Short Sales

Definition of a Short Sale

A short sale is a real estate transaction wherein the lender agrees to accept a mortgage payoff that doesn’t cover the outstanding loan. In other words, when the seller’s mortgage balance is higher than the current market value of the property and the lender (or lenders) does not get paid the current mortgage balance but agrees to settle the debt owed on the property for less than the full amount.

Lenders will almost always lose money when they foreclose on property. In many cases, they will lose less money through a short sale than they would by foreclosing on the home and selling it as a bank-owned property. Short sales make better business sense. With a short sale, the banks can liquidate your mortgage before any of the foreclosure costs start accumulating, making the process simpler for the banks and many times more profitable.

However, there are rules with short sales:

The borrower must experience a genuine financial hardship. Talk to your lender’s customer service department and inform them on what is going on. That way, knowledge of your hardship is communicated to the lender and becomes a part of their files. Keep your own communication log.
Eventually, you will have to document the hardship and your inability to meet monthly mortgage payments. Part of the process requires that you disclose all your assets. This would be inclusive of Bank statements, stocks, bonds, tax returns, pay stubs, real estate holdings, etc. The lender will want to see everything that may document that you are not hiding assets or income. The lender will not make a commitment based solely on your hardship. You’re also going to have to put your home on the market and sell it.

Once your property is under contract, you have to supply additional documentation. When the property is listed, your real estate agent prepares a comparative market analysis. You’re going to need that and you will need to supply a copy to the lender, along with your hardship letter, the documents mentioned above, a copy of the purchase agreement, and a “net sheet” showing how much you will net (or lose) from the sale of the home.

It may be that you actually want your real estate agent or some other professional to negotiate with your lender. If so, you need to prepare an authorization letter that will allow your agent to talk directly to your lender. That letter includes your name, property address, loan number, your representative’s name, the date and your notarized signature. Your agent will know almost all of this and have the proper format.
Then your agent submits it all to your lender and you must wait.
Normally, your lender can’t make the decision to accept a short sale on their own. If there is mortgage insurance, they get a say-so. Your mortgage has an investor. The investor gets a say-so.
If the deal is acceptable to your lender, they believe your hardship is genuine, and you do not own any other property — you may get a “yes” decision. Your chances go up markedly if you have someone experienced negotiating for you.

If your lender does forgive part of your debt, debt forgiveness is taxable income. The IRS will require you to pay taxes on that income and will forward a 1099 to you.

The primary advantage to doing a short sale vs. walking away and letting your home go to foreclosure is that in a short sale the debt is settled and you no longer owe the bank any money. If your home goes to foreclosure, you may still be liable for the deficiency in the event that the bank files a judicial foreclosure.