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 on the primary mortgage. But of course there are conditions to qualify for the exemption from the 1099.
BUT THERE’S MORE
If the homeowners feel they qualify by meeting the criteria for the lender to consider a short sale, there’s still more. In the past, if the note was insured, meaning the homeowner carried PMI (Private Mortgage Insurance) or if it was FHA or VA, there was no incentive for the lender to take a short sale. All the lender had to do was wait for the home to go into foreclosure, pass through the 6 or 12 month redemption period and then they would be paid off in full by the insurer for the entire balance due, regardless of the market value of the home. Then the home became the property of the insuring party to sell. However, recently most lenders have changed their position on insured mortgages and are now agreeing to short sale requests on properties that are insured.
THE HARDSHIP PACKAGE
The homeowners must begin by signing 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. Some banks may wait for an offer to come in before they assign a negotiator. The first thing a Realtor will do is order a “loss mitigation” package which will outline the requirements for the lender to consider a short sale. (Recently however, some lenders offer the homeowner portion of this package on line to their customers to speed the process along before it’s even assigned to a loss mitigator). 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.
HOW MUCH WILL THE BANK TAKE FOR THE HOME?
The listing 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 will order another BPO, just to be sure they are receiving fair market value for the home. If the offer is within 90% of the BPO, the bank will accept it. The mortgage balance that is owed has no effect on the offer the bank will accept, only the BPO matters.
WHAT’S THE POINT?
At this point, a seller may be asking …what’s the point of all this work? Just tell them to hand the deed back to the bank and walk away.” After all, isn't that what the "experts" on the morning talk shows are advising? (Who are these people?). 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 their 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 for a homeowners credit.. Even if the home goes to Sheriff’s Sale, a short sale during the redemption period shows up in a manner that is similar to a “Paid Charge Off” which is much better than a full foreclosure and light years ahead of a “Deed in Lieu”.
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".
AN ISSUE FOR BUYERS: THE TIME FACTOR
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 it has passed into foreclosure, gone through the 6-12 month redemption period and is now what is refereed to as an 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.) One reason the process takes so long, is the fact the banks negotiator often will not even look at an offer for 30-60 days after it comes in. The second reason the process takes so long is that there are usually other lien holders on the property that must be negotiated with to take less than is owed on their notes as well. Most often it’s a home equity line of credit. When an offer comes in, the primary lender who holds the first mortgage will offer the secondary lien holder a portion of their payoff to go away. The incentive for them to take it is this; if this home goes into foreclosure and the redemption period expires, all secondary liens are automatically gone and they get nothing. Better to take a little now as opposed to nothing later. However, most of these secondary lien holders will dig in their heels and demand more than the primary lender is offering to go away, and therein lies the major stumbling block in closing a short sale.
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 many many months. At best, even if all those things have been done, it will take at least 3-4 months.
HOW DO I KNOW IF A LISTING IS A SHORT SALE?
Look for language in the description of the home that says things like: “Subject to Lender Approval”, “Subject to 3rd Part Approval” or “Subject to bank approval”. There may also be a “Y” on the listing above the description next to the words “Short Sale” but not always.
For more information on the process of buying a foreclosure click here.
Cathy Blight
ReMax Platinum
Foreclosure Specialist
E-Pro Certified Realtor
Certified Home Stager
Direct: 810-844-2294
Cell: 517-505-8958
cblight@comcast.net
