The Short Sale
As property values have declined, some home owners find that the amount they owe on their mortgage exceeds their home’s current value. Yet at the same time, a home owner may be in a situation where he or she needs to sell the home. The home owner may have faced a financial hardship such as a job loss, illness, divorce or other matter that is forcing a sale of the home in this bad market. Lenders don’t care - - they just want to get paid. What can be done? One option is the Short Sale.
A Short Sale is when a lender agrees to accept less money than what is owed on the mortgage. Lenders agree to a Short Sale if they believe the property value is less than the amount of the loan and the property is at risk of foreclosure or the borrower’s hardship.
If a loan goes into foreclosure the lender may spend years in litigation, creating uncertainty and possibly costing the bank more in the long run. That is where a borrower with the help of his counsel may be able to convince the bank to accept the Short Sale option.
The borrower needs to do three things to convince a bank a Short Sale is the right choice.
First, the borrower must find a motivated buyer. Short Sales are complex and time consuming so the borrower must find the buyer that wants the property and is willing to wait to get it. It is helpful to find a real estate broker with some experience in closing Short Sales. They need to price the property at a value that will attract an immediate offer - - no matter what you owe. Then get the offer in writing – a contract of sale with a commitment from a bank.
Second, the borrower needs to contact the lender’s “loss mitigation” department and ask them to send the applications the borrower needs to fill out in order for the bank to consider a Short Sale. Usually this will consist of an application, a financial statement, two years of tax returns, pay stubs, bank statements and a “hardship letter.”
Third, once you have the contract of sale and the application complete, the bank usually sends an appraiser to confirm the property value. If the bank approves the sale, a closing can take place and title can be transferred even though the purchase price is not enough to pay off the mortgage.
If the bank approves the sale, the bank may, or may not agree to waive its right to collect the deficiency balance. If you are attempting to protect your credit, and the bank agrees, you may be able to pay the lender a part of that deficiency amount. The lender’s agreement to accept a note will prevent a negative credit report. Instead, you will get a “release.”
I have successfully closed several short sales over the past two years, many of them without any payment or note to the bank for a deficiency.