What is a "Short Sale"?
What Is a “Short Sale”?
When a homeowner owes their lender more than the home is worth and is therefore unable to get enough from the sale of their home to pay off their mortgage, that’s a “short sale”. When a home such as this is on the market, the homeowners will have to ask their lender to accept an offer on the property that is less than they owe. A short sale most often occurs before a home goes into foreclosure. It can also occur during the redemption period after a home has gone to Sheriff’s Sale but before it goes back to the bank completely as an REO (Real Estate Owned). See “How To Buy A Foreclosure” for more information on the subject.
THE LENDER’S POINT OF VIEW
However, most lenders will not simply accept a short sale from a homeowner who is current on their payments just because the homeowner requests it. The lenders logic is; “Well, they’re making their payments now, why should we take a short sale? Just let them continue making the payments.”
THE HARDSHIP ISSUE
As a result, lenders will require the homeowner to demonstrate “hardship”. In some cases, the lender may require the homeowner to miss a certain number of payments on the home. In addition, they will require that the house be listed on the MLS to insure an “arms length” transaction by offering it to the general public. Not every lender requires missed payments to qualify for a short sale. But for those that do, each one will have different “missed payment” criteria. Some require the homeowner to be at least 30 days late, some others require 60 or even 90. Some will accept what is called a “rolling 30”, meaning the homeowner misses one payment and then begins to make payments on time, but as a result of the missed payment, is always 30 days late.In addition, the homeowners must write a “hardship letter” explaining why they need to sell, and the reasons for the hardship. But a hardship letter alone is not enough to qualify. If they have a good job, good income, and enough assets to cover the short sale by bringing cash to the closing table to cover the loss and pay off the mortgage, it’s unlikely that the bank will agree to accept a short sale request. However, in some cases, the lender may allow it if the homeowner agrees to sign a promissory note for the balance due. In cases where the homeowner does not have assets to cover the loss, and the bank agrees to the short sale, recent changes in the law prevent lenders from sending a 1099 to homeowners for the shortfall. But of course there are conditions to qualify for the exemption from the 1099.
BUT THERE’S ALWAYS A CATCH
If the homeowners feel they qualify by meeting the criteria for the lender to consider a short sale, there’s still more. If the note is insured, meaning the homeowner carries PMI (Private Mortgage Insurance) or if it’s FHA or VA, there’s no incentive for the lender to take a short sale. All the lender has to do is wait for the home to go into foreclosure, pass through the 6 or 12 month redemption period and then they will be paid off in full by the insurer for the entire balance due, regardless of the market value of the home. Then the home becomes the property of the insuring party to sell. However, some lenders have recently agreed to short sale requests on properties that are insured if the homeowner agrees to sign a promissory note for the balance due. But of course, in such cases, there are additional conditions that must be met. Every lender is different.
THE NEGOTIATIONS
If it’s not insured, then we go to the next step. The homeowners must sign a form authorizing their Realtor to speak with the lender on their behalf. It usually takes 72 hours for the bank to respond to the request and assign a negotiator. However, depending on the lender, it can take even longer, sometimes weeks or even months. At that point, the Realtor orders a “loss mitigation” package which will outline the requirements for the lender to consider a short sale. Both the Realtor and the homeowner must complete the package. The homeowner will be required to provide much the same documents that were necessary to get the loan in the first place, w-2’s, pay stubs, tax returns, bank accounts, credit report, assets and debts. Only this time it’s to prove they don’t have the money to make the payments or bring cash to the closing table. The Realtor will be required to prove to the lender that the list price for the home, while less than is owed on the note, is fair market value. This is done by preparing a market analysis, including comparable homes and providing a BPO (Broker Price Opinion) which is similar to an appraisal. However, when an offer comes in, before accepting it, the lender may send out their own appraiser, just to be sure.
CAN THE BANK COME AFTER ME FOR THE DIFFERENCE?
Banks had been sending homeowners a 1099 for the difference in the amount that was owed on the mortgage and the amount that the homeowner paid off in a short sale. Example: A home is sold for $200,000 in a short sale. The homeowner owes $250,000 on the mortgage. The lender would send the homeowner a 1099 for the $50,000 shortage. However, a bill has passed in Congress preventing this. There are certain restrictions for homeowners to qualify for the debt forgiveness. If there are secondary liens on the home, such as home equity lines of credit, they too must agree to take less than they are owed in order to accomplish a short sale. In some cases, those lenders may send the owner a 1099 or come after them for the difference owed. For information on these issues Click here to see the "Homeowners Mortgage Debt Relief Act".
WHY BOTHER?
At this point you may be asking yourself…what’s the point of all this work? Just hand the deed back to the bank and walk away.” That’s referred to as “Deed in Lieu of Foreclosure” and it appears on the homeowners credit history as “Deed in Lieu” which is even worse than a foreclosure. Because it says to creditors…”They didn’t even try. They just gave it back and walked away”. By selling the home short, it appears on the credit report in a manner similar to a “Paid Charge Off”. That says to creditors “They did their best to get as much as they could to pay off the note”. Much better. Even if the home goes to Sheriff’s Sale, a short sale during the redemption period shows up as a “Paid Charge Off” which is much better than a full foreclosure and light years better than “Deed in Lieu”.
BUYER BEWARE
The caveat to buyers considering the purchase of a short sale home is the time factor. It takes much longer to buy a home in this stage than after the 6-12 month redemption period after the Sheriff's Sale has expired and it's now what is refereed to as a REO. That stands for Real Estate Owned, the term the lenders use for the properties that have gone back to them completely or have been paid off by a third party insurer such as HUD and turned over to them to sell.
When considering making an offer on a short sale, it’s critical that the Buyers Agent get as much information regarding what has been done thus far. If the homeowner has not even completed the hardship package and been approved for the short sale, or if the agent has not yet submitted the BPO, it could take months. Unless this is the home of your dreams and you have all the time in the world…. move on to something else.
