Short sales in real estate are usually not pleasant transactions for many different possible reasons.
For owners who can no longer afford to stay current on their mortgage payments, there are alternatives to bankruptcy or foreclosure proceedings. A "short sale" is one of those options.
When lenders agree to a short sale, it means the lender is accepting less than what the total amount is due from the borrower. Not all sellers or all properties are guaranteed to qualify for a short sale. Likewise, not all lenders will accept short sales or discounted payoffs, especially if it would make more financial sense to foreclose.
As real estate agents, we are not licensed as CPA’s or Attorney’s and cannot advise on possible consequences of short sale transactions. Except for certain conditions pursuant to the Mortgage Forgiveness Debt Relief Act of 2007, be aware the I.R.S. could consider debt forgiveness as income, and there is no guarantee that a lender who accepts a short sale will not legally pursue a borrower for the difference between the amount owed and the amount paid. In some states, this amount is known as a deficiency. A lawyer can determine whether your loan qualifies for a deficiency judgment or claim.
Although all lenders have varying requirements and may demand that the borrower submit a wide array of documentation, the following steps will give you a pretty good idea of what to expect.
- Call the Lender
You will most likely need to make multiple phone calls to your lender before you find the person responsible for handling short sales. You do not want to talk to the "real estate short sale" or "work out" department; you want the name of the individual capable of making decisions. - Submit Letter of Authorization
Lenders typically do not want to disclose any of your personal information without written authorization to do so. You will receive better cooperation from the lender if you write a letter giving the lender permission to talk with specific interested parties you are working with. I.e.; real estate agent, closing agent, Title Company or Attorney about your loan. The letter should include the following: - Property Address
- Loan Reference Number
- Your Name
- The Date
- Your Agent's Name & Contact Information
- 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 Attorney 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
This letter will describe how you got into this financial bind and makes a plea to the lender to accept less than full payment. Lenders usually understand if you lost your job, were hospitalized, etc, 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 (CMA)
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.
If you get to this point in the short sale process and all is well, the lender will approve your short sale. Keep in mind that during the negotiation period, you might ask that the lender not to report adverse credit to the credit reporting agencies, but also keep in mind that the lender is under no obligation to agree to this request.
