Unfortunately in these difficult times, some homeowners and families arrive at the place where they can no longer afford to keep their mortgage payments current. Perhaps they lost a high-paying job, went through serious illness or suffered some other personal tragedy. Whatever the reason, it is never pleasant when a home needs to be given up before the owner and occupants would like. Some of the more negative options include foreclosure and bankruptcy, but there is an alternative. This option for real estate is called the short sale, which is becoming an increasingly common tactic as the trying economic times continue.
As a definition, a short sale occurs in real estate when the lender agrees to accept less than the total amount of money due. Not every lender is willing to accept a short sale, particularly if it makes more financial sense to try a foreclosure, and furthermore, not all sellers and properties qualify for a short sale. It is essential that anyone considering this option check with an accountant or lawyer before proceeding. For example, the I.R.S. could consider the debt forgiveness as income, which presents serious tax implications. On the other hand, a lender that agrees to a short sale may decide legally to pursue the borrower for the difference still owed. Only accountants and lawyers can answer the question of what consequences a short sale might involve for the particular seller.
Once you determine whether you qualify for a short sale and what the consequences might be, start to prepare for the steps involved. The first action is to call the lender and find the person responsible for handling short sales. This person should be a supervisor who can make decisions.
Next, submit all the appropriate documentation. First, submit a letter of authorization to the lender that gives them permission to talk with all the involved parties, such as a closing agent or lawyer, about your loan. The letter should include your property address, loan reference number, name, date and your agent’s name and contact information. Also submit a preliminary net sheet that includes the sales price you expect to receive plus all the costs of the sale, unpaid loan balances, any outstanding payments due and late fate, including real estate commissions. Have your real estate agent or closing lawyer prepare this document for you, and know that if the bottom line shows any cash going to the seller, you likely do not need the short sale option.
If a short sale still seems likely, include a hardship letter to the lender. Be specific in the letter and do not hold back about the severity of your problems. You must explain why they should accept less than full payment. Mention difficulties that caused your predicament such as job loss or hospitalization. Lenders are sympathetic provided your actions do not involve any wrongdoing or something illegal.
Also include to the lender proof of income and assets. Disclose your financial situation including all accounts like savings, money markets, stocks and bonds, cash, other real estates and anything of measurable value. Lenders want to know that you cannot pay back any of the debt they plan to forgive.
If the reason you cannot sell your home at a high enough price to pay off the lender involves falling market and property value, be sure to note this in the documentation. Include a comparative market analysis prepared by your real estate agent or realtor that shows the prices of similar homes and proves you live in an area where prices have been declining.
Finally, once you reach an agreement to sell with a prospective purchaser, notify the lender with a copy of the offer and a copy of your listing agreement. Expect that the lender will refuse to pay for certain items like home protection plans or termite inspections.
If you follow the above steps, it is likely the lender will approve the short sale. You may also wish to ask that they not report adverse credit to the credit reporting agencies, but they may not be able to honor that request.