In general terms, a short sale is when the proceeds of a proposed sale of property are insufficient to pay off the loan in full and the lender agrees to accept less than the full loan repayment to release its secured lien against the property. The loan may be delinquent, in process of default or in imminent default when the lender agrees to a short sale.
In order for a lender to consider allowing a short sale, a homeowner will have to be able to document hardship and an inability to pay the difference between the mortgaged amount and the sale price. If the homeowner has other assets or a high-income job with potential for high earnings down the road, a lender may not agree to accept a short sale, or may agree now but with a promissory note to repay the deficiency at a later date. A short sale can be a complicated process, so it is typically undertaken when a homeowner still has a relatively good credit rating worth preserving, but without the assets to pay off the loan balance.
Homeowners considering applying to their lender for a short sale should consult an attorney and an accountant for professional advice regarding the implications, especially as the laws and rules may change regarding any tax implications for the homeowner in connection with a short sale.
In addition to an attorney and an accountant, a real estate agent well-versed in the short sale process can be a valuable asset in negotiating with a lender regarding a short sale. Each lender's requirements vary, but most will require an extensive short sale package be submitted for their consideration. Some of the items in this package may include, but are not limited to—a net proceeds statement showing all related closing costs and the projected shortfall amount, a broker's price opinion to establish value or a current offer to purchase, the real estate agent's commission request, a financial hardship letter from the homeowner, and myriad financial documents from the homeowner including pay stubs, bank statements and tax returns.
One of the key components of a short sale negotiation can be convincing the lender that allowing the short sale will net them a larger sum than if the property were to proceed to foreclosure and would then need to be marketed and sold. A knowledgeable realtor can assist a homeowner in compiling and submitting this package, and with the homeowner's written consent, may also represent the homeowner in negotiations with the lender.
In order to begin the short sale process, a homeowner will typically need to contact the lender's loss mitigation or workout department, rather than customer service or the collection department. Approval times can vary, from a couple of weeks to a couple of months, with the usual being 6-12 weeks. At that time, the lender can approve or deny the short sale, so both seller and prospective buyer need to understand the wait period, and that without the lender's approval, there can be no sale.
If there are multiple lenders involved (i.e. a first mortgage and a second mortgage, or a home equity line of credit that has been accessed), then approval may be required from more than one lender for a short sale to be completed. If any of the loans has been securitized (sold to a third-party or covered by private mortgage insurance), then approval may be needed from that entity as well. This can become very complicated, and sometimes the first place lien holder has little or no motivation to approve a short sale if they will be covered in getting their money repaid, whereas the second place lien holder might be left in the cold, with or without a short sale. A REALTORS® skill and experience in negotiating these types of situations can be a tremendous benefit to the homeowner facing a short sale situation.
Some of the deterrents and impediments to a short sale may include the extensive paperwork that's required, determining that it's an "arm's length" transaction (i.e. the seller isn't selling to a relative at a bargain-basement price at the bank's expense), assuring the lender that the prospective purchaser can obtain financing for the deal, assessing the short sale proceeds versus the proceeds from a foreclosure sale, obtaining approval from all parties involved, and getting the right people involved from the beginning of the process.
As a homeowner, you should have a frank conversation up front with your REALTOR® if you feel you may have a potential short sale situation. Your real estate agent will have certain obligations to disclose this information to prospective buyers and other cooperating agents through the Multiple Listing Service (MLS). Banks, in agreeing to short sales, are asking the property's purchaser for indemnification and an acknowledgement that they are taking the house “as is”. It is unlikely any bank will remedy any issues with the property in a short sale.
Do you live in Westchester County and need more information about short sales? Let Park Sterling Realty lead the way! Contact us today.