Short Sales Benefit Lenders and Seller

Often homeowners find themselves in the difficult position of being months behind in their mortgage payments with no way to catch up. In these cases, a foreclosure would appear to be imminent. But there is another option that is getting more attention during the current housing crisis. A real estate “short sale” may be a good alternative to foreclosure.

In a short sale, the lender agrees to accept a sale of the home for less than the current outstanding loan balance. It might seem no lender would agree to these terms, but there are times when a short sale is preferable to foreclosure. For example, if the home is in an area where numerous properties are on the market, a short sale could be a good idea.

Not all properties or homeowners qualify for a short sale. The home’s declining market value is the primary reason. Difficulties in the homeowner’s life, such as unemployment or serious medical issues, could be another reason to consider a short sale, even if the homeowner is current on the payments. The lender will want to determine what assets could be liquidated to bring the mortgage current. If assets are available, the lender may agree to a short sale, but require that some of the assets be used to offset the difference between the sale price and the loan amount. However, some lenders won’t consider a short sale option, even if there’s a valid reason.

A short sale sounds like it would be very similar to a foreclosure, but it’s not. In a foreclosure, the lender has the legal right to seize the property and remove the homeowner. The homeowner no longer has any stake in the home’s sale. A foreclosure can drop a person’s credit score by 200 to 400 points, for at least five years, and possibly as long as ten years, making it virtually impossible to buy another home during that time.

On the other hand, a short sale will be reported as a paid off transaction; the fact that it’s a short sale may or may not be mentioned, depending on the lender. If the homeowner otherwise has a good credit record, he may be eligible to buy another home right away. His credit rating probably won’t be greatly affected.

Finding a buyer is the important first step in beginning a short sale. A homeowner should list the property with a Realtor, preferably one familiar with short sales. It’s important to price the home so a buyer will make an offer quickly; time is working against a homeowner who wants a short sale rather than foreclosure. Once a buyer is found, the homeowner will need to submit a short sale package to the lender. A good Realtor can help gather the needed documents, which generally include a hardship letter detailing the reasons for the short sale, proof of the buyer’s intent to purchase, and possibly detailed documentation of the seller’s financial condition. When the lender gets the package, an appraisal will be done to ascertain the home’s current fair market value. Then the lender has the option of accepting or countering the buyer’s offer. When the lender accepts the offer, then the terms of the short sale will be approved and the lender will document the sale’s terms. The Realtor must insure the buyer complies with the terms so that the transaction can be completed.

Some homeowners use a short sale negotiator as their point of contact with the lender. A negotiator can save the homeowner time and frustration in filing necessary paperwork, sometimes repeatedly. A knowledgeable negotiator can help guide the homeowner through the short sale process. However, a Realtor experienced in short sales can do the same thing, so a negotiator isn’t essential.

Even though the short sale has been completed, a lender still has the right to go after the homeowner for a deficiency judgment, which is the difference between the sale price and the amount of the outstanding loan. Many lenders won’t do that, however. If a lender issues a 1099-C document with the Internal Revenue Service, they no longer have the option to pursue a deficiency judgment.

Today, many lenders are discovering that a short sale is just as beneficial to them as it is to the homeowners behind in their mortgage payments, making this type of hardship sale a viable alternative.

About the author - Tim Ryan specializes in helping buyers find great deals on Naples foreclosures. Tim also offers Naples property management to homeowners.