What is a Short Sale?
A short sale is when a Lender agrees to accept less than the amount owed on the seller(s) mortgage(s) because there is not enough money generated by the sales transaction to payoff the mortgage(s) in full. Be aware that the seller will need to be in default, to have stopped making mortgage payments, before a Lender will consider a short sale. Also, the seller might have over-encumbered, owe more than the home is worth, so a discounted price might bring the price in line with market value, not below it.
When is a short sale an option? Well, a Lender is not going to agree to a short sale unless the seller has no equity and is unable to repay the difference between your sales price and the existing loans. Sellers need to provide a hardship letter to the Lender. Sellers may also owe taxes on the amount of debt that is forgiven.
If a Lender approves a short sale it does not take away the seller(s) liability for paying the Lender the remaining amount due against the mortgage. It means that the mortgage can be released against the property that is being sold. A Lender could pursue the deficiency amount against the seller. The Lender may require that the seller sign a notice that the seller understands and agrees that they are still liable for the mortgage deficiency.
Be aware that THIS PROCESS MAY TAKE 45-60 DAYS.
Advise seller to obtain legal advice from a competent real estate attorney. Will the Lender release the borrower from the liability under the note by signing a “deficiency waiver” or will they legally pursue the borrower for the deficiency.
Be prepared to provide the following to the lenders loss litigation department:
1. Letter of authorization (notarize): As an Agent, make sure your Seller submits this to the lender. The letter should include; property address, loan Reference number, your client name, the date and Realtor name & contact information.
2. Estimated cost sheet: Lenders want to know if you have savings accounts, money market accounts, stocks or bonds, negotiable instruments, cash or other real estate or anything of tangible value.
3. Hardship letter: This statement of facts describes how they got into this financial bind and makes a plea to the lender to accept less than full payment.
4. Proof of income and assets:
– last two years tax returns with W-2’s and any tax schedules
– most recent two months pay-stubs
5. Bank statements: If the bank statements reflect unaccountable deposits, large cash withdrawals or an unusual number of checks, it’s probably a good idea to explain each of those line items to the lender.
6. CMA: Include active, pending and the last six months solds.
AFTER YOU RECEIVE AN OFFER:
7. Purchase contract along with earnest money receipt and loan approval letter.
Short Sale Frequently Asked Questions:
Q: How long does the process for a short sale take?
A: 45 to 60 days, although, we have found that some of the lenders are so busy it is taking them longer.
Q: What do I do if I can’t get a hold of a person at the lender’s office?
A: Keep calling, and emailing. Stay Persistent.
Q: Will the short sale lender want the seller information prior to or at the time I submit my contract?
A: When you contact the loss mitigation department ask them when they want it submitted, each lender has their own preference.
Q: Will the seller’s credit rating be affected if they do a short sale on their property?
A: This is very probable commonly noted on credit report is “settled for less than originally owed”.
Q: If a seller is in bankruptcy will that affect a short sale?
A: Yes, you will need to go through the bankruptcy trustee.
Q: What are tax implications for the short sale?
A: Numerous consult their tax professional, they will receive a 1099-C at year end.
Q: What if foreclosure has been started?
A: Varies from state to state, but you should be in contact with the foreclosure attorney and lender.
Q: Do I have to show “subject to lenders approval of short sale” in my listing and contract?
Q: Why does the 2nd mortgage holder seem to take a bigger hit i.e. biggest reduction?
A: The 2nd lien holder has the biggest risk sitting second position, so they should be more willing to accommodate a reduction in lieu of being wiped out thru a foreclosure.
Q: Will the short sale lender feel differently if the property is a primary residence versus an investment property?
A: This varies from lender to lender so make the call the loss mitigation dept.