A Short Sale is where the mortgage holder agrees to release their lien to allow a house to be sold for less than what is owed. This does not always mean they forgive the balance of the loan, although sometimes that is part of the negotiation. Short sales are one of many alternatives to foreclosure. Although no bank is required to approve a short sale, there is no harm in asking if they will consider this option, especially if you are denied a loan modification and are facing foreclosure.
What is an example of a Short Sale?
A typical example is where the house is worth $200,000 and the mortgage payoff is $225,000. The mortgage holder may agree to accept only $188,000 after the realtor is paid.
A more complicated example may involve a first and second mortgage. Say the house is worth $300,000, the first mortgage payoff is $310,000, and the second mortgage payoff is $40,000. The first mortgage company may agree to accept $270,000 and the second mortgage company may agree to accept the remaining $12,000 after the realtor is paid.
How do I ask for a Short Sale?
Every lender has their own forms and procedure, but calling and asking if they would allow a Short Sale is the first step. Sometimes you have to request a loan modification first and be denied.
What is the bank refuses a Short Sale?
Other options include requesting a loan modification, deed in lieu of foreclosure, or simply filing a bankruptcy and walking away from an underwater home loan. Of course you can always list the property for a high asking price and see if you can bring your own money to closing to sell the house.
How long does approval for a Short Sale take?
This simply varies by bank. Many individual home buyers won’t even bid on a house that is listed as a Short Sale as they can't afford to wait for approval that can sometimes take months.
What are the benefits of a Short Sale?
A Short Sale avoids a foreclosure that is almost always bad for both borrower and lender. Houses sold at auction rarely bring marker value because mainly investors bid at foreclosure auctions. Short Sales expand your scope of buyers to include conventional home buyers resulting in more money to the lender and a smaller deficiency for the borrower. In addition, you can avoid the dreaded foreclosure on your credit report via a Short Sale.
Any risks to a Short Sale?
As stated above a Short Sale, much like a deed in lieu of foreclosure does not automatically forgive the balance of the underlying loan. This is an important item to bargain for in your request for a Short Sale. Don’t forget you are doing the bank a service by agreeing to properly market your house in an effort to get them the most money at closing. Insist they agree to forgive any balance owed by you on the original mortgage as part of the Short Sale agreement. Be aware with the expiration of the mortgage debt forgiveness act this may still leave a substantial tax liability.
Any alternatives to a Short Sale?
The main alternatives include:
What if there is a second mortgage?
If you owe more on the first mortgage than the house is worth and have a second mortgage (with a different bank) then a Short Sale may not be a viable option unless you convince the first mortgage holder to leave some money for the second mortgage holder to receive from the sale. Often a second mortgage holder is much more open to Short Sale. They know in the event of foreclosure by the first mortgage holder they face a substantial risk of receiving nothing.
What if there are judgment liens?
Any judgment liens, tax liens, or HOA liens must be paid at the closing. It may be advisable to consult an attorney to conduct a title search so there are no surprises later.