What is a Short Sale?
A short sale is when a lender agrees to accept less than the amount owed on the seller(s) mortgage(s) because there is not enough money generated by the sales transaction to pay off the mortgage(s) in full. Be aware that the seller will need to be in default, to have stopped making mortgage payments, before a lender will consider a short sale. Also, the seller might have over- encumbered (owe more than the home is worth) so a discounted price might bring the price inline with market value,not below it
When is a short sale an option?
Well, a lender is not going to agree to a short sale unless the seller has no equity and is unable to repay the difference between your sales price and the existing loans.Sellers need to provide a hardship letter to the lender .Sellers may also owe taxes on the amount of debt that is forgiven.
If a lender approves a short sale it does not takeaway the seller(s) liability for paying the lender the remaining amount due against the mortgage(s). It means that the mortgage(s) can be released against the property that is being sold. A lender could pursue the deficiency amount against the seller(s). The lender may require that the seller(s) sign a notice the seller(s) understand and agree they are still liable for the mortgage deficiency.
Be aware that THIS PROCESS TAKES 45-120 DAYS
Advise sellers to obtain legal advice from a competent real estate attorney. Particularly on“Will the Lender release the borrower from the liability under the note by signing a deficiency waiver or will they legally pursue the borrower for the deficiency”.
Frequently Asked Questions:
How long does the process for a short sale take?
45 to 120 days, although, we have found that some of the lenders are so busy it is taking them longer.
Will the short sale lender want the seller Information prior to or at the time I submit my contract?
When you contact the loss mitigation department ask them when they want it submitted each lender has their own preference.
Will the seller’s credit rating be affected?
This is very probable. They commonly note the credit report is “settled for less than originally owed”.
If a seller Is In bankruptcy will that affect a short sale?
Yes, you will need to go through the bankruptcy trustee.
What are tax implications for the short sale?
Numerous consult their tax professional ,they will receive a 1099-C at year end.
What if foreclosure has been started?
Varies from state to state, but you should be in contact with the foreclosure attorney and lender.
Do I have to show “subject to lenders approval of short sale” in my listing and contract? Yes.
Why does the 2nd mortgage holder seem to take a bigger hit (i.e.biggest reduction)?
The 2nd lien holder has the biggest risk sitting in second position, so they should be more willing to accommodate a reduction in lieu of being wiped out through a foreclosure.
Will the short sale lender feel differently if the property is a primary residence versus an investment property?
This varies from lender to lender so make the call to the loss mitigation dept.
Short Sale Offer Process
1. Offer is submitted to short sale lender after being negotiated with seller. Included in the offer are:
a. Purchase agreement
b. Pre-approval letter
c. Proof of funds to close (if applicable)
No offer shall be considered complete without the three items listed above.
2. Buyer can wait until acceptance by lender is received lo proceed with their appraisal and home inspection. Contingencies will need to be released 10 days after acceptance.
3. Lender will accept or decline offer verbally with agent. This process can take anywhere from 5 to 60 business days. The lender WILL NOT COUNTER. The offer is either accepted or declined.
4. If offer is accepted, lender will send an acceptance letter based on agreed terms and set a close of escrow date. The terms usually cannot be altered after the fact and most transactions areas-is.
5. Buyer is to release contingencies within 10 days after acceptance and escrow is to close as soon as possible after acceptance or by close of escrow dates etforth by lender.
6. If the agreed upon close of escrow date is late due to any fault of buyer, a fee set by the lender will be accessed.
7. If offer is declined, buyer can re-submit a higher offer for consideration.This process should take considerably less time, usually within 5 to 10 business days.
8. This entire process can take up to 60 days or longer. Patience and cooperation from all parties can make the process considerably shorter.
Above statements/conditions are acknowledged by undersigned: