What is a Short Sale
A Short Sale involves the sale of the property by the borrower to a third party for less than the amount owed to satisfy the delinquent mortgage, as agreed to by the lender, investor, and mortgage insurer. Due to the increased incidence of preforeclosure sales, Fannie Mae is establishing a 2-year elapsed time period for reestablishing credit following completion of the action.
To qualify for a “Short Sale”, In most cases homeowners must demonstrate a hardship and be financially insolvent. The homeowner should be able to demonstrate inability to make the loan payment. Most importantly, homeowners must prove a willingness to cooperate with the process.
List of Acceptable Hardships
- Loss Of Job
- Loss Of Income
- Divorce
- Death Of A Family Member
- Job Transfer
- Business Failure
- Damage To Property
- Inheritance
- Medical Bills Military Service
- Payment Increase
- Insurance or Tax Increase
- Too Much Debt
- Incarceration
Possible Advantages
With a short sale, sellers avoid having to go through a lengthy foreclosure process and prevent the impact of a foreclosure on their credit score. In a short sale, the seller and the lender work together to determine the details of the agreement, but typically sellers who complete a short sale also avoid owing the balance of the loan.
The biggest advantage to buyers is clearly the prospect of moving into a new property at a great discount. Moreover, buyers may find that short sales have an additional benefit over foreclosures too, since unlike a foreclosure, there’s not much of a risk that the buyer will need to take action to remove the seller from the property.
Of course, mortgage lenders can benefit as well. With a short sale, lenders don’t have to worry about getting involved in a long foreclosure process. More than anything else, lenders want their money back, and they generally want to steer clear of taking responsibility for selling a home. So, a short sale can actually be good for them.
Potential Pitfalls
Sellers considering a short sale must understand a few important things. First, not all lenders will offer to relieve the seller of the responsibility of paying off the balance of the loan. So, sellers should get a solid commitment from lenders that states this is part of the deal. Also, though the seller is avoiding a foreclosure, even a short sale may affect their credit score to some extent. So, sellers should discuss this issue with their lender to figure out how the process will be reported to the credit agencies.
For Sellers
Most importantly, not all sellers even qualify for entering into a short sale. For example, few lenders will enter into a short sale agreement with sellers who have not yet missed multiple payments. So, if you’re a seller thinking about a short sale, you’ll want to talk to your lender about the options available.
For Buyers
Buyers need to be wary too, since getting a deal on a short sale is not as easy as it may sound. In fact, there are some extra steps that buyers need to take when entering into a short sale, which can require doing some additional homework and assembling the right paperwork. For a guided tour of this process, see the ten steps to buying a short sale.
Of course, if you’re a buyer considering entering into a short sale, it would be wise to consult a real estate professional who can answer your questions and help you navigate the process. This way, you can be better prepared to pull together all the appropriate information you need to complete the transaction and move into your new home.
Process
In a short sale, the bank or mortgage lender agrees to discount a loan balance because of an economic or financial hardship on the part of the borrower. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender. Neither side is “doing the other a favor;” a short sale is simply the most economical solution to a problem. Banks will incur a smaller financial loss than foreclosure or continued non-payment would entail. Borrowers are able to mitigate damage to their credit history, and partially control the debt. A short sale is typically faster and less expensive than a foreclosure. It does not extinguish the remaining balance unless settlement is clearly indicated on the acceptance of offer.
Lenders
Lenders often have loss mitigation departments that evaluate potential short sale transactions. The majority have a pre-determined criteria for such transactions, but they may be open to offers, and their willingness varies. A bank will typically determine the amount of equity (or lack thereof), by determining the probable selling price from an appraisal or Broker Price Opinion(BPO).
Lenders may accept short sale offers or requests for short sales even if a Notice of Default has not been issued or recorded with the locality where the property is located. Given the unprecedented and overwhelming number of losses that mortgage lenders have suffered from the 2009 foreclosure crisis, they are now more willing to accept short sales than ever before. This presents an opportunity for “under-water” borrowers who owe more on their mortgage than their property is worth and are having trouble selling to avoid foreclosure as a result.
Approvals & Conditions
Multiple levels of approvals and conditions are very common with short sales. Junior lien-holders – such as second mortgages, HELOC lenders, and HOA (special assessment liens) – may need to approve the short sale. Frequent objectors to short sales include tax lien holders (income, estate or corporate franchise tax – as opposed to real property taxes, which have priority even when unrecorded) and mechanic’s lien holders. It is possible for junior lien holders to prevent the short sale. If the lender required mortgage insurance on the loan, the insurer will likely also be party to negotiations as they may be asked to pay out a claim to offset the lender’s loss in the short sale. The wide array of parties, parameters and processes involved in a short sale makes it a relatively complex and highly specialized type of real estate transaction. Unsurprisingly, short sale deals have a high failure rate and often do not close in time to prevent foreclosure when they are not handled by a knowledgeable and experienced professional. The best sources of knowledge and expertise in short sales are real estate Agent (negotiators),Who understand loss mitigation process,and specialize in short sale.
Different from Foreclosures Because…
Short sales are different from foreclosures in that a foreclosure is forced by a lender, whereas both lender and borrower consent to a short sale. However, this consent may change at any time, and negotiations may be ongoing between the lender and borrower even while the short sale is on the market. The borrower may decide to remain and refinance their house, or become obstinate and force foreclosure. The bank may renege as well if they decide to stick with the current borrower, or if they disapprove of the sale price. Any short sale contract includes a contingency where the bank must approve the sale.
Changing Consent
Changing consent can present a perilous situation for potential buyers. It can waste considerable time and money for a prospective buyer who anticipated a sale. Typically, deposits with the bank will be refunded but money for paid inspections or other services cannot be.
There are several defenses against this. If the seller has moved out of a property, that is a clue that they have no intention of staying or negotiating further with the bank. “Bank Approved Short Sales” are advertised by real estate advertisements, indicating that a real estate broker has verified the selling bank’s position. This still does not guarantee acceptance, and it often does not take junior lien-holders into account, but it is better than situations where the bank holding the mortgage has only been lightly involved in the borrower’s decision.
Short Sales & Credit
Short sales are a type of settlement, and they adversely affect a person’s credit report, though the negative impact is typically less than a foreclosure. Like all entries except for bankruptcy, short sales remain on a credit report for seven years. Depending upon other credit information, it is typically possible to obtain another mortgage 1-2 years after a short sale.
While lenders sometimes forgive the remaining loan balance, other lien-holders likely will not. Further, it is common for a lender to omit updating mortgage balances zero balance after a short sale. However, willfully misrepresenting information on a credit report can constitute libel in some jurisdictions, and lenders may be sued in civil court for engaging in this behavior.
