When Is a "Short Sale" an Option?
If a "Notice of Default" has been issued to you or recorded against your property, and you face a substantial financial hardship in meeting your bills or if the value of your property has dropped below the amount you borrowed in exchange for the mortgage, you might want to start considering to attempt to negotiate a "Short Sale" with your lender - and finding a qualified buyer for your property that has the ability to pay the adjusted monthly payment. If you have filed for bankruptcy, lenders will most likely not pursue short sale negotiations with you. Having a qualified buyer ready to purchase the property in the event that a "short sale" settlement can be reached is key to the whole process.
What Do I Need to Do to Start the Process?
If you have found a qualified buyer, then it's probably a good time for you to contact your mortgage lender's Loss Mitigation Department & request the proper paperwork to begin the process. Lenders require detailed information about your current financial situation, including an accounting of your income and expenses, (recent bank statements, W2s, information for other real estate owned, rental contracts, etc.), a written statement of your financial hardship, and details regarding the pending real estate transaction, including a Sales Contract and Estimated Closing Costs. You will also have to provide access to the interior of the property so a real estate professional can assess the value of the property. The Appraisal generated is called the "Broker's Price Opinion", or BPO. Once all the information is submitted, the Lender will determine whether a short payoff is in it’s best interest & may offer you a payoff amount that may be substantially less than what you owe.
How Can I Make the Strongest Case Possible to My Lender?
Homeowners should provide as much detail as possible as to why, despite the home owner's best efforts, he/she can no longer make the mortgage payments. "Short Sale" negotiations are successful when homeowners are honest with the Lender regarding their situation. This is not the time for pride - the Lender won’t help you unless you handle things honestly and with maturity. Homeowners should also be present when the real estate professional inspects the property. Homeowners know their property better than anyone, and should point out all the problems with the property, & make the real estate professional aware of changed circumstances in the neighborhood. If you think that something affects the property's value, point it out to the real estate professional. Finally, be polite to the person handling your case. Remember, you're trying to gain a favorable outcome to the negotiations, and offending the person who is determining the outcome of the negotiations is bad strategy!
What are the Downsides to Agreeing To a "Short Sale"
The most obvious downside to the process is that it results in you losing your home. A short sale will adversely affect your credit - though the negative impact is normally less than the impact that a foreclosure would create. Like all entries (except for bankruptcy), "short sales" will remain on your credit report for 7 years. Also, depending on your circumstances & credit information, you may not be able to obtain another mortgage 1-3 years after a short sale. Also, homeowners will be liable for taxes on the unpaid balance. A Short sale settlement means that the homeowner receives the benefit of the unpaid mortgage amount, and that is taxable. Recent legislation has changed the consequences, so consult a tax specialist to determine the impact on you. Finally, understand that this is not a cure-all for all your debts! There is no way for you to benefit from the transaction & if you have other debts that are not secured by the property, you will still owe those creditors.