A "short sale” is an option for a homeowner to avoid foreclosure when they can no longer afford the mortgage payment on the home. In a short sale, the lender allows the borrower to sell the property at its current value, even if the sale nets less than the total amount owed on the mortgage. The lender agrees to pay the seller’s commissions, closing costs, and reasonable attorney and title fees charged in most real estate short sale transactions. The terms of the short sale approval are as much a part of the negotiations as is the buyer’s offer. In most cases, the lender allows the property to be sold at fair market value and releases the seller from any future financial obligation to the lender’s loss.
In order for a lender to agree to a short sale, they usually require the homeowner to list their property for sale at fair market value, provide financial information to the lender to confirm hardship, and only accept an offer from a buyer that is “arm’s length” in the transaction. In most cases, it is in the best financial interests of the lender to approve a fair short sale offer than foreclose on the property.
Short sales can be very technical and complex transactions involving careful coordination and close cooperation among a number of parties – lenders, sellers, buyers, attorneys, real estate brokers, title agencies, and often mortgage insurance companies and junior lien holders. When foreclosure is the alternative, a short sale usually provides a better outcome for the seller, lender, and the community in which the property is located.
Typically the first step is to complete an initiation package as required by your lender. This will provide authorization forms for your Realtor, a Listing Agreement, and other disclosures.
After the home has been listed and an offer has been accepted (for less than what you owe), the lender will want a fully signed copy of that purchase agreement as well as your updated financial documentation. This will include pay stubs, bank statements, and your 2 most recent years of tax returns as well as other items on their checklist. This entire package is submitted to your lender for processing and negotiating.
When they have received this package they will determine the current fair market value of the home by ordering an appraisal or Broker Price Opinion (BPO). The valuation on this report is what they mortgage company will use to start negotiating from, regardless of how much more you owe on the home.
Your short sale eligibility is based on a number of determining factors including, but not limited to your reason for having to sell, your financial situation, and your specific lender’s requirements.
In most cases, the answer is yes. Whether it is your primary residence, a second home, or an investment property, a short sale can be approvable depending on your specific lender requirements and short sale guidelines.
Your lender will typically pay all reasonable real estate commissions, title services and settlement fees, attorney negotiation fees, as well as real estate taxes due at the time of closing. A seller commonly has only the cost of minor recording fees, water bills, or other small costs necessary to clear the title. It is also common for a seller to have zero expenses in a short sale closing.
It depends. Through both short sale or foreclosure, it is likely your lender will provide you with a 1099C that could be potentially taxable income. If a seller is insolvent at the time the debt is forgiven, they will not owe tax on the 1099 income. It is important that you consult your personal tax professional to see where and how any current tax laws apply to your specific situation.
In some cases, a lender will postpone the sheriff sale so the short sale process can continue. However, if they are not willing to do so, a homeowner has the right to postpone the sheriff sale themselves. If the property is homesteaded, you can postpone the sheriff sale for five months by filing certain documents with the county offices and foreclosing attorney. This must be done at least fifteen days prior to the date sheriff sale is scheduled. By postponing the sheriff sale yourself for five months, the redemption period is decreased from six months to five weeks. That postponement can make the difference of getting the short sale approved or not.
As everything else, benefits and consequences of either can be “case by case.” Each homeowner has to decide what is best for them specifically. Commonly homeowners choose short sale over foreclosure for the following reasons: credit restoration timelines; an ability to come to a settlement with junior lien holders (ie: 2nd mortgages); no foreclosure on public record limiting credit availability or employment opportunities; avoiding the embarrassment of signs in the windows, public notifications of foreclosure, and sheriff’s sale of the property; the ethical decision to “do the right thing.”
There are some programs available through the government and some lenders that do provide the seller with relocation assistance. The relocation assistance funds can be as high as $30,000 depending on what type of loan you have, who the investor is on the loan, and your financial and default status. For non FNMA or Freddie Mac conventionals, Bank of America and Chase are offering relocation assistance of $5,000 to $30,000 to distressed homeowners to encourage short sale vs foreclosure. If your mortgage is FHA, HUD may provide up to $3,000 to the seller to use toward any costs of the sale not approved by HUD and seller can keep anything left over. If your mortgage is conventional, the HAFA short sale may be available to you allowing for up to $3,000 in relocation assistance funds. Some lenders have other programs available to certain sellers in certain short sale situations. If you are eligible for any of these programs, you will receive the applicable monies available through that program. Your lender will review you for any government or lender short sale programs available during the approval process. Most relocation assistance funds require that the property is owner occupied at the time the short sale is approved.
Call me at (651) SELL-NOW or send me an email at email@example.com to get started. We will schedule a time for your consultation so we can discuss what is the best plan of attack, as well as going through the initiation packet specific to your lender.