With the contemporary boom in foreclosures hitting the state, it is almost certain that if you watch the news or read the news paper, you have possibly heard the term short sale But do you understand or know what a short sale is? For most they are still confusing. Put simply, a short sale is when a lender or lenders, accept less that the total amount due on a loan when the property is sold.
The lender will generally accept the short sale to bypass the expense and time of a foreclosure, but do require that the owner of the property show some kind of a hardship, or reason that they cannot afford the home and need to sell. In a short sale, the lender will pay all the charges that are concerned with the sale, including the Realtor’s commissions. With home costs down over 29% across the land, many owners are finding themselves in a situation where they don’t have any equity in their property. And even if they have got a tiny amount, when a borrower is in default on a mortgage they not only owe the back payments but also may owe late penalties, back taxes, lawyer fees, etc.
This may add up quickly to eat all of the equity the borrower had in the property. If the borrower is not able to bring the account current the lender will then foreclose on the property. With a foreclosure, the lender can lose up to 40% of the mortgage amount thanks to the additional costs concerned with foreclosing on a property : lawyer charges, court costs, lost interest, eviction costs, property upkeep costs, and selling costs. Foreclosing on a property can take anywhere from some months, up to two years in some states. , it is commonly in the best interest of the lender to accept the short sale. It can also be in the best interest of the borrower.
They won’t have to endure the time and stress of a foreclosure and their credit might not be as negatively influenced as it might with a foreclosure. It is faster and simpler and doesn’t subject the borrower to the humiliation of a foreclosure.
How does it work?
The first thing the borrower should do when they can no longer afford a property is to contact the lender immediately. The last thing a lender wants to do is foreclose on the property. When contacting the lender, they have departments that work with people who are behind on their payments to resolve the situation and will be able to direct you to their departments.
Unfortunately though, these departments are typically understaffed, overworked, and have very poor systems in place. Getting through to someone and getting them to actually work on your file can be a very frustrating battle. This is why it is important to hire a Realtor, or Realtors that are experienced in short sales and dealing with the lender that hold your mortgage. If they are experienced, they will have the numbers and the contacts to get the deal done.
Once you have notified the bank, the first step will be hiring a Realtor and placing your property on the market. With most lenders, they will not review any paperwork or consider you for a short sale until your property has been listed on the market and a buyer has submitted an offer. Once that has taken place, there is a lot of paperwork the lender will require along with the offer in order to consider the short sale. The information required may include:
- Income documentation such as 2 years of tax returns and W-2s, along with one month of pay check stubs to verify the borrowers’ income.
- Bank statements to verify the borrowers’ assets.
- Hardship letter – this letter will describe for the lender the reasons the borrowers are in the financial position they are in and will ask the lender to accept the short sale. Borrowers should make this letter sound as sad as possible and back up the story with any documentation you may have such as medical bills, etc.
- Financial Worksheet – this worksheet will show the borrowers net montly income vs. all of the monthly expense, and will be used to show that the borrower is unable to afford the property.
- Fair market value for the property –depending on the lender they may require aComparative Market Analysis (CMA) from the Realtor justifying the price of the property.
- Purchase agreement signed by all parties.
- Preliminary HUD1 – This will show the proceeds of the sale of the property after the mortgage is paid off and all other closing costs and fees are paid. This will show the lender what they will be receiving as the short payoff.
- Listing agreement.
- (And many lenders have their own specific forms that are required in addition to everything above.)
Once the lender receives all of the above information, they will hire an outside third party to complete either an appraisal on the property or a BPO (broker’s price opinion) to determine the fair market value of the property. They will use the information provided above to make sure there is a hardship and they will compare the offer that is presented against this value to determine if the short sale makes sense, or if they can obtain more by going through foreclosure.