Homeowners are led to believe they can short sell their property, prevent their home from entering into foreclosure and walk away without owing any money.
Although there is some truth to this, short sales are not quite as simple as they sound.
When homeowners ask me what is a short sale, I attempt to provide a clear and concise explanation.
Regrettably, there is no all-encompassing answer to cover every option.
However, certain techniques exist which can help borrowers negotiate with their mortgage lender to obtain a positive outcome.
The term, short sale, is used when lenders allow borrowers to sell their property for less than is owed on their mortgage note.
When short sale approval is granted, borrowers are given the opportunity to sell their real estate at a discounted price to avoid foreclosure.
If you are wondering why banks would accept less that is owed, you are not alone.
Several reasons exist for banks to engage in short sales.
The primary reason is because short sales cost less than foreclosure.
According to mortgage financier, Freddie Mac, foreclosure costs lenders between $60,000 and $80,000 per property.
Most mortgage lenders are carrying a large number of non-performing loans; meaning homeowners are not adhering to their contract.
Banks receive money from the Federal Reserve based on profits and loan performance.
When borrowers do not pay, the Federal Reserve can reduce or suspend funding; leaving banks with little money to lend.
Short sales allow lenders to discharge non-performing loans to recover a portion of financial losses and improve their bottom line.
Not all real estate or borrowers qualify for short sale approval.
Once properties fall into foreclosure, the real estate is no longer eligible for short selling.
Therefore, it is of the utmost importance for borrowers to contact the bank the instant they realize they cannot continue making mortgage payments.
At present, no standardized short sale protocol exists.
However, established criteria must be met before borrowers can engage in a short sale arrangement.
This includes:
- Borrowers must be at minimum of 31 days delinquent on their mortgage loan, but not yet entered into the foreclosure phase.
- Borrowers must owe more than the appraised value of their property.
- Borrowers cannot own assets which can be used to repay the home loan.
Since banks are taking a loss on their investment, borrowers must endure a financial audit to determine eligibility.
Mortgage lenders scrutinize financial records to ensure borrowers are insolvent and unable to repay the loan.
Most mortgage lenders require borrowers to submit a short sale hardship letter outlining the events which caused them to become delinquent on their loan.
The letter of hardship is an extremely important aspect of obtaining approval.
Therefore, borrowers should take time to carefully craft it.
Banks usually prefer handwritten letters.
Details should include a timeline of events that occurred and how they impacted finances.
The hardship letter should also document any actions taken to overcome financial difficulties.
It is important to determine which type of short sale transaction is offered through the lender.
Two types exist.
The first is a Deficiency Judgment which holds borrowers accountable for the difference between the loan balance and purchase price.
This can amount to several thousand dollars and take several years to repay.
Deficiency judgments remain on credit reports until paid in full.
The second type of short sale agreement is Payment in Full without Pursuit of Deficiency Judgment.
This is the preferred choice because lenders accept the purchase price as payment in full toward the loan.
Once the real estate is sold, borrowers can walk away without owing additional money.
Short sales are handled by each bank's loss mitigation department.
In order to determine what type of short sale arrangements are offered and if real estate qualifies, homeowners must contact their lender to discuss available options.