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What is A Short Sale?
A short sale is a sale of real estate where the lender who holds the mortgage on a property will allow the property to be sold and accept less than the current mortgage balance. This has given homeowners a favorable alternative to foreclosure. When a lender approves a short sale there is a good chance they will forgive the deficiency owed by the homeowner. While this is not guaranteed they may also require:
· A cash contribution from the seller
· A promissory note for a portion of what is owed by the seller
· Reserve their right to pursue the deficiency balance against the seller
In most instances the mortgage deficiency will be forgiven, but even if it is not, a short sale may still be a better option for the homeowner rather than foreclosure. First, if the homeowner is required to pay the deficiency balance, it is fixed and the balance is much less after a short sale when compared to a foreclosure. A foreclosure forces the lender to incur legal fees, property preservation, maintenance and carrying costs – all of which is added to what the homeowner ultimately owes the bank. When this is coupled with a lower selling price, they could wind up owing the bank in some cases 50% or more than what they would have owed under a short sale scenario. A short sale also gives the homeowner the opportunity to negotiate any potential deficiency with the bank.
What Is Required With A Short Sale?
Short sale approval requires financial hardship and a sale of the property for fair market value. The sale must also be an “arms-length transaction.” This means that the property cannot be short sold to family members or anyone else with whom the homeowner is associated.
The biggest misconception in understanding the short sale alternative is that the homeowner must be delinquent on their mortgage payments before considering the short sale option. This is not true. Making late mortgage payments or allowing the mortgage to fall into default will have a significant negative effect on the homeowner’s credit rating and may eventually lead to what they are seeking to avoid in the first place, foreclosure. If a homeowner is able to stay current on their mortgage payments, when approaching the bank with a proposed short sale, it is still necessary that the homeowners demonstrate that a default on their mortgage payments is eminent based upon their financial hardship. Typical hardships include divorce, job loss, pay reduction, increased living expenses, relocation, illness and any other factors that might affect someone’s ability to pay their mortgage.
SHORT SALE PROCESS:
The short sale process can be very confusing because it has quickly become as common as a regular real estate transaction. Typically the short sale process takes longer because you have to deal directly with the bank and gain its approval to sell the home. When a purchaser makes an offer to purchase real estate in a short sale context, they do not have the benefit of receiving a quick response.
The short sale process begins with the seller having to show that they are eligible for a short sale transaction. Banks scrutinizing short sale transactions typically require 2 years of tax returns, 2 years of W2’s, recent bank statements for all accounts, recent pay stubs, a hardship letter, financial worksheet and a purchase contract for your property. The process of getting approved for a short sale is the exact opposite of what a borrower goes through when they are trying to obtain financing. When a seller is trying to get the bank to approve them for a short sale, they have to demonstrate that they have made every attempt possible to try and make the payments.
WORK WITH EXPERIENCED PROFESSIONALS:
If you decide to pursue a short sale, it is critical you work with a real estate agent and a company experienced in dealing with distressed assets. A short sale is more complicated and takes longer than a traditional sale. Never has your “team” of professionals been more important to the success of your transaction.
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