Short Sale: Is It Right For You?

   How a Short Sale Happens?

       When the lenders provide the option to sell the burrowed property to a third party at a lower price than what they actually owe on their loan, it is called a real estate short sale. To illustrate further, if the mortgage is $200,000 and the market value of the property has dropped to $185,000 an amount of $15,000 is short excluding the real estate commission, title charges and other similar contingencies. If the lender accepts the above short price instead of the full loan amount the transaction is called a short sale. Lenders often resort to short sale in order to avoid foreclosure and consequent financial burdens.

What are the Steps in a Short Sale?

       The short sale process is not as easy as some people may think. The lender has to approve the process; the homeowner has to convince the hardships to the lender leading to the short sale. The following steps are involved in a typical short sale. The seller or the homeowner signs a listing agreement with the real estate agent. The agent negotiates with a buyer who is willing to buy the property for less than the total mortgage loan amount.  If the seller is satisfied with the amount purchase offer is agreed. The lender accepts the purchase offer made by the buyer. When funds are delivered by the buyer to the lender, the transaction is closed.  Finally the lender releases the lien on the property and the new deed is made in favor of the buyer.

How a Person Qualifies for the Short Sale?

     

    A borrower if wants to qualify for a short sale should satisfy the lender the circumstances that have lead to last step of ending in short sale of the property. Generally the following situations are accepted by the lenders as valid reasons for making a short sale.

•      Unemployment and critical illness of the borrower.
•      A drop in market value of the property.
•     Mortgages in continuous defaults and the recovery of funds not optimistic according to the lender.
•      The property becomes in poor condition either by its own or due to natural calamities.
•      The area or neighborhood has started decreasing trends in property value.

     In addition to the borrower reasons, the banks and other lenders may have their circumstances to think in favor of short sales to sustain the business. These includes,  Increasing defaulting loans that decrease the confidence of the shareholders and REO being a liability rather than an asset, many banks avoid the complications that come later.

      In any case the seller needs to submit a hardship letter explaining the circumstances that prompt for a short sale. The letter should state the incapacity to make monthly loan dues and also the inability to pay the difference upon short sale. The homeowner may be required to submit the financial statements, tax records and all other documents in support of his hardship. Some of the valid reasons for accepting hardship are,

• ·       Unemployment.
• ·       Divorce.
• ·       Acute Illness.
• ·       Bankruptcy
• ·       Death

The below mentioned situations do not constitute hardship.

• ·       Spending on luxury when there is an acute shortage of income.
• ·       Personal problems with the neighbors.
• ·       Relocation of the house simply to abandon the present house for seeking comfort.
• ·       Pregnancy is not considered a hardship.
• ·       Buying another home because of the poor condition of the present home.

       In short it is very important to convince the lender the reasons for seeking short sale. If the lender discovers that the homeowner has enough income to repay loan, short sale may not be granted. In some cases the lender may grant a short sale to a homeowner with some assets but he or she may be required to pay back the short fall. The seller is not entitled to make a profit or receive a portion of money from the short sale.

The Consequences of a Short Sale:

       Even if the hardships are acceptable to the lender, there are few things that must be taken into account when planning a short sale. A short sale happens only when a buyer agrees to buy the property and therefore confirmed decision to buy the property is very important. Besides the lender has to accept the offer to get final approval of the short sale.

         In a short sale, the homeowner owes the difference between the mortgage balance and the discounted amount. The lender may issue a 1099 for the difference but according to the Mortgage Forgiveness Debt Relief Act of 2007 there are many situations where exemption can be granted for debt forgiveness. A short sale leads to negative credit score and therefore efforts should be made to get a positive feedback from bank stating that payment has been made in full.

Porama Srijinda, MBA.

REALTOR®, CIPS

Broker Associate at Keller Williams Realty.

Authorized HUD  Agent. Short Sale and Equator Experiences,

Ca. DRE. Lic# 01838443