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SHORT SALE AS A PRE-FORECLOSURE SOLUTION FOR SELLERS
When your assets are limited due to changes in your economic siutation and you can no longer keep up with your mortgage payments, and you can't sell your home for enough money to pay off your mortgage, it is likely that you may eventually be facing foreclosure. In this situation you may want to consider the advantages of attempting a short sale.
A short sale isn't available to everyone who wants to sell their home. Only homeowners who are in financial difficulty and find themselves unable to pay their mortgage and who are facing the possibility of foreclosure are eligible.
There Is No Guarantee:
Even if you are in dire straights there is no guarantee that your lender will accept selling your home as a short sale. You must contact your lender to request that they allow you to do a short sale. Your lender will usually request that you fill out a financial statement, write a letter explaining your financial hardship and give a another party such as a real estate agent or a lawyer permission to talk with them about your situation. Your lender is under no obligation to accept a short sale. It is always up to the lender to decide how they will handle a delinquent borrower's request to allow them to sell their property for less than they owe. In many cases there are multiple mortgage holders and all will have to accept the sale.
Why sell short?
Some borrowers are as much as 25% to 30% or more upside down between the amounts of debt compared to the value of their property. Finding a buyer on the open market means that the seller will have to make up that difference in order to sell their home. Most sellers in this situation simply don't have the money to do that.
Selling short may preserve your credit and prevent you from loosing everything you have. You may walk away without your credit being completely destroying through foreclosure. Foreclosure is expensive to both you and the lender, and once started the lender is going to do everything they can to go after you to recover their loss.
You might want to avoid Foreclosure because of the damage it can do to your credit. A Foreclosure can remain on a credit report for 7 to 10 years. It will be very hard to get credit or another loan before a credit report has been cleared. After several years, a borrower might be able to find a lender who will consider lending if the borrower has reestablished good credit. In these cases the circumstances surrounding the foreclosure can also influence a lender's decision. For example, if you went through a foreclosure because you lost your job or had an illness in the family the lender may be more inclined to take that into consideration. However, if your foreclosure was due to a large credit debt from irresponsible lifestyle decisions that had you living beyond your means, then the lender probably will be less likely to give you a loan.
What is the Short Sale Process?
Before a short sale can take place you must give authorization in writing for your real estate agent or attorney to talk with your lender. Your realtor or attorney will negotiate with your lender on your behalf to see if the lender will be willing to accept a discounted offer without holding you liable for the difference.
Most lenders will not tell the seller or the selling agent what they would consider an acceptable price. This practice makes it difficult for sellers to price their homes. They must price it low enough to attract an offer and high enough that they hope the offer will be acceptable to the lender. Since pricing short sales is truly a guessing game, buyers should be aware that even a full price offer may not be acceptable to the seller's lender. Negotiations with the lender can't begin until a valid offer is presented
Properties offered for sale in the MLS as a short sale must clearly state in the public comments that the sale is contingent upon the lender approving the sale.
Almost all lenders will ask that a short sale "packet" be supplied with the offer. The "packet" contains copies of your income tax returns for the last two years, proof of your income (W-2 forms), bank statements, a financial statement and other documents, including a hardship letter that explains why you can't pay the full amount of your mortgage.
Before your lender decides whether or not to approve a short sale offer, the lender will usually have the property appraised.
Why lenders often agree to a short sale:
Lenders also benefit from accepting a short sale because they're saving thousands of dollars in carrying costs and other expenses by wiping the properties off their books.
The terms of the Short Sale have to make financial sense to the lender. They wont give away the property. A lender might agree to discount the property 20% or even 30% in some cases but would probably be reluctant to discount it for more.
A lender may deny a short sale if there is a large discrepancy in the propertys value or if the borrower has enough assets to cover the mortgage.
Possible Pitfalls:
The Seller May End Up With A Tax liability:
If the mortgage lender decides to send the borrower a Form 1099 for the amount of the deficiency, (the difference between what the property sold for and the actual amount of the full mortgage balance) the deficiency amount may be considered as income by the IRS. The mortgage company is forgiving the debtors liability for the deficiency and the IRS considers forgiven debt to be taxable income. This can be a hardship on the borrower as the reason most borrowers do a short sale is that they cannot afford mortgage payments much less an additional tax liability.
The Seller May End UP With Lower Credit Scores:
Lenders are required by law to show late payments on the short sellers credit report. They also may note that you were involved in a short sale or indicate that your loan was paid in full with assistance, Although the late payment and the paid in full with assistance will change your credit scores, it will have far less of an impact than a foreclosure and will be much easier to recover from.
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