Short Sale

How To Do a Short Sale?

If you are a homeowner on the verge of foreclosure or need to sell your house fast, a short sale is the quickest option for you. However, it's not as easy as you think. There are many legal and financial implications of doing a house short sale. Let's look at the processes involved in short selling your property.

What is a House Short Sale?

To understand a short sale, let's look at this example. Suppose that you filed a mortgage financing to buy a house ten years ago for $300,000. After inflation rates and normal wear and tear conditions, you can only sell your house now at the current market value of only $150,000. Let's say you've already paid $100,000 towards your mortgage. Then you will need to do a short sale, and you will still owe the bank $50,000.

Short sale means selling your property at less than the amount that you owe in a mortgage loan. In a short sale, all the proceeds of the sale will automatically go to the lender. The lender can then either forgive the balance left after a short sale or apply for a deficiency judgment against the seller.

What is a Deficiency Judgment?

A deficiency judgment is a legal document that requires a homeowner to pay the difference between the sale price and the original amount of the mortgage. The conditions of a short sale are different for every state but generally require the lender's approval before starting the selling process. They must sign-off on the mortgage to execute the short sale process, and they require documentation that justifies why a short sale is needed.

Foreclosure Versus Short Sale

Both foreclosure and short sale are good options for financially distressed homeowners. Although proceeds from both house sales will automatically go to the lender, the difference between them is the process for which the sale is completed, the parties involved in the sale process, the timeline for the deal to be closed, and the consequences on the credit standing of the seller.

  • Sale of Foreclosed Properties

In a foreclosure sale, the lender typically initiates the sale to liquidate the assets in the quickest time possible. They seize the property after a specific time of delinquent payments. Foreclosure is usually the last option for lenders because it involves a long and painful process that the lender will have to complete without much help from the house owner.

Once a foreclosed property is sold, the proceeds will be distributed in this order of importance; foreclosure expenses, the capital amount owed to the lender, and junior liens. The remaining proceeds will then be forwarded to the borrower.

  • House Short Sale

The homeowner usually initiates short sale to avoid foreclosure. Although it requires approval from a lender, a short sale negatively impacts your credit score less than if your house is foreclosed. The homeowner can also persuade the lender to report the mortgage as fully paid with the credit bureau, giving you another chance to apply for another mortgage in the future.

The downside in a short sale is that there is a possibility that your mortgage financier will not forgive the difference between the amount of the mortgage and the sale proceeds. And on top of that, you will not receive any amount of the sale proceeds.

Benefits of a Short Sale

Each party in the short sale will benefit (and lose) in this transaction. However, the outcome is still better than a foreclosure.

  • Lender

For the mortgage lender, he may or may not lose a few dollars because he has the option of either forgiving the remaining balance on your loan or applying for a deficiency judgment against the money loaned. If the lender decides to dismiss the remaining balance, he will accept a financial loss, but not as bad as a foreclosure sale. 

The lender will have to do all the work involved in the selling process in a foreclosure, shoulder all the costs, and may still end up getting less than the money owed. The worst-case scenario is that he will get nothing if the house gets no bids or the property can get tied up in the real estate market listings for too long.

  • Buyer

Houses on a short sale will most likely have their own share of headaches. The value of the house depreciated over the years. It can be because of an economic recession or the current conditions of the property. Either way, you cannot get $500 worth of items when you paid only $100. The property will most likely need renovations or a whole make-over. On the flip side, you get a property for a hugely discounted price.

  • Seller

A short sale will negatively impact the seller's credit standing, but they will still have the opportunity to apply for another mortgage. A foreclosure record stays on a person's record for up to seven years. In a short sale, you have a good chance of persuading the lender to report the mortgage as fully paid. Which effectively clears you of any bad record.

Alternatives to Short Sale

There are other alternatives to avoid selling your house at less than the amount you owed the mortgage bank. If you are delinquent in your payments, request your bank for revised payment options and loan restructures to help get your payments up to date.

Some homeowners who want to keep their assets also opt for refinancing, or in most cases, apply for Private Mortgage Insurance (PMI). The insurance company can assess your current financial standing and, if they determine that you can pay soon, can advance your loan payments. You are still required to pay any amount they paid in advance, though, but at least it gives you enough time to recover financially.

Short Sale Process

There are several steps that a homeowner needs to do to complete or be approved for a short sale. Before deciding on a short sale, find alternative solutions. If there is no other choice but to get one, here are a few things that you need to do.

Contact the Mortgage Lender

Get approval from the mortgage lender. Your reason for selling your house less than your loan balance should be something that is not already stipulated in your mortgage agreement. You don't want the lender to think that you falsified your income capacity when you applied for a loan. Acceptable reasons would be the death of the primary breadwinner, failing health conditions, economic crash, losing a job due to pandemics, or a divorce.

The lender is more sympathetic if, after investigation, they determine that you are not applying for a short sale to get out of paying your loans. Always remember that a short sale relies on the lender's approval because they hold lien or legal right to the property as collateral. If they see that you have a new car or are not yet delinquent in your payments for a few months, they might not agree to short sell your property.

Additionally, if the mortgage has a co-borrower, the lender might decide to transfer the payment obligation to the 2nd party. Or if they think that your property will get more value with a foreclosure.

Talk to the mortgage financier and find out your options. You can directly communicate with the lender's loss mitigation department to discuss options or check if it's possible to sell your property short. 

Decide How Much the Property is Worth

As a seller, you want to keep the selling price as close to your property's current market value. Talk to expert realtors and conduct a comparative market analysis of similar properties in the area. Include the expenses you will incur in the selling process, and consider other aspects such as legal fees, realtor fees, taxes, and other required documentation.

Complete Documents and Find a Buyer

After deciding to short sell your house, you need to gather all the documentation to prove that you cannot pay your mortgage. It can be a notice of termination, a divorce decree, hospital bills, a death certificate, and any other document you can use to convince the lender to approve the short sale. Once approved, you can now find a buyer.

Contact a reputable real estate agent to create a listing in the market for you. Discuss why you need to do a short sale, and get advice on how high to sell your property through a short sale. As discussed, it is best to keep the price as near to the loaned amount as possible. The agent can find the most suitable buyer for you and protect your interests as a seller.

Submit Your Bank Proposal

Your bank proposal should include comprehensive details explaining your financial distress. Be careful of the documents you will attach to the bank proposal because it can be used against you if the lender decides to start a foreclosure process. Or, if you have additional assets, they can file a deficiency judgment and make you pay for the difference in the balance after the loan proceeds.

The risks often involve the buyer changing their mind because it takes quite some time to get the lender's approval. Your credit score will also suffer a minor setback because the bank may still report your monthly delinquent payments before the sale. It's your responsibility to convince the bank to forgive the balance of the money owed from the proceeds and declare the mortgage as fully paid after closing the short sale.

Short Sale Buyer Strategies

If you are a buyer instead of a seller, a short sale can guarantee some savings towards buying or investing in a property. As a buyer, here are some items that you need to keep in mind:

  • Where to Find Short Sale Properties

Properties that are offered as a short sale are not usually advertised as such. Find the right real estate agent with proven experience in a short sale to navigate the property market listings for you. However, there are some signs if a property is a short sale. Look for disclaimers like "Subject to Bank Approval" or "Bank Response Required."

  • Buyer Flexibility

A short sale can either be processed very fast or take a long time. Either way, prepare yourself to wait or take action when needed. Bank approval can take a long time, which is why many buyers eventually cancel their bids and find another property to buy. However, if you have a strong desire to own the property, you can wait until the required processes are completed

  • Short Sale Proposal

The homeowner will need to justify the reason for the short sale. Financial documents that need to be submitted to the bank include an explanation for the financial distress, financial records, bank statements, tax returns, payroll stubs, and W2s.

  • Offer for Short Sale 

When a potential buyer is found, the realtor will send the mortgage bank a listing agreement, a purchase offer, the buyer's mortgage pre-approval letter, the sale deposit, and the short sale package from the homeowner. Any missing document will lengthen the whole process.

  • Processing Time of the Mortgage Lender

The financial institution that holds the liens on the mortgage will need to review the offer, and this process can take a very long time. The bank has the option to either approve or deny the request. If the lender deemed that they could get more cash through foreclosure, they would probably reject the offer. After all, they are there to make money out of their investment. So additional profits will always be their priority.

Conclusion

As a buyer, a short-sale property gives you a chance to own a property for less than the amount you are willing to pay. Not all short sale houses are dilapidated and worn down; some are still in perfect condition and may even be a good investment in the long term.

For sellers, a short sale gives you less severe repercussions than foreclosure or bankruptcy. However, the process is complicated, and deals often fall through because of the time it takes for it to be completed.

A reputable realtor can help both parties navigate through the intricacies involved in a short sale. Getting the experts' help can make a big difference in making the sale or experiencing a considerable loss.