Familiarizing yourself with the intricacies of a short sale may yield huge dividends. This is especially true for the homeowner who realizes that the softening real estate market makes it virtually impossible to sell off their home without cutting the asking price – and this frequently means settling for less than it takes to pay off the existing mortgage on the home.
What is a short sale?
In simplest terms, a short sale occurs when a homeowner sells a piece of real estate for less than the outstanding loan on the property that must be repaid. When a borrower and a lender agree to a short sale, the lender, who might be owed $400,000, agrees to accept $350,000 instead. The borrower must be careful to give an accurate estimate of the amount of money the real property can be sold for realistically. This sales price must factor in any real estate commissions, recording fees, title search fees, and other charges.
Why do lenders agree to a short sale?
Lenders agree to a short sale simply because it is cheaper to accept a lesser payoff amount than to incur expenses related to a foreclosure proceeding and subsequent real estate auction. This is generally done when the real property is in pre-foreclosure and there is little chance of the borrower finding the funds required to cure the default. This is similar in nature when creditors agree to settle credit card debts.
Steps of a short sale
- The borrower contacts the lender and asks to have the mortgage account flagged for a possible short sale.
- The borrower next lists the home with a realtor. A clause is worked into the agreement that specifies that the property is subject to a short sale and the transaction requires a third party approval.
- A potential buyer makes an offer on the real property. The offer price is less than the payoff on the outstanding mortgage.
- The borrower accepts the offer from the potential buyer and presents it to the lender.
- The lender accepts the offer from the potential buyer and the real estate transaction proceeds.
- The lender marks the mortgage as satisfied and paid in full and forgives the difference between the sales price and the payoff amount.
How does a borrower qualify for a short sale?
In order for a lender to accept the short sale proposal of a borrower, the latter needs to document that there are several reasons why it is unreasonable to assume that any default could be cured by the borrower in a reasonable amount of time.
- The real estate market has dropped to such an extent that the borrower is now upside down in the mortgage and the house is actually worth less than what is currently owed on it.
- The mortgage payment history shows that default is already incurred or imminent.
- The borrower can prove that the financial situation has changed considerably since incurring the mortgage and these changes are precluding him from making any more mortgage payment in the amount required. In addition, because of the borrower’s current fiscal problems it is unlikely that any defaults will be cured.
- The borrower must demonstrate that it would be beyond his fiscal resources to make up the difference between the home’s market value and the outstanding mortgage. This may be done by submitting proof of unemployment, divorce, medical emergencies, bankruptcy, or death of a family member.
Are there occasions when the lender will not agree to a short sale?
Indeed there are times that lenders do not give the borrower a break. This is done in cases of buyer’s remorse, when the borrower demonstrates he made a bad financial decision when purchasing the real property, or when financial irresponsibility results in funds for the mortgage payments not being available. In addition, simply wanting to get out of the real property because the neighborhood might be changing for the worse or the borrower has another piece of real estate in mind do not qualify for financial hardships that will move lenders to let borrowers off the hook. Finally simply abandoning the property or citing changes in family size have no bearing on the lender’s decision to disagree with a short sale.
What about assets?
When the borrower has little or nothing in the way of assets, lenders are quick to agree to a short sale. As proof, lenders may request copies of tax returns and financial statements. If the borrower does own some assets – such as cash on hand, a savings account, real estate, stocks, bonds, or a retirement savings account – there is a chance that the lender may ask the borrower to cover the difference in selling price and mortgage payoff from these funds.
What happens after the short sale?
Even though an approval for a short sale does not actually guarantee that the borrower will be able to unload the real property he can no longer afford, oftentimes the sale does go through. In the aftermath of such a sale, there are still some other consequences to consider. For example, the amount of money forgiven by the lender is considered income to the borrower and he must declare it on his taxes.
