Frequently Asked Questions - Short Sales.
What is a Short Sale?
A real estate Short Sale is a form of agreement between the seller of a home in the beginning stages of foreclosure and their lender, allowing the home to be sold for less than the existing loan balance outstanding. The mortgagee would accept less than the loan amount in order to avoid a foreclosure proceeding. This short sale would result in a substantially discounted purchase price for the buyer of the home. The buyer would then proceed with the purchase of the home much the same as in any conventional realty transaction.
The best part, the existing lender pays virtually all sales costs, including
commissions, escrow and title fees. You get your home sold, the
loan(s) paid off and you avoid foreclosure.
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Is a Short Sale right for me?
Mortgage lenders are increasingly willing to work with borrowers faced with a
financial hardship to accept a discounted payoff on a mortgage. If you are faced
with a hardship that makes it likely you will be unable to meet your obligation
on your mortgage, your lender would prefer to settle the matter with you as
opposed to taking the property through foreclosure.
As you consider the option of pursuing a Short Sale, remember your lender is
looking to limit any potential loss on your loan. By completing a Short Sale,
your lender has arrived at a solution that is, for them, much better than a
foreclosure.
Bottom line, your lender wants to work with you.
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How late in the pre-foreclosure process can you start a short sale?
Depending on individual state law and regulations, a foreclosure can proceed as quickly as 35 days from the date the notice to the borrower is filed. For that reason, time is of the essence and you should allow a window of no more than 60 days to effectuate a lender approved short sale.
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If I do a Short Sale, how much will I have to pay to
sell my home?
Nothing. It’s true, in most cases you will pay literally no sales costs if
your lender approves the Short Sale. All Real Estate commissions, title and escrow fees are paid by the lender as part of the Short Sale
approval. We will include the *following clause in the contract.
"Seller’s agreement to sell is subject to approval by existing lender of a
Short Sale at no cost to Seller. Seller shall not be required to deposit funds
to close escrow."
Remember, lenders approve Short Sales and accept the resulting loss in an
effort to avoid bigger losses through foreclosure.
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How do I get started on a Short Sale?
It’s easy. You simply fill out the Contact form and we'll get started. There is no charge to you to get started. It is as simple as
contacting us and we will get to work. If you later decide you don't want to do
a short sale, that is okay too. Top of Page
What documents are necessary to proceed with a short sale?
The individual documents necessary to proceed with the short sale will depend on the lender. Typically the lender will require hardship letter detailing the circumstances behind the short sale. A signed, valid purchase and sales contract, preliminary HUD-1 settlement statement and a preliminary estimate of proceeds to the lender. There may be additional requests for more detailed information on the financial condition of the seller, ie; pay check stubs, bank statements, a personal financial statement and monthly budget assessment, amongst other things.
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Can I simply deed my property to someone else
and avoid the hassle?
Deeding your property to someone without paying off the loan is nearly always
a bad idea. In the first place, the lender still considers you primarily
responsible for payment on the loan. If loan payments do not get paid, or if the
lender ultimately forecloses, this will show on your credit.
Secondly, when you deed your property to someone else, you give up control of
the property. Along with the deed goes the ability to control the property.
Do not deed your property to someone without paying off the loan unless you
have consulted with an attorney.
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What sort of hardship would my lender consider
legitimate?
To some extent, that will depend upon the mortgage company considering the
Short Sale request. Generally, so long as the hardship is real and the mortgage
company believes the loan is likely to become delinquent as a result, the Short
Sale request will be processed by the Loss Mitigation Department. A big key to
getting Loss Mitigation to accept a hardship is to submit a strong hardship
letter. The hardship letter sets the tone for the entire file.
Below you will find a list of “hardships” that are common and frequently
accepted by mortgage lenders.
- Family illness or injury
- Illness or injury in the extended family – particularly if it forces
relocation
- Job relocation when the property is equity deficient
- Job loss or significant income loss
- Divorce or split of domestic partners
- Adjustment in mortgage payment or unforeseen increase in living expenses
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I am current on my mortgage, will my lender consider a Short Sale?
The answer is, maybe. Some lenders will accept a Short Sale file for approval
on loans that are not delinquent. Other lenders will not accept the file until
the loan is delinquent. We can put your Short Sale file together within a couple
days and submit it for approval. (Remember, there is no charge for this). That
is the best way to determine if your lender will accept a file for approval on a
loan that is current.
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Why would a mortgage company agree to accept a
Short Sale?
There are actually several reasons why a mortgage company would approve a
Short Sale payoff, including the following;
Legal Concerns – Mortgage lenders have come under legal pressure to work with
borrowers to equitably resolve situations where borrowers are unable to meet
their mortgage obligation, particularly when the borrower makes an effort to
arrive at a compromise solution.
Wall Street is Watching – Mortgage lenders rely heavily on their ability to
package and sell bundles of loans on the secondary mortgage market. They need to
sell these bundles of loans in order to put the funds back to work by loaning
the money again and collect loan fees along the way. If mortgages perform poorly
after they are sold it could impact the lender's ability to sell their loans on
the secondary market. A successful Short Sale gets the loan payoff resolved
quickly.
Asset Management Expenses- If a lender acquires a property through
foreclosure, the property will be managed until it is repaired and resold. It is
expensive to manage real property assets - homes – spread throughout the region,
the state and possibly even the nation. Keeping properties maintained, keeping
utilities on, making repairs and the administrative costs attached to these
activities are all costs the lender would prefer to avoid. A successful Short
Sale eliminates most of these costs
Reserve Requirement- Delinquent and non-performing loans place another burden
on mortgage lenders. For all delinquent and non-performing loans lenders must
set aside funds in reserve to deal with potential losses. These funds cannot be
put to work generating new loan fees until the bad loans are resolved. A
successful Short Sale lets the lender put more money to work.
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Do lenders approve all Short Sales?
In a word, no. That is why it is critical to work with someone that has
extensive experience at getting Short Sales approved.
From the presentation of the Short Sale package to the lender to working with
the lenders Loss Mitigations Department, we know how to keep the file moving
towards approval.
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I have two loans, can I still do a Short Sale?
Yes. We can work with both lenders (many times the same lender hold the 1st
and the 2nd loans) to put together a Short Sale transaction. Even if the value
of your home is below the balance of the 1st mortgage, we can normally get the
two lenders to cooperate.
In the end, neither lender wants to own another home through foreclosure.
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My property is in rough shape and needs work, can I
still do a Short Sale?
Absolutely. In fact, lenders are more motivated to do a Short Sale on a
property that needs work than on a property that doesn’t. The lender knows the
risk of loss goes up when they foreclose on a property that needs lots of work.
Aside from expense of completing the work, lenders are simply not set up to
get the work done. They are in the loan business, not the fix- it business.
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I am concerned about my credit, how will a Short Sale
affect my credit?
The big key here is to avoid foreclosure. By nearly any measure, a
foreclosure is the most damaging event your credit status can encounter - worse
than bankruptcy. In the course of getting your short sale approved you may miss
your mortgage payments, and these will show on your credit.
While it is up to the individual lender to decide what to report, what often happens is the loan will report as "paid" on their credit report. While that is good news, the bad news is that there will likely be a reference that says "settled for less than originally owed" or something similar. The credit scores will recover faster, with a loan “settled for less than was owed” than it will with a completed foreclosure. It is certainly more advantageous to have the short sale referenced than to have a foreclosure on their credit report.
By avoiding foreclosure, you will likely be able to resume normal borrowing
(car loans, credit cards, consumer goods and such) relatively quickly.
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You may be able to keep your home. You need to convince your mortgage company
of two things:
The problem that caused the mortgage payment disruption was beyond your
control – illness, injury, temporary disability or forced job change are a few
examples
You are now solidly in a position to stay current on your mortgage payments
and make some progress towards making up the delinquent amount.
We can help. Get our Free Guide:
Getting lender approval on a Forbearance or Loan Modification Agreement
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Will a lender the seller to make a profit on a short sale?
By the nature of the transaction, the seller is not going to make a profit on the short sale. They may have extracted equity from a previous refinance of the home, but their current loan balance will be higher than the selling price of the home.
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If a seller is in bankruptcy, will that affect the short sale of the property?
Absolutely, as most lender would not consider a short sale if the homeowner is in the middle of a bankruptcy proceeding. Negotiating a short sale between the parties is considered a collection activity and such a negotiation is prohibited in bankruptcy.
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Will the bank or lender require an appraisal on the home in a short sale?
Most lenders will require that a full appraisal be submitted in the short sale package. Some may only require a BPO or brokers price opinion. The lender will need some formal assessment of the value of the home in order to make a decision as to accept or reject the short sale offer.
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Are there tax implications in the short of real estate?
Much like the issue of credit reporting, the circumstances are individual to the lender. As a short sale represents a loss for the lender, they can report the amount lost a debt forgiveness to the seller. If a formal tax form 1099 is filed, the seller may be responsible for paying taxes on the amount of debt forgiveness.
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Why does it take so long to close a short sale?
A normal real estate transaction can close at will once the contract is “four cornered” or that all signatures are affixed and there has been a meeting of the minds. In the short sale, all agreements are “subject to lien holder approval”. Since the seller is requesting a discounted payoff from the lien holder all parties must allow the lien holder to complete an evaluation to determine the value of the home and determine if the loss is justifiable. The lender wants to mitigate his losses and so the process of evaluation must be completed before approval is granted. This process can delay closing for several months.
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If the client files a bankruptcy should he still complete the short sale?
One of the main goals in the completion of the short sale is to minimize the damage to the credit of the individual. It is true that a Bankruptcy is disastrous to ones credit. Adding a foreclosure is financial suicide. Why afflict the client with both. There are methods available to have the home released from the assets included in the bankruptcy allowing the agent to complete the sale.
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How long after the short sale can the client purchase another home?
The client’s ability to purchase a new home is dependent upon several factors. Credit is only one of the factors. We have seen cases where minimal credit damage was caused as a result of the short sale and the client repurchased within six months with little down and with an excellent rate. A lender is most interested in the borrower’s ability to repay the loan. If the problems that led to the Short sale are behind and there are at least twelve months of good credit with three or more credit accounts, he should be able to purchase with minimal down payment at a competitive interest rate.
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A Forbearance Agreement is a written agreement with your mortgage company in
which you arrange to keep your home. The agreement will normally include two
primary elements:
- 1. The borrower’s promise to remain current on the mortgage going forward
- 2. Some plan for making up the delinquent interest and other charges. It may
mean making additional payments to the mortgage company or the delinquent amount
could be added to the loan to be paid later.
A borrower who is willing but unable to make payments, and who does not qualify
for a deferment, may request forbearance from the lender. Forbearance allows
payments to stop temporarily or decrease in amount for a specific length of time.
The lender may grant forbearance of principal, interest or both. The borrower is
always responsible for repayment of accrued interest charges. The borrower can make
interest-only payments, or the interest will be
capitalized
(added on to the principal).
Unlike deferment, forbearance is not an entitlement. It is something the lender may
choose to do for the borrower if the borrower is sincere in meeting his/her loan obligation
and if the borrower's circumstances indicate forbearance would be helpful. Forbearances are
processed for a maximum of twelve months. Forbearance will not eliminate any prior
derogatory credit history.
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