What is a Short Sale?
A Short Sale, also called a “pre-foreclosure sale,” is the sale of a home for a price less than the amount owed on the home. For example, if you owe $200,000 on your home and you sell it for $175,000, and the lender accepts this price, then the lender receives less than, or an amount “short” of fully satisfying the loan. In most cases, the existing lender pays virtually all sales costs, including commissions, escrow and title fees and repair costs. You get your home sold, the loan is paid off and you avoid foreclosure.
Is a Short Sale right for me?
The answer to this question depends on your goals. If your goal is to remain in your home then the answer is “No.” If you wish to remove yourself from a bad financial situation with the least amount of damage to your credit, then most likely the answer is “Yes.” Banks are increasingly willing to work with borrowers faced with a financial hardship and accept a discounted payoff on the loan. If you are faced with a financial hardship that makes it likely you will default on your mortgage, then your bank would prefer to settle the matter with you as opposed to taking the property through foreclosure. By the way, this solution is also good for the lender since the lender makes more money by accepting a short sale than by taking title to the property by foreclose.
If I do a Short Sale, how much will I have to pay to sell my home?
In most cases, you will pay little to nothing out of pocket. If your lender approves the Short Sale, it will pay for all commissions, settlement fees, title insurance and most repair expenses. To protect you, your attorney or real estate agent should include in your sales contract the following clause. "Seller’s agreement to sell is subject to approval by existing lender of a Short Sale at no cost to Seller. Seller shall not be required to deposit funds to close." Remember, lenders approve Short Sales and accept the resulting loss in an effort to avoid bigger losses through foreclosure.
How do I get started on a Short Sale?
You should speak with a real estate attorney or a real estate agent that is experienced in the short sales process. He or she will explain the steps involved. The very first step is to get your home listed by a real estate agent and secure the best contract price possible. Then you will forward the contract to your lender for a short sale approval. You will also submit to the lender your current financial information and a financial hardship letter as part of the approval process. The approval process can take up to 60-90 days so be patient.
Can I simply deed my property to someone else and avoid the hassle?
The deed to your property is your proof of title or ownership. Transferring the ownership of your property to someone else does not relieve you of your obligation to pay off the loan. The lender can still foreclose on the property and take the title from the person to whom you transferred it. In addition, the lender can still seek a deficiency judgment against you for the amount you owe on the debt. In addition, if you deed your property to someone else, you give up control of the property since you will no longer be the owner. Please be wary of anyone or any company that asks you to deed the property to them. Do not deed your property to anyone unless you have consulted with a real estate attorney.
What sort of hardship would my lender consider legitimate?
What hardships are acceptable vary from bank to bank. Generally, if the financial hardship is real and the bank believes the loan is or is likely to become delinquent as a result, the banks loss mitigation department will process the Short Sale. Therefore, it is vital to submit a strong hardship letter by including specific details of your situation. Canned or boilerplate letters of hardship may not work. The hardship letter sets the tone for the entire file. Here are a list of “hardships” that banks frequently accept.
• Family illness or injury
• Illness or injury in the extended family – particularly if it forces relocation
• Job relocation when the property is equity deficient
• Job loss or significant income loss
• Small business downturn
• Divorce or split of domestic partners
• Adjustment in mortgage payment or unforeseen increase in living expenses
I am current on my mortgage; will my lender consider a Short Sale?
Generally, the banks will not consider a short sale unless you are in default of your loan. If you anticipate being in default, some banks will accept the paperwork to begin your file.
I have two loans; can I still do a Short Sale?
Yes. However, if your loans are with different banks, each bank will have to approve the short sale. For example, if you have a first mortgage with Bank of America and a second with Chase, it is equally important to submit all the necessary approval paperwork to Chase as it is to Bank of America. Generally, the second mortgage will agree to the short sale even though it is getting a fraction of what you owe it. Nevertheless, you must still get the second mortgage’s approval.
I am concerned about my credit, how will a Short Sale affect my credit?
The key here is to avoid losing your home to foreclosure, which can adversely impact your credit score as much as 250 points. By nearly any measure, a completed foreclosure is the most damaging event to your credit status - worse than bankruptcy, according to some banks. In the course of getting your short sale approved you may miss your mortgage payments or a bank may begin a foreclosure action against you; both events will adversely affect your credit to a small extent. However, by avoiding losing your home to foreclosure and retiring the debt by a short sale, you will likely be able to resume normal borrowing (car loans, credit cards, consumer goods and such) relatively quickly.
What is a deed in lieu of foreclosure?
This is the process where you offer and the banks accepts the title of your home up front prior to and instead of making the bank go through the complete foreclosure process. However, banks rarely agree to these unless you have been unsuccessful in short selling your home for a few months.
If my home does go into foreclosure, can I still short sell it?
Yes. Many short sales are in foreclosure. Once a foreclosure begins, it can take three to six months or more for the bank to finish the process and receive the title. This allows the homeowner time to short sell the property. Once sold, the bank will cancel the foreclosure action because it will have been paid. If you receive a foreclosure complaint, you should speak with a real estate attorney immediately to discuss your options.