Short Sale SellersShort Sale Your Home
If you have fallen behind on your mortgage payments and you don’t see another way to avoid foreclosure, a short sale may be a good option to resolve the situation.
A short sale is where a lender or bank accepts a discounted mortgage payoff that is less than owed in order to sell the home of the financially distressed homeowner. The lender is essentially, forgiving the remainder balance of the mortgage loan. This resolves the problem opposed to simply walking away from the property hoping that the problem goes away. Inaction will inevitability result in a foreclosure vs a short sale.
With real estate short sales, there are pros and cons. Home sellers receive a benefit of avoiding a mess of their credit but they will do so without a cent in profit from the home sale and their credit score will still be hit in a bank short sale. Although, if a good faith effort is made, the lender may help minimize the damage to the credit score.
Remember, that short sales are a negotiated agreement between the owner and lender, so you will be in more control than in a foreclosure process. In foreclosures, the lender has the ability to pursue the seller for a deficiency judgment to obtain the difference between what was owed and what was actually collected. In short sales, the seller might be able to get the bank or lender to accept the sale as “payment in full without pursuit of any deficiency judgment”. The lender may agree to this language since they would prefer a maintained home instead of a home gone through foreclosure that potentially could get trashed.
Short sales can fail if there is no default on the loan or the seller has filed for bankruptcy. Few lenders will consider doing a short sale because negotiating a short sale is considered a collection activity and these activities are prohibited in bankruptcies.
Why Would a Lender Agree to a Short Sale?
A lender will agree to do a short sale to save time and money on their end. Foreclosures are expensive and time consuming for lenders and a short sale may be the lesser of two evils. In addition, the short sales will help the lender look good on paper, as the property will not be listed as an actual foreclosure and will help the bank’s numbers.
The lender will need convincing that a short sale must happen. To do so, a short sale package will need to be delivered to the bank. A short sale package includes a short sale hardship letter, value statement, offer or contract, a settlement statement and an authorization letter for a real estate agent to work on your behalf.
The hardship letter will need to explain how the seller’s situation is irreversible and you have no way to bring your mortgage up to date. The seller will need to supply as much evidence and documentation as possible including, evidence of job loss, divorce papers, last two years of tax return, recent pay stubs and bank statements. If there are medical issues, include statements and proof of the seller’s condition.
Finding a Short Sale Buyer
Purchasing a short sale is a big commitment for the buyer since short sales are notorious for not being “short” at all. Responses to short sale offers can take weeks and sometimes months, requiring the buyer to sit and wait during the whole time. If the buyer is in a rush to purchase a house, then they may walk, leaving the seller with no buyer. If the buyer is looking for a good deal and has the time to wait for the lender, then you’ve got yourself a potentially good buyer.
You may be tempted to sell your home using a “for sale by owner” sign but in cases of short sales it is highly recommended getting a real estate agent who has a track record with short sales and bank owned properties. Ideally, you would want someone who has a basic understanding of short sales or works closely with a broker who does. In addition, the real estate agent should have a list of investor and buyers in the area that may be interested.
In the past, sellers were responsible for reporting and paying taxes a short sale. Since the Mortgage Forgiveness Debt Relief Act of 2007, short sale sellers have a big tax break by changing the way the forgiven amount is viewed for tax purposes. Prior to the act, the amount forgiven was considered as income to the borrower and subject to tax.
