If you owe more on your mortgage than the current value of your house, then you may want to look into a short sale as an option. When you are having financial problems and you want to try avoiding a foreclosure, the alternative is a short sale. Unfortunately for either option, the consequences are grave: destruction of your credit score, loss of personal dignity, and possibly embarrassment for your family members. Sometimes this is your only option so you just have to proceed and push through the discomfort of the situation.
All About Short Sales
Many realtors are reporting that they are having more short sales compared to any other sales in the last 5 years. This sad fact highlights the depressed economy and the many Americans struggling with debt. Even non-delinquent sellers are qualifying for short sales these days.
When a lender agrees to a real estate short sale, the lender is basically accepting an amount less than the total due. But not all lenders accept discounted payoffs or short sales, especially when a foreclosure will mean more financial recovery for them. It is also important to note that not all properties or sellers qualify for a short sale arrangement.
Honestly speaking, there are some drawbacks to short sales with the parties involved. All borrowers are advised to:
- Know the type of loan involved. This influences flexibility in negotiating for an offer.
- Seek legal advice. Find a competent and registered real estate lawyer in your state.
- Find out about taxes. Ask an accountant about taxes associated with short sale transactions.
- Meet deadlines. Be aware of all of the deadlines and stay on top of them. Not following the timeline could potentially ruin a short sale, so it is important to stick to dates throughout the process.
According to the Mortgage Forgiveness Act of 2007, the IRS will not consider debt forgiveness as income per se. There is no guarantee as to whether a lender that accepts a short sale will legally pursue the borrower for the difference unpaid. This amount is referred to as a deficiency in some states. Given the prevailing laws, a lawyer may be required to determine whether you actually qualify for a claim or deficiency judgment.
Steps to a Short Sale
1. Contact the lender.
Before finding a short sale specialist, you will have to make several calls in order to find the right person. You will hopefully be able to establish rapport with the lender and make sure that the lender has you in their best interest.
2. Submit a letter of authorization.
Lender etiquette says not to disclose any personal information about their clients unless there is express permission to do so in writing. It would be much better if you directly speak to the lender and endorse the lawyer or agent representing you. This letter contains your name, the loan reference number, the property address, the date, the name of your agent and their contact details.
3. Prepare the net sheet.
A net sheet is an estimated closing statement which indicates the selling price that is expected along with the costs of sale, outstanding payments, unpaid balances, and any real estate commissions. You don’t have to stress remembering every detail in preparing this because your lawyer or agent should be able to do this on your behalf. If the net figure indicates some cash then you may discover that you don’t really need a short sale.
4. Obtain a hardship letter.
This letter is meant to hit the nail on the head. It clearly describes what happened that led you to your financial disability. In this letter, you are pleading with the lender to accept less than the amount due. You need to explain that you were ill, lost your job or had your family involved in an accident. However, you must be honest because criminal behavior and dishonesty may only lead to prosecution.
5. Provide proof of assets and income
Honesty about your income and assets is paramount in one’s attempt at a successful short sale. You should clearly relay information pertaining to your negotiable instruments, real estate property, money market accounts, savings accounts, and stocks to the lender. This is considered assurance that you will not be able to repay.
6. Provide bank statements.
The lender wants to be convinced of your financial misfortunes by all means. That’s why you need to explain any unaccountable deposits, unusual number of checks or huge cash withdrawals on your bank statement. This will enable the lender to determine whether any deposits will actually continue.
7. Conduct a comparative market analysis.
A comparative market analysis enables you to substantiate that the value of your property has dropped because of a market decline. It should indicate the prices of similar homes that have been sold in the past 6 months, the ones being sold currently and any pending sales. Your agent can prepare this document on your behalf.
8. Strike a purchase agreement.
If you come to an agreement for selling, then you should provide the lender with a copy of that offer. If you had listed it, then the listing agreement should be there too. However, the lender may refuse to make certain payments such as home protection claims and the cost of inspection on the property.
If all goes well, the lender will most likely approve your bid. You may also request that the lender not report adverse details about you to credit agencies given your present financial difficulty.