What is a short sale? A short sale occurs when a lender is willing to accept a loss on the amount of the original loan in order to prevent the foreclosure process from taking place. in this instance, the selling party would remain the home owner instead of the bank, or lending party. however, in a short sale situation, the bank has an opportunity to either approve or disapprove the proposed offer. A bank will often allow a short sale to avoid the foreclosure process from occurring, as it is both expensive and time consuming. A short sale is favorable to the home owner because it does not have a negative impact on their credit history.
What is a foreclosure? A foreclosure happens when an owner defaults on their mortgage payment, and the lender or lien holder (often the bank) initiates the sale of the property, against the wishes of the owner, so that the unpaid mortgage on the property can be paid off by the proceeds of the sale.
Which one is right for me? A real estate short sale is the lesser of two evils. Inevitably, if the homeowner cannot afford to remain in premises, the lender will repossess the residence through a foreclosure proceedings. A short sale can save the homeowner more than months of stress, aggravation, embarrassment, and uncertainty but can also limit the damage done to the person’s credit as compared to the foreclosure. Short sales typically affect a homeowner’s credit lasting only for around 18 months while foreclosures are far worse and can prevent purchasing another home for many years to come. if you are considering a short sale, there could be drawbacks.
- The Note may not be considered paid in full and may remain fully in force. A lender who accepts a short sale may legally pursue the homeowner for the difference between the amount owed and the amount paid. This amount is known as a deficiency.
- be aware the IRS will consider debt forgiveness as income. therefore the lender can file a 1099-C (“Cancellation of Debt Form”) which may subject the homeowner to tax liability.
- The lender may reserve the right to report this transaction to the appropriate credit bureaus which may negatively affect the homeowner’s credit.
What you can expect from a short sale?
Although all lenders have different requirements and a broad array of documentation, the following steps will give you a pretty good idea of what to expect from a short sale:
Hardship Letter: This statement of fact describes how you got into this financial bind and makes a plea to the lender to accept less than full payment.
Proof of Income and Assets: Lenders will 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.
Copies of Bank Statements: if your 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. in addition, the lender might want you to account for each and every deposit so it can determine whether deposits will continue.
Comparative Market Analysis: sometimes markets decline and property values fall. if this is part of the reason that you cannot sell your home for enough to pay off the lender, this fact should be substantiated for the lender through a comparative market analysis (CMA). We can prepare a CMA for you which will show prices of comparable homes in the area.
Purchase & Listing Agreement: when you reach an agreement to sell with a prospective purchaser, the lender will want a copy of the offer, along with a copy of the listing.