What is a Short Sale?
In real estate, a short sale is when a bank or mortgage lender agrees to discount a loan balance due to an economic or financial hardship on the part of the mortgagor. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender in full satisfaction of the debt. In such instances, the lender would have the right to approve or disapprove of a proposed sale.
What are the seller benefits of a Short Sale?
With a short sale, sellers avoid having to go through a lengthy foreclosure process and prevent the impact of a foreclosure on their credit score. In a short sale, the seller and the lender work together to determine the details of the agreement, but typically sellers who complete a short sale also avoid owing the balance of the loan.
What are the potential pitfalls of a Short Sale?
Sellers considering a short sale must understand a few important things. First, not all lenders will offer to relieve the seller of the responsibility of paying off the balance of the loan. So, sellers should get a solid commitment from lenders that states this is part of the deal. Also, though the seller is avoiding a foreclosure, even a short sale may affect their credit score to some extent. So, sellers should discuss this issue with their lender to figure out how the process will be reported to the credit agencies.
Most importantly, not all sellers even qualify for entering into a short sale. For example, few lenders will even think about entering into a short sale agreement with sellers who have not yet missed multiple payments. So, if you’re a seller thinking about a short sale, you’ll want to talk to your lender about the options available.
Why would a lien holder accept a Short Sale?
A short sale typically is executed to prevent a home foreclosure. Often a bank will choose to allow a short sale if they believe that it will result in a smaller financial loss than foreclosing. Additionally, a short sale is typically faster and far less expensive than a foreclosure.
How long does it take for a Lender to approve a Short Sale sales contract?
Short Sale approval depends on the number of Short Sales the bank has open. The typical response time for a Short Sale approval in 2008-09 is approx. 2-4 months (60-120 days).
Does just the 1st Mortgage need to approve the sale? Or all lien holders?
Junior liens, such as second mortgagees, HELOC lenders, and HOA (special assessment liens), need to approve the short sale as well. Frequent objectors to short sales include tax liens (income, estate or corporate franchise tax – as opposed to real property taxes, which have priority even unrecorded) and mechanic’s lien holders. It is possible for junior lien holders to prevent the short sale.
While it is frequent if not common for a lender to forgive the balance of the loan in question, it is unlikely that a lien holder that is not a mortgagee will forgive any of their balance.
Who’s selling the house in a Short Sale deal, me or the lien holder(s)?
In Connecticut the seller ‘owns’ the property, not the lender. Therefore the seller is the only one with the ability to sell or not sell the property. The seller must accept a contract before the lien holders will even consider a short sale. After the property goes to the foreclosure auction, and no one ‘wins’ the property, the bank becomes the official owner of title and will become the seller.
Do I need to add any additional details to incoming sales contract?
Generally you will want to require your buyer to add an addendum to their contract that states they understand the sale of the property is void if any lien holder refuses a required short sale payoff. Otherwise, without this disclosure, the seller could be held reliable to sell the property no matter if the lien holders accept or decline the short sale.
What is involved in presenting a Short Sale to a lien holder?
Most lien holders have a ‘Short Sale Package’ ready for the seller once they are contacted with the request to sell short. A Short Sale Package is just a checklist of documents for ‘proof of hardship’, or in other words, proof the home owner is financially unable to continue making mortgage payments, has no money in the bank and has no liquid assets. Typical paperwork includes pay stubs, bank balance sheets, tax returns, ect.
What happens after the seller accepts a contract and the property is considered ‘Under Deposit’?
From their the seller or seller’s Listing Agent will send all lien holders the signed sales contract along with the lien holders required proof of hardship (aka Short Sale Package).
Once the bank receives all the documentation, it is placed in line to be reviewed by the loss mitigator. It can take several weeks just for the loss mitigator to get to the file. Once the loss mitigator reaches the file and begins assessing the situation, a BPO Agent or an Appraiser is sent to the property to report the properties current value for the lenders consideration. The Appraisal is sent back to the lender and again the bank spends several days / weeks assessing and comparing the loan and property values. Occasionally the lender will request a second appraisal to get a more accurate property value.
After several weeks (more like months), the bank finally comes to a conclusion as to whether selling the property today nets them more money than waiting months for a foreclosure, including the associated attorney fees, realtor fees and property management fees, etc.
What happens if the bank accepts the Short Sale sales contract?
If the Short Sale is accepted, the lien holder(s) will contact the seller or listing agent to confirm and supply a letter of acceptance stating the accepted mortgage payoff. The lien holder(s) will also usually require the closing be held no more than 30 days from the date of approval.
What happens if the bank denies the Short Sale sales contract?
If your Short Sale sales payoff is denied, the purchase offer becomes void and their is no deal (as per the Shot Sale Addendum). But, the bank will often hint to the seller or listing agent a value they will accept, and a new purchase can be submitted with little lag time.
What is my next step after the lien holders accept my Short Sale sales contract?
At this point any inspections and mortgage financing should be pursued by the buyer and a final closing date should be set.
What happens to the money ‘forgiven’ by the lien holder(s) of the Short Sale?
When the lender decides to forgive all or a portion of a borrower’s debt and accept less, the forgiven amount is considered as income for the borrower and is liable to be taxed.
However, after the signing of The Mortgage Forgiveness Debt Relief Act of 2007 by President Bush, amendments have been made to remove such tax liability and allow the borrower and lender to work freely together to find a common solution that is beneficial to both parties. This protection is limited to primary residences so consultation with a tax advisor is necessary ensure that a borrower qualifies.