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.
REALTOR®, CIPS
Broker Associate at Keller Williams Realty.
Authorized HUD Agent. Short Sale and Equator Experiences,
Ca. DRE. Lic# 01838443
