A short sale allows a home or property owner to negotiate with the mortgage lender to sell a property for less than the mortgage owed, thereby avoiding foreclosure. Short sales are common for underwater homes, vacant land, or apartment buildings which have a mortgage balance which is higher than the market value.
When the home market is strong short sales are less common, especially if the homeowner could simply sell the home for the value of the mortgage and pay-off the lender. In a buyer’s market, however, short sales are very common with lenders more willing to accept less than what is owed when the alternative is foreclosure.
Owning real estate is expensive because it forces the lender to insure the property, maintain the property, and pay taxes on it. For this reason lenders may agree to a short sale simply to avoid a foreclosure, which can cost the mortgage company thousands of dollars.
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Steps to complete a short sale
If you want to avoid foreclosure there may be several options. Although a short sale is one of those options, it should be a last resort. It’s preferable to first contact your lender and find out if they are willing to temporarily lower your mortgage payments or allow you to refinance the home loan with a lower interest rate.
If all of your efforts fail, however, a short sale may be your best option. Remember, however, a short sale is not a right, and the lender may have to be convinced it is in their best interests.
Steps to begin the process are listed below.
1. Contact the lender.
All lenders will have different requirements for completing a short sale. Make sure you get in contact with the person who can make the decision about whether or not this is a viable option. You cannot complete a short sale if the lender does not agree.
2. Hire a real estate agent.
Find an agent who is familiar with the short sale process and knows how to work directly with your lender and their mitigation department.
3. Complete the short sale documentation package
- Write a hardship letter
The hardship letter should explain why you are unable to pay your mortgage. Do not lie but be sure to include any factor such as job loss, severe health condition, or hospitalization which may make the lender more sympathetic to your financial situation.
- Submit financial documents
Talk to the lender about what financial documents are required. Common documents which must be included are two years of tax returns, two months of pay stubs, bank statements, proof of assets and income, and types of investments you own (i.e., bonds, stocks, money market accounts, real estate, and savings accounts).
- Market Analysis of your home
Provide any information about why you cannot sell your home. If you have hired a real estate agent they can provide this information for you. Comparative market analysis information should include prices of similar homes which are pending for sale, homes which have sold in the last several months, and homes which are currently active on the market.
4. Find the right buyer and submit your purchase agreement with your lender.
It’s important that you find the best buyer for your home. The lender will be more likely to approve the sale if the buyer is preapproved for the mortgage and is able to put down a large portion of the down payment.
Next, make sure you understand what documents must be submitted to the lender to close the deal. If you fail to provide the right information the process could face substantial delays. Common documents which must be submitted can include a copy of the offer and a copy of the listing agreement.
Downsides of a short sale
Although a short sale may allow you to avoid foreclosure, there are some major drawbacks. First, you will have to sell the property, which means you will no longer own your home. Next, in some cases, assuming you have not negotiated properly with your lender, you may owe a deficiency, which is the difference between the sale price and the mortgage balance owed. You may also owe money to other lenders if you had a home equity line of credit or a second mortgage.
Finally, not only will a short sale lower your credit score and be reflected on your credit report as an account “not paid as agreed,” you may also owe money to the IRS for forgiven debt which may be considered taxable income. Talk to your tax accountant if you have questions about the tax implications of a short sale.