Short Sale
Tim Ford
IIn the current market conditions, the term “Short Sale” is being used much more frequently. A short sale occurs when a lender is willing to accept less than the loan balance that is owed on the home due to hardships facing the borrower.
Lenders are often unwilling to accept less than the total amount due on the loan and the process of completing a short sale is often complicated. However, during market conditions in which the number of foreclosures is on the rise, lenders begin to look more closely at short sales if they believe it makes more sense financially than foreclosing on the property.
There are a rising number of cases in which lenders have foreclosed on properties only to find them stripped of appliances and light fixtures, carpets have been intentionally damaged, and holes have been punched in the walls. Some lenders have even started a policy of “cash for keys” in which they offer homeowners of foreclosed properties cash in order to vacate the property unarmed. Even in foreclosure cases in which homeowners do not inflict damage to the property, lenders face recovery costs, legal fees, and they still have to sell the property after the foreclosure.
There are many criteria for a successful short sale. The first is to have a Competitive Market Analysis performed on the property to determine market value. Lenders are not going to allow a short sale if the market value is higher than the loan balance.
Additionally, the borrower must be facing some type of hardship that is forcing the sale of the property. A few examples of such hardships are the loss of a job, the death of an income earning family member, or a rising adjustable rate mortgage through which the payments have risen beyond the financial capabilities of the mortgagor. It is usually the case that a lender will not consider a short sale if a Notice of Default has not yet been issued.
A borrower who wishes to keep the property but can no longer afford the payments should always talk with their lender to determine if there is an option of resetting payments, interest rates, or other workout options. Generally, the lender would rather work something out with the borrower rather than foreclose on the property.
Moreover, if the borrower has enough liquid assets to cover the difference between the market value and loan value, a lender may not be willing to accept a short sale. In this case, the borrower most likely can still afford the payments but may need to sell for another reason, perhaps career relocation. Under these circumstances the homeowner will most likely need to sell the home and bring cash to the closing.
To determine whether a lender is willing to consider accepting a short sale, the borrower should contact their lender’s Loss Mitigation Department. They will need to send correspondence including a hardship letter, bank statements, paycheck stubs, tax returns, and a financial statement. The correspondence should also include a letter authorizing the bank to communicate with the listing Real Estate Agent on behalf of the borrower. Also include the property address, loan reference number and the Real Estate agent’s contact information. Many Real Estate agents or Real Estate attorneys will be able to assist the borrower through this process.
It should be understood that the short sale process can be extremely complicated. It will take time to communicate with the lender to begin the process as well as to get offers accepted. In short sale situations, the lender will have final say as to accepting or rejecting offers. In some cases the lender may still pursue the borrower to repay the difference between the sale price and loan amount. Additionally, the foregiven debt may be considered income and taxes could potentially be owed on the amount foregiven.
This article is merely an overview of the short sale process and should not be considered tax or legal advice. Homeowners considering pursuing a short sale should consult their tax advisor.
Tim Ford is a Realtor with Vellinga Real Estate in Bozeman, Montana. He can be reached at (406) 209-1214 or at timothyjford@gmail.com.
