Foreclosure Prevention: Short Sale

What is a short Sale?

Short Sales occur when borrowers sell their properties for amounts that are less than the amounts owed to the lender. When lenders agree to do a short sale in real estate, it means the lender is accepting less than the total amount due. A short sale is usually executed to prevent a home foreclosure. However, a lender may consider a short sale if the value of the property has fallen, the owner now owes more than the property ish worth and a short sale is predicated as the most economic way for the bank to recover the amount owed on the property. A short sale is typically faster and less expensive than a foreclosure.

Short Sale - Q & A

Q: Can I really sell my home for less than its mortgage?

A: Yes-this is what is known as a "short sale." Sometimes home owners can negotiate with lenders and have them split the difference between the sale price and loan amount, which still must be paid.

A short sale may be complicated if the loan has been sold to the secondary market because then the lender will have to get permission from Fannie Mae or Freddie Mac, the two major secondary-market players.

If the loan was a low-down-payment mortgage with private mortgage insurance, then the lender also must involve the mortgage insurance company that insured the low-down loan.

Q: Can I qualify for a Short Sale?

Not all homes can qualify for a short sale. Lenders usually approve short sales when there are unforeseen circumstances such as: a drop in market value, your mortgage is in or near default status, the borrower is in a situation of hardship or the borrower has no assets.

Lenders also consider whether it would be cheaper to simply repossess the house, make any necessary repairs and sell it through a real estate agent.
Other factors in the lender's decision are how many other properties the mortgage lender currently has in default and hether there are co-signors who can be held responsible for the balance owed on the mortgage.

Q: What hardships would make a home a candidate for a short sale?

A: Qualifying hardships could include loss of job, a decrease in commission from what you earned when you applied for the original mortgage, unforeseen medical problems, divorce or separation, death of a co-borrower, interest rates adjusting to unmanageable levels, and other similar circumstances. You most likely will have to provide a hardship letter. This statement of facts describes how you got into this financial bind and makes a plea to the lender to accept less than full payment.

Q: What Steps Do I Need to Take for a Short Sale?

A. First verify the value of the property. In order for a lender to consider a short sale they will first want to appraise the home. They will have to justify why they took less than they were owed on the loan. Next, you want to add up all of the costs of selling the property. These will include real estate commissions, transfer taxes, closing costs and title fees. Then get the balances of all loans owed on the home. Don't forget, the principal balance is not the payoff. The payoff will include accrued interest and any unpaid late fees, etc. Add all of these things up and the total is the amount needed to walk away from the home even money. If these costs total more than the value of the property the difference is the Short Sale amount. This is the amount the lender stands to lose if it accepts the sale.

Q. What is required from the property owner?

The property owner must:
* Sign a listing agreement with the Realtor
* List the property for sale
* Cooperate with access, showings, offers, and with the Realtor and SSW.
* Vacate the home following close of title
* Agree not to finance or otherwise encumber the property
* Be responsible to maintain the home in "show" condition
* Be responsible for minor repairs to the home
* Be a responsible homeowner until close of title and vacancy of home.

Q: How does a Short Sale affect my Credit Rating?

First, whether you are trying to sell your home in a Short Sale or in any other situation, always make your mortgage payment on time. Late payments can lower your credit score dramatically.

A short sale will negatively affect your credit, but not nearly as much as a foreclosure or deed-in-lieu. Expect to suffer some credit score damage, but nowhere near as much. Loss of FICO points will be around 75-125 and your report will show it listed as a ‘pre-foreclosure in redemption’ which is far less negative. You will most probably be able to secure a new home loan in about a year and a half. In any case, it is a good idea to consult with a lawyer, tax accountant (CPA) or a good real estate agent who is experienced with short sales. These professional may charge you a bit for their services, but failing to have the right counsel could end up costing you a sizable bundle. So get the help you need.

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