1. What is a short sale?
According to Freddie Mac, a short sale “occurs when a property is sold at a price lower than the amount the homeowner owes on the mortgage, and the homeowner’s mortgage lender(s) agrees to the “short” payoff.”
Usually the homeowners is experiencing some sort of financial set back or troubles and requires assistance from the bank to end their mortgage contract and paying a lesser than owed amount. The homeowner can call the lender and attempt to initiate a short sale, or a private party with the permission of the homeowner can negotiate with the bank on their behalf. Even if a homeowners’ attempts to reconcile with the bank have failed in the past, the third party should still be considered, because oftentimes they have more leverage than the homeowners’ themselves.
2. What are the downsides of a short sale for the homeowner?
The homeowner will lose their home and walk away with nothing from the sale. The bank will be accepting a lower payout that what was owed, but sometimes moving expenses can be negotiated. The homeowner’s credit will be affected similar to if a foreclosure had taken place, but not as severe. There is also a possibility of dealing with deficiency judgments if they are not specifically addressed before the completion of a short sale. A deficiency judgment is when the bank comes after the homeowner for the portion of the loan they have not paid. Before you initiate a short sale, ensure you have in writing that your lender will not pursue a deficiency judgment. Finally, short sales are painfully slow. It is beneficial to the homeowner to use a third party service to deal with all of the paperwork, phone calls, and emails, so that the process is completed in the most timely manner.
3. How can a short sale be beneficial to a homeowner?
The homeowner will walk away from the property with less of a hit than if they had gone through a traditional foreclosure. They will also be able to walk away from their mortgage obligation and have a fresh start. The homeowner’s credit will be affected much less than a traditional foreclosure, and they will avoid a costly foreclosure litigation and lengthy trial. The average person conducting a short sale is able to buy another home in 2-5 years. According to How Stuff Works, “from a lender’s perspective, it’s better to recover a portion of a mortgage loan than to absorb a total loss,” so lenders will err on the side of the better outcome and work with the homeowner in most justifiable situations.
4. Do I qualify for a short sale?
There are four qualifications that are considered for a short sale to be initiated. If you do not meet all four, check with your lender or a local short sale expert to determine your eligibility.
A. The home’s value has dropped
The comparable homes in a neighborhood may significantly decrease and the amount you paid for your home may no longer be relevant. This is referred to as being “underwater.” This is a hard situation to recover from and usually takes a turn in the market to overcome completely, which could take a few years or even a decade.
B. The seller has fallen on hard times
Hard times may include divorce, medical emergencies, death, unemployment, sudden illness or bankruptcy. Hard times usually do not include bad purchase decisions, unfriendly neighbors, buying another house, pregnancy or moving into an apartment.
C. The mortgage is in or near default status
The homeowner may be behind on one payment or six months worth of payments. Both situations are eligible for consideration of a short sale. It’s important that you talk to your lender immediately when you determine you can no longer afford your mortgage. If it is a temporary situation, they may be willing to work with you to refinance your mortgage to account for the missing payments.
D. The seller has no assets
As part of the short sale paperwork and process, the lender may request to see tax records and financial statements. If the homeowner has any assets, the lender may deny a short sale, under the assumption the homeowner has the ability to repay the rest of the mortgage. According to HomeBuying.About.com, “if the seller has cash in a savings account, owns other real estate, stocks, bonds or even IRA accounts, the lender will most likely determine that the seller has assets. However, the lender might discount the amount the seller is required to pay back.”
5. What documents are needed from the homeowner?
According to Fortune Builders, the lender will require a “hardship letter, expense worksheet, tax returns, pay stubs and a bank statement.” If these documents are not up to the lender’s standards, they can reject the offer and proceed with a foreclosure.
Click here for your short sale document checklist: http://www.realtystore.com/short-sale-guide/chapter-12-your-short-sale-document-checklist-2869474