SHORT SALES
A
short sale is 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 process is
handled through the loss mitigation department. In a
short sale, the home owner sells the mortgaged property
for less than the outstanding balance of the loan, and
turns over the proceeds of the sale to the lender in
full satisfaction of the debt. In all short sales, the
lender has the right to approve or disapprove of a
proposed sale.
Not all banks will discount a loan balance. The
circumstances are usually related to the current real
estate market climate and the individual borrower's
financial situation.
A short sale is most often executed to prevent a
home foreclosure. Bank often choose to allow a short
sale when they believe it will result in a smaller
financial loss than foreclosing. For the home owner, the
advantages include avoidance of having a foreclosure on
their credit history and the partial control of the
monetary deficiency. Short sales are typically faster
and less expensive than foreclosures.
Short sales are often wrongly portrayed as
difficult to complete or morally questionable. This is
simply untrue if the value of the underlying asset, a
home, has fallen dramatically and the debtor has limited
assets. Short sales are common in standard business
transactions. When it makes no business sense or is
economically not feasible to retain an asset businesses
default on their loans. It is not uncommon for business
bonds to trade on the after-market for a small fraction
of their face value in realization of the likelihood of
these future defaults. Short sales in real estate
are simply the application of the same principles in
another discipline.
Loss Mitigation
Most lenders have a loss mitigation department
that processes potential short sale transactions.
Typically, lenders do not accept short sale offers or
requests for short sales until a Notice of Default has
been issued or recorded with the locality where the
property is located.
Lenders have a varying tolerance for short sales
and mitigated losses. The majority of lenders have a
pre-determined criteria for such transactions. Other
distressed lenders may allow any reasonable offer
subject to a loss mitigator's approval. Junior liens -
such as second mortgages, HELOC lenders, and HOA
(special assessment liens) - may need to approve the
short sale. Frequent objectors to short sales include
tax lieners (income, estate or corporate franchise tax -
as opposed to real property taxes, which have priority
even when unrecorded) and mechanic's lien holders. It is
possible for junior lien holders to prevent the short
sale.
Recent Changes to Federal Laws
The amount forgiven by a lender is considered
income for the borrower and is liable to be taxed.
However, The Mortgage Forgiveness Debt Relief Act of
2007, removes such tax liability and allows the borrower
and lender to work freely together to find a common
solution that is beneficial to both parties. This
protection is limited to primary residences –excluding
rental properties -- so consultation with a tax advisor
is necessary to ensure that a borrower qualifies.
More recent legislation provides for a specialized type
of refinancing option, available for mortgages made
after in 2006 or later, for owner-occupied homes. Under
this program a debtor provides information similar to
that necessary for a short-sale but rather than selling
the house to a third-party an FHA guaranteed loan at a
fixed-rate is available if the original lender is
willing to write-off all but 85-percent of outstanding
of the debtor's obligations (including principal,
interest, late-fees, prepayment penalties, and all other
fees).
A short sale does affect a person's credit report,
though the negative impact is typically less than a
foreclosure. Short sales are a type of settlement and
remain on a credit report for seven years. Depending
upon other credit information it is typically possible
to obtain another mortgage 1-3 years after a short sale.
How to Handle a Short Sale
Preliminary Net Sheet
This is an estimated closing statement that shows
the sales price you expect to receive and all the costs
of sale, unpaid loan balances, outstanding payments due
and late fees, including real estate commissions, if
any. Your closing agent or lawyer should be able to
prepare this for you, if you do not know how to
calculate any of these fees. If the bottom line shows
cash to the seller, you will probably not need a short
sale.
Hardship Letter
The sadder, the better. 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.
Lenders are not inhumane and can understand if you lost
your job, were hospitalized or a truck ran over your
entire family, but lenders are not particularly
empathetic to situations involving dishonesty or
criminal behavior.
Proof of Income and Assets
It is best to be truthful and honest about your
financial situation and disclose assets. Lenders will
want to know if you have savings accounts, money market
accounts, stocks or bonds, negotiable instruments, cash
or other real estate or anything of tangible value.
Lenders are not in the charity business and often
require assurance that the debtor cannot pay back any of
the debt that it is forgiving.
Copies of Bank Statements
If your bank statements reflect unaccountable
deposits, large cash withdrawals or an unusual number of
checks, it's probably a good idea to explain each of
those line items to the lender. In addition, the lender
might want you to account for each and every deposit so
it can determine whether deposits will continue.
Comparative Market Analysis
Sometimes markets decline and property values
fall. If this is part of the reason that you cannot sell
your home for enough to pay off the lender, this fact
should be substantiated for the lender through a
comparative market analysis (CMA). Your real estate
agent can prepare a CMA for you, which will show prices
of similar homes:
·
Active on the market
·
Pending sales
·
Solds from the past six months.
Purchase Agreement & Listing
Agreement
When you reach an agreement to sell with a
prospective purchaser, the lender will want a copy of
the offer, along with a copy of your listing agreement.
Be prepared for the lender to renegotiate commissions
and to refuse to pay for certain items such as home
protection plans or termite inspections.
David T. Seif represents clients throughout the
state of Florida including the cities of Boca Raton,
Boynton Beach, Carol City, Cooper City, Coral Gables,
Coral Springs, Davie, Deerfield Beach, Delray Beach,
Fort Lauderdale, Hialeah, Hollywood, Jupiter, Lake
Worth, Miramar, Miami, Oakland Park, Palm Beach, Palm
Beach Gardens, Palm Springs, Pompano Beach, and Rivera
Beach
Broward County - Miami-Dade County - Palm Beach County