The real estate industry in general throughout the U.S. is facing difficult and challenging financial situations. Because of the fact that many American homeowners are unable to afford the mortgages they entered into at the time they purchased their homes, those homeowners are now facing foreclosure actions brought by the lender. Generally speaking, a foreclosure action is brought by the lender if the owner/mortgagor is currently in default under the terms of that mortgage; which generally means that they have not made a mortgage payment in at least the last three months. Once the lender serves and files the foreclosure action, the homeowner has few options at that juncture. One obvious option the homeowner has after the foreclosure action is filed is to list the home with a real estate broker and sell the property. This option will be successful if the home is priced intelligently in light of the local real estate market conditions, and the existing debt on the property does not exceed the anticipated listing/selling price of the home. This factor, however, is the biggest stumbling block for homeowners facing foreclosure, because the reality is that there are many homeowners whose debt in the property is equal to or exceeds the anticipated selling price of the property. As a result of this factual reality, the short sale was born. A short sale occurs when a bank or mortgage lender agrees to discount a loan balance due to an economic or financial hardship on the part of the mortgagor.
The first step to effectuate a short sale is the borrower or their attorney must contact the lender's loss mitigation department. At the outset, that department will require some or all of the following information from the borrower before any consideration is given to the merits of the short sale: a copy of the fully executed contract of sale, a hardship letter from the borrower, an authorization by the borrower to allow a third party to negotiate the short sale on the borrowers behalf, a proposed HUD-1 settlement statement which shows all of the projected closing costs of the seller, including real estate commissions, legal fees and moving expenses, a copy of several years of local and federal income tax returns, bank account statements with evidence of any other assets and a comparative market analysis usually prepared by the listing broker.
Most lenders will consider a short sale even if the mortgagor is not in default, because one of the most important factors lenders employ to analyze a short sale is the hardship(s) the borrowers are facing. Hardships include the loss of a stream of income, a serious and debilitating illness, divorce or any other circumstance that may persuade the lender of the gravity of the mortgagors' financial situation which contributed to their inability to continue to pay the loan on a timely basis.
Keep in mind that lenders are inclined to negotiate with a borrower who truly has suffered a documented hardship. The reason for that is because it is cheaper in the long run for the lender to negotiate a short sale with the borrower when they compare the costs of a completed mortgage foreclosure action. In addition, the lender does not want to own the property, because that ownership will inevitably cost the lender more money in addition to the legal fees, insurance and taxes it already paid during the pendency of the foreclosure action before the property is finally sold. Also, from the lender's point of view, a short sale is more advantageous than a deed in lieu of foreclosure because that type of transaction still makes the lender the owner of the property which they would prefer to avoid. However, that method is less costly to the lender when compared to the costs of a foreclosure action. Lastly, it is not advantageous for the lender to run the risk of a bankruptcy by the borrower because that will stay a foreclosure proceeding until the conclusion of the action, and as a result, the foreclosure delay results in the lender's expenditure of money it would rather not disburse.
If the lender does agree to discount the amount the mortgagor owes, the lender will typically forgive that amount of the debt over and above the contractual purchase price of the current transaction, and will also reduce the amount it will accept at the closing to include payment to the real estate brokers, (usually less than the seller originally contracted to pay), payment for legal fees to seller's counsel as well as an allowance for the seller's moving expenses. The lender does have established guidelines it follows for the approval of a short sale, and may not be inclined to approve a short sale if the difference between the value of the property and the outstanding mortgage debt on the property is over $100,000. If the borrower is successful and the lender does approve the short sale, please check with your tax advisor to determine whether the debt that the lender has forgiven could be considered taxable income to the borrower/mortgagor. Additionally, a short sale typically does not adversely affect the borrower's credit rating unless that borrower had a history of slow or non-payment of the monthly mortgage payment and/or the credit agency reported the fact that a foreclosure action was begun against the borrower.
In closing, bear in mind that a short sale can be successfully negotiated with the lender and that alternative may be the only way for a borrower in default to sell the home without facing foreclosure, bankruptcy or damage to their credit rating.
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