I am sure that a lot of you have heard about short sales in the real estate market, but don’t really know what they are or what is involved in getting one approved.
In a short sale, the bank or mortgage lender agrees to discount a loan balance because of a borrower’s financial hardship. The homeowner sells the mortgaged property for less than the outstanding balance on the loan, and turns over the proceeds of the sale to the lender. Banks will incur a smaller financial loss than foreclosure or continued non-payment. A short sale is also typically faster and less expensive than a foreclosure, but can still take several months to get approved.
It is very common in short sales to have multiple levels of approvals. Not only does the lender have to approve the deficiency, but junior lien holders such as second mortgages, equity lines, and homeowner associations must give approval. If the lender required mortgage insurance on the loan, the insurer will probably be involved in the negotiations also. It is not surprising that many short sale deals have a high failure rate and often do not close in time to prevent foreclosure.
So what do you do if you have to sell your home and owe more on it than it is worth?
- Call the lender- Get the supervisor’s name and phone number who handles short sales. This may require many phone calls. The best place to start is the customer service number on your mortgage statement.
- Submit a letter of authorization-Typically lenders do not want to disclose any of your personal information without authorization to do so. If you are working with a real estate agent to sell your home, then you need to provide a letter with the property address, loan number, your name, date and the name of your agent and contact information.
- Preliminary net sheet-You will need to get an attorney to prepare a settlement statement with the estimated sales price you expect to receive and all the costs of the sale to include unpaid loan balances, outstanding payments due, late fees, real estate commissions etc.
- Hardship letter- Provide the lender with a detailed letter describing how you got in a financial bind i.e. lost job, health issues etc.
- Proof of income and assets-Provide bank statements,savings accounts, money market accounts, financial assets such as stocks, bonds or real estate to the lender.
- Comparative Market Analysis-If your home is worth less than you owe , have your real estate agent prepare a market analysis which shows prices of similar homes to provide to the lender.
Short sales can adversely affect a person’s credit report, although the negative impact is typically less than a foreclosure. Short sales will remain on a credit report for seven years, but is is possible to obtain another mortgage one to three years after the short sale.
But beware, the I.R.S. could consider debt forgiveness as income and there is no guarantee that the lender will not legally pursue a borrower for the difference between the amount owed and the amount paid. I recently closed a short sale and the seller had to sign a promissory note with the lender for $20,000!
Short sales are not for the”faint of heart” for either sellers or buyers. If you are considering selling your home as a short sale, or buying a short sale, I would highly recommend talking with a real estate attorney and your accountant before starting the transaction.
If you have any questions about this post, or I can be of service to you, please call me at 704-574-3680, or e-mail me at debbie.williams@atcmail.com.
