If you are in financial distress and can longer afford to live in your home, you may be considering a short sale. Short sales can seem mysterious and challenging. What is involved? Who qualifies? What if the mortgage amount is more than the home is worth?
We are here to answer your questions and shed some light on the process. Each bank approaches short sales differently. It can be a hard process to navigate. That's why you need a team looking after your best interests.
What is a short sale?
A short sale can occur when the home owner owes more on a house than it is worth. The home owner and bank must come to an agreement with the bank taking a loss. The lender will either forgive the debt or get a deficiency judgement against the borrower that requires the seller to pay all or part of the difference between the sale price and original mortgage debt.
Important facts about short sales:
It is important to note that the lender is under no obligation to accept a short sale. It is only allowed at the bank's discretion.
In order for a lender to consider a short sale, there must be a relatively new source of financial trouble, not an ongoing problem undisclosed during the original mortgage process. Banks are also highly unlikely to consider a short sale if finances have simply been mismanaged. Examples of qualifying troubles could be divorce, job loss, or health problems.
Most banks will not consider a short sale until the home owner is actually in default on their mortgage. Each bank will have different rules on this. Some will require multiple missed payments.
The Lender might not accept a short sale if...
As stated before, even if a homeowner is absolutely certain they are headed for default, most banks will require missed payments before they will even discuss a short sale or the their short sale process.
If the lender believes they can get more money for the home by foreclosing, they are likely to foreclose no matter the source of financial trouble. Their main objective is to recover as much of the funds as they can.
If a mortgage is co-signed, the bank may choose to hold that person responsible for the mortgage instead of negotiating a short sale.
Do you pay PMI on your loan? If so, there are certain cases where they will advance funds in order to keep payments on track. This would help only in terms of short term financial troubles.
Additionally, the home owner may be eligible for a loan modification.
Make sure you check into all of these issue before you decide to pursue a short sale.
Starting the Process
One the biggest obstacles to negotiating a short sale may very likely be finding the right person to talk to at the bank. Don't just talk to a customer service representative! They have no actual authority in these situations.
Ask to speak to the loss mitigation department. You may have to work your way through the phone ladder, but they will be able to point you in the right direction. Since short sales are at the bank's discretion, you may just have to find the right person. If you don't get anywhere with the first decision maker, call back another day at another time and speak to someone else. Your main objective in these phone conversations is to find someone to email you a detailed list of documents needed to apply for a short sale. This will vary bank to bank.
Building a Team
At this point you will need to consult with a real estate agent, attorney, and a tax professional. Don't be discouraged by the fees required. You must have these professionals in order to complete the short sale process. They are used to these situations. It's their job. They will help guide you in paying any fees.
Letter of Authorization
This is one of the most important steps! You will need to submit a letter of authorization. It will make the process much smoother. This letter authorizes the lender to speak with your real estate agent, closing coordinator, title company, and lawyer. It should include the following:
- Property Address
- Loan Reference Number
- Your Name
- The Date Effective and Time Period
- Your Agents name and contact info
Short Sale Proposal
Putting together the short sale proposal will be up to you. Gather all of the documents needed for your short sale proposal (listed in the email you had your lender send.) Even though the list will vary bank by bank, there are some general requirements that every bank will include. Every document in the proposal must be in order for the bank to consider the short sale.
This is where having an experienced real estate agent will be invaluable! Our team will be here to walk you through each step.
The proposal should include:
- Preliminary Net Sheet. This is prepared by our closing coordinator. It details final numbers on the sale including the sales price you expect, the costs of the sale, unpaid loan balances, outstanding payments and late fees associated with default, and real estate commissions.
- Hardship Letter. This is where you share the source of your financial troubles. Remember it must be a relatively new setback. You must describe how you arrived in this state of financial distress and then make a plea to the lender to accept less than the full payment. Divorce, job loss, or health issues are legitimate reasons for financial hardships, but dishonestly or criminal activity is less than likely to qualify. This letter should pull on the heartstrings! This isn't the time to save face. Be sincere. It may be a hard letter to write, but remember, the bank is under no obligation to accept a short sale and will need to be convinced.
- Proof of Income and Assets. The lender will require information and documentation on any savings accounts, money market accounts, stocks or bonds, negotiable instruments, cash, other real estate or anything of significant value in your possession. Be truthful and honest about your financial situation. Any undisclosed assets will most likely be found anyways, and dishonesty will likely lead to foreclosure instead of a short sale. The bank will also require at least 30 days of pay stubs.
- Copies of Bank Statements. Typically your bank will want to see at least the last 2 months of bank statements. Be prepared to explain unaccountable deposits, large cash withdrawals, or an unusual amount of checks. An explanation will help the bank determine whether or not those deposits will continue and prevent any hold ups in relation to unexplained deposits/withdrawals.
- Comparative Market Analysis (CMA). The housing market is in constant flux. Property values can fluctuate year by year. This is another time you will lean heavily on your real estate agent. Rachel has over 15 year of experience in North Georgia. She is extremely knowledgable about local markets and will easily be able to prepare a current CMA. This is especially important in a down market. Your home may not be worth what it was at the time of purchase. If you, you need substantiated evidence of this. A CMA includes prices of similar homes that are active on the market, pending sale, and sold in the past 6 months. This give a general overview of the market and what value you can realistically expect from your home.
- Purchase Agreement and Listing Agreement. Finding a buyer for your home falls on YOU, not the bank.
- Having the right real estate agent can make all the difference! Experience, marketing, and relationships within the community all factor in. See why we believe we are the right team that can get your home sold here.
- Your lender will most likely want to see the home originally listed at the highest market value possible. If it does not sale within a reasonable amount of time, then they will accept a 5K-10K price drop at bimonthly or monthly intervals.
- When you find the right buyer and reach an agreement to sell the lender will require a copy of the offer as well as your listing agreement. We will be able to provide both of these for you.
- Please note that the lender will most likely negotiate fees and/or refuse to pay for certain items such as home warranties or specific inspections requested by buyers. Your real estate agent will be able to help you during this time of negotiation with both the bank and the prospective buyers.
Credit Score and the IRS
One of the biggest questions for those considering a short sale is, "How will this affect my credit?" That's hard to answer. A short sale will effect your credit. A lot depends on how many months of mortgage payments were missed. They can show up as delinquent payments on your credit report. However, it is up to the bank to report these, so it's in your best interest to convince the bank not to report the missed payments while negotiating the sale. Again, this is up to the discretion of the bank. The sooner you applied for a short sale the better. If you waited months before presenting a hardship letter, they may be less likely to work with you. The good news is even though your credit will be affected, it will be significantly less than foreclosure!
Another important fact to note is that the IRS can count the debt forgiveness between what you owed and what you paid back as taxable income.
All of this may feel like information overload in what is already a stressful situation. As your real estate team we will be ready to walk you through each step of the process.
Having a third party you can rely on will be invaluable! We know how to sell homes and how to sell them quickly. Contact us today and see what we can do for you!
See what we can do for you and check out some of our recent sales here:
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