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What is a Short Sale?

National Association Of Realtors Issues Existing Home Sales For March

Most people who have bought or sold a home is familiar with the homes listed as a short sale. A short sale is when a lender of a property accepts the sale of a property at a significantly lower amount compared to the market value. Homeowners are often in the position to choose either a short sale or opt for foreclosure. The lender, seller and buyer reap the basic benefits of the short sale. The seller retains a good credit score and frees them from the burden of foreclosure, the buyer obtains the house at a reduced price and the lender sells the house for a reasonable price and in reasonable time. Selling or buying a house can be overwhelming regardless of the financial environment. It may be helpful to hire a realtor experienced in short sales. It will help streamline the process and can shorten the completion time. Keep in mind the lender may require you to spend less on a realtor if you are requesting short sale. Before making a decision make sure you understand the short sale process.

Before you initiate the short sale process make sure you meet the criteria. There are guidelines set in place that will determine if a homeowner can proceed with a short sale or foreclosure. If you meet the stipulations listed below, you are a candidate for a short sale.

The value of the property has dropped.
Loss of income or job stability.
Mortgage payment is one month or more delinquent.
All savings and assets have been exhausted.
Existing liabilities cannot be satisfied through a debt service.
Financial obligations are current but there is ample proof future payments cannot be made.
The value of the property can be verified through a Comparative Market Analysis.

There are advantages and disadvantages to consider before proceeding with a short sale. It may not be the best choice for everyone and thorough research can help you make a well informed decision.

The advantages for the seller, buyer and the lender or bank are very different. The homeowner or seller avoids foreclosure and eviction, maintains a sense of control and respect during a financial hardship, maintains a good credit score, can qualify for another mortgage loan in two years compared to seven years during foreclosure. A short sale can delay the foreclosure process if a notice was reported. If this happens, the approval period on average takes about three months. The lender with the assistance of qualified investors benefits by saving the bank time involved in the closing the sale and locking down the best market price during fluctuating market prices. The buyer obtains their desired property at a lower cost.

The disadvantages are minimal if all of the set criteria are met and you have prepared and informed yourself before making a decision. It be a challenge based on the number of parties involved compared to traditional methods. There is the seller, the seller’s agent, the prospective buyer and their agent, the first lender and their loss litigator. Some lender refuse to accept short sales and force foreclosure. Depending on what state you live in, there might be a challenge to qualify tax exemption while completing the process.

There are other options to consider before making your final decision. Depending on your lender you might be offered a Deficiency Judgment or a Payment without Pursuit Judgment. It’s crucial you know the difference before you are made an offer while weighing all your options.

Deficiency Judgment. The homeowner will owe whatever the difference may be in the short sale and the balance of their mortgage loan. A Deficiency Judgment will stay on the homeowner’s credit report until the balance is paid. Short sales like this usually take a number of years to pay off, as the amount owed is generally still very high.

Payment in Full without Pursuit of Deficiency Judgment. This is a popular choice among many sellers. They do not have to worry about additional costs that are required above the amount their property is sold for. This means they are free and clear of obligations after the process is complete and the property is sold.

Loan Modification. If you’re interested in keeping you home you should consider a loan modification. The basic premise is that you reduce your monthly payments by lowering your interest rate. Your monthly payment should be around thirty percent of your monthly income. This might be a good choice for homeowners with high interest rates or if your mortgage payments are consistent and on time. A loan modification can help a homeowner avoid losing their home through a short sale or foreclosure.

After you have done your research, weighed your options and have decided to proceed with the short sale the next step is to begin the process. The process is fairly common regardless of the lender.

The first step is to contact your lender. The individual lender will review your options and provide specific information needed to complete the process. The homeowner will then send a letter to the escrow agency and the property buyer detailing the short sale information and granting authorization to release all information. The lender will review the settlement statement, which includes the selling price of the property, an itemized list of relevant expenses, balances on loans and any other fees that may be applied closing costs of the short sale. The homeowner is required to submit a “letter of hardship”. The letter should include in depth details pertaining to the causes and results of the financial difficulties the homeowner is experiencing. The lender will also need documentation pertaining to checking accounts, investment accounts, savings accounts payroll stubs, tax documents and any other records pertaining to finances that would verify and validate the necessity of a short sale. The current condition of the property and market value will determine the fair market price by the lender based on all information provided by the seller and broker. Before the process is official and final it will be carefully reviewed by the mortgage lender. This is to ensure that amounts and conditions are favorable for all parties involved.

Photo by Joe Raedle/Getty Images

Written by Brian McCaw

Brian is a lover of all things real estate including photography, architecture, news, and so much more.