a buyer through private sale.
How does the short sale process work?
Most lenders have a short sale package containing documents that the seller must submit in order to have the short sale approved. Such documents include: hardship letter from seller/borrower explaining why the short sale is necessary, seller’s financial statement, two most recent pay stubs, two most recent bank statements, two most recent tax returns, copy of an Agreement of Sale with buyer, copy of proposed settlement statement (HUD-1) demonstrating net monies to the lender. Once the package is submitted to the lender, a negotiator is assigned to the file who handles the short sale on behalf of the lender through closing.
Miscellaneous Points to keep in mind
- If you find a buyer, don’t expect closing to take place quickly. It may take 60 days, 90 days or even longer, depending on the lender, to get approval from the negotiator for the short sale to go forward.
- Lenders are not properly staffed to handle the number of short sale requests. In order to make sure that your file doesn’t linger on someone’s desk, you need to be persistent—your agent or attorney should make frequent calls to the negotiator in order to insure that your short sale moves forward.
- You must negotiate for the release of both the property and the underlying personal debt secured by the note. If you fail to do this, the lender may not forgive the personal debt.
- It is wise to consult with an attorney and real estate agent who has been through this process before and has significant experience working with lenders. Also, attorney’s fees come out of the lender’s net proceeds. Therefore, you will not have to pay out of your own pocket for an attorney to assist you in the transaction.
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- Homeowner Bankruptcy: When Lenders Hope for it
Article Author: Joshua M. Marks, Esq.Joshua has written 22 articles for us.
Visit Joshua's Website: http://www.lawmr.com
Joshua Dorkin
{ 9 comments… read them below or add one }
Wonderful write up on Short Sales! I was actually considering one last year, but ended up going with another property. Hopefully a lot of new homebuyers know about this, because it will be a wonderful way to obtain property this year!
Good general information on short sales. But, don’t forget that many real estate investors are also skilled at negotiating short sales.
Nice article about short sale…So I think the short sales could bring benefits to other real estate businessman.
How do you know if you’re really getting a better deal though?
Nice article on short sales and just wanted to add that it helps to be very, very detailed and to keep track of all correspondence/discussion with negotiators.
Our short sale files get pretty extensive really, really fast.
Very helpful article. I am a first time home buyer and I am putting an offer on my first house and it is a Short Sale. This really puts things into perspective.
I am recently divorced and got approved for a short sale even got a bid i know it will take about 3 months to get the lender to approve but what steps can i take to protect myself from any fees? And what kind of fees are there?And i am a active member of the military and a veteran can that help?
Great post on short sales. I think your point about getting a real estate agent familiar with the process is probably the most important one. Its even better if they have worked with your lender before because they will have direct phone numbers that they can use to get to the underwriters processing your deal. I would also suggest that you be very tough in the negotiation process. The lenders may want you to bring money to closing or pay a zero interest debt. You should stick to your guns here and know that if the house is appraised for fair market value and you have a qualified buyer then the lender needs to take that deal or face owning the house when you foreclose.
It’s amazing how back in 2006 to 2009, most realtors were not property “schooled” or educated on how to handle a short sale. It felt most were just playing the cards as they lay and tried to help home buyers and sellers go through processes very new to everyone. I think it was a heart breaking time for both buyers and sellers because the process wasn’t a guarantee and took some faith and TIME! At least things have gotten faster but are still a pain to complete.