What is a "Short Sale"?
A short sale is the process by which a homeowner can sell a house for less money than he actually owes on the mortgage(s). This is done by the buyer or investor providing proper documentation to the mortgage lenders to convince them to reduce the mortgage balance to allow the sale. The mortgage lender actually takes a loss on the mortgage because the value of the home has fallen below the mortgage balance AND the homeowner is in a poor financial condition that will not allow him to continue to pay on time.
If the bank approves the discount on the mortgage, the home can be sold for a lower price without the seller having to come up with cash to cover the shortfall, and the mortgage is satisfied and the foreclosure process stops.
What type of situation is the short sale best for?
Most short sales are done on properties in pre-foreclosure. This means the homeowner is at least 3 payments behind and the foreclosure suit has been filed by one of the mortgage lenders. Recently, more mortgages that are simply behind or "in default" are considered short sale candidates without actually being in foreclosure.
In addition, the homeowner typically has negative equity or no equity in the home. In other words, the total balance owed on the mortgages is equal or greater than the price at which the house can be sold. This situation is growing increasingly common due to the declining housing market and poor economy.
In addition, the homeowner must have some type of financial hardship that is preventing him from paying the mortgage. This is commonly job loss, medical bills, disability, or some other hardship.
How does a homeowner benefit from a short sale?
First and foremost, it relieves the stress of being in foreclosure and being hounded by the mortgage lender; and it allows homeowners to get rid of their big mortgage payment and move on with their lives. A short sale allows you to stop the foreclosure and get a fresh start. In my experience, this is the primary benefit to homeowners. They are tremendously thankful to just relieve the burden that their home and mortgage have become.
A short sale also prevents additional damage to your credit. Having some late payments and a foreclosure filed has already done damage to your credit. However, a completed foreclosure will do much more damage and lower your credit score tremendously. Obviously, if you have to declare bankruptcy, that is a huge black mark on your credit. A short sale results in the mortgage actually being paid off, which reflects positively compared to a foreclosure.
I am a potential buyer. What are the advantages of buying a short sale?
1)As a buyer you can great deal, often paying well below market value.
2) There is currently an extremely large inventory of short sale listings on the market giving you more homes to choose from.
3) Bank like terms! If you plan to pay cash for the home you will have a tremendous advantage when purchasing a short sale.
I am a potential buyer. What are the disadvantages of buying a short sale?
1) As a buyer you must be patient. Short sales can take several months to complete. It often takes weeks just hear back regarding your offer.
2) Another down fall would be some additional paper work, in the form of lenghty addendums and disclosures.
3) In addition, banks like terms. If you are buyer that needs assistance with closing costs and / or plan to finance the majority of the purchase price, your offer will be much harder to get accepted.
The bottom line is that there are often steep discounts when buying a short sale... however if you have any time restraints you should seek a more traditional sale.
Why would a bank or mortgage lender want to do a short sale?
A common saying is that banks are in the business of lending money and do not want to own real estate. This is slightly misleading but is essentially true. When a bank takes a property back via foreclosure, it is a long and expensive process and often results in holding the property in their inventory as a non-performing asset. Banks have a limit to the amount of non-performing assets they want to hold. Once this limit is exceeded, they have strong incentive to get rid of the properties at discount prices.
For a lender, doing a short sale avoids many of the costs associated with the foreclosure process. Attorney fees, delays from borrower bankruptcy, damage to the property, costs associated with resale, property tax, insurance, etc. all must be paid by the bank during a foreclosure. In a short sale scenario, the lender is able to cut its losses by getting rid of the property faster.
Will a short sale "save my house"?
In the sense that you will be able to continue to live in the house, unfortunately the honest answer is no. A short sale is only done involving a legitimate sale of the home from the foreclosed owner to another unrelated party.
Will a short sale “save my credit”?
The short answer is yes and no, a short sale can save you from the worst credit disasters.
By defaulting on mortgage payments and having a foreclosure filed against your property, you have already done damage to your credit. Your credit score has declined and those negatives will stay on your credit report for some time. However, it will get much worse if you allow the foreclosure to continue and do not try to short sale the property.
Once a foreclosed property is sold at auction, your credit score is further reduced and when the foreclosure is completed via eviction and repossession of the home, your credit will be even further damaged. If you can complete the short sale BEFORE either of these takes place, then you can prevent that further damage to your credit. In addition, when the short sale is completed, it shows up on your credit as a “Paid” mortgage and a canceled foreclosure, which shows future creditors that you did take care of your obligations.
If your situation eventually winds up in bankruptcy, then that is the worst item that could appear on your credit report and it will remain there for years and cause numerous difficulties in getting future credit. A short sale can help avoid this, but don't delay act quickly. I am in foreclosure, is a short sale for me, and do I qualify for a short sale?
Each situation is different and must be evaluated individually. If you believe you fit the basic criteria of:
- Property in foreclosure or default
- Personal financial hardship
- Little or no equity in the property
- At least 60 days until eviction date
I am NOT in foreclosure and I have missed NO PAYMENTS, can a short sale work for me or do I qualify for a short sale?
It is difficult to do a short sale if foreclosure has not been filed but it is possible if a couple of payments have been missed and there is a good hardship story. The lender must be convinced that they will NOT BE REPAID without the short sale.
What if my mortgage is an FHA...or HUD...or VA mortgage?
Short sales can still be done on all these types of mortgages though each one has different criteria.
What other options might I have at this piont?
When faced with a foreclosure, some things you may be able to do are:
- Sell your home through the normal channels
- Bring your mortgage current by making the missed payments and paying the penalties
- Refinance your mortgage with another lender
- File for bankruptcy
If you can do any of the first 3, then you probably should! Those are usually the best solutions for a homeowner in foreclosure.
However, if your situation is such that your house cannot be sold for the amount owed, and you have no money to bring the payments current, and you have no equity to qualify for a refinance, then you should consider a short sale before considering option #4.
Again, I encourage you to educate yourself as much as possible about your situation and seek advice from any attorney, CPA, or Real Estate Agent you have access to about your choices. I do caution you against paying for the advice of so-called “foreclosure work-out specialists” or other such advisers unless it is by personal recommendation.
What is "Financial Hardship" and why is it so important?
"Financial Hardship" is a critical part of the short sale equation. No matter what you hear about banks "not in the business of owning real estate", etc., they DO NOT give homeowners a break easily. They require GOOD REASON to give a discount for a short sale. .
The main reason a lender will agree to a short sale is if they determine that the short sale will net the more money that proceeding with the foreclosure. Understanding the homeowner's financial hardship is a big part of the lender estimating whether they will be paid in full for the mortgage.
Many homeowners try to use a short sale as a "get out of jail free" card to dump their poor investment. Lenders will not allow this and it is a waste of time to try. If you are employed and have some assets, but you have simply lost value on your home and want to sell, YOU PROBABLY CANNOT SHORT SALE. If you are current on your mortgage, IT IS VERY DIFFICULT TO SHORT SALE. Lenders need to see that you simply cannot pay them back before they will short sale.
Can I short sale my own house to myself or a family member?
No, this would be illegal. A short sale must be an “arms length” transaction. You cannot short sale your own house nor can close members of your family or friends do one for you either.
In a short sale, the lender is agreeing to discount the mortgage amount due to legitimate hardships; but not so that the homeowner can make a profit. No money from a short sale transaction can be paid to the homeowner (seller). Lenders will not approve any short sale in which they suspect the foreclosed homeowner will profit.
Can’t I just go down to my branch or mortgage broker and talk to them about reducing my mortgage?
You can try however, things don’t work that way anymore in the banking business. Once you obtain a mortgage, it typically gets bundled with other mortgages and sold to other banks or investors. Oftentimes, the company to which you make your payments is not even the bank who holds your mortgage; they are simply paid to “service” the loan.
Also, once you mortgage lender begins the foreclosure process, the file is turned over to a loss mitigation company so the “lending” departments or the branch no longer have anything to do with the loan.
All negotiations regarding the short sale are done between the buyer/investor and whatever loss mitigation or asset management company works for the lender.
Do you handle short sales in my area?
I am licensed to handle homes in the entire state of Florida. However, I am only accepting short sale listings for homes in Palm Beach and Broward Counties of Florida.
My house is already listed for sale on the MLS but isn’t selling; can I do a short sale?
Yes, you can and it is relatively common. Some lenders even require that a house be listed for sale before approving a short sale in order to show that a discount is necessary.
My house is really nice, why is your short sale offer so low?
Sellers often have an emotional attachment to their home and often feel an ibuyers short sale offer is too low. It is important to remember a few things. First, the seller in a short sale can never receive any money in the transaction, therefore it should be of very little concern at what price the short sale is done. The only real exception is when the seller has tax liability concerns. Otherwise, the price should not matter to the seller.
The important factor in a short sale is whether the lender will accept the price.
Is my house too cheap or too expensive to do a short sale?
Homes in any price range can be eligible for a short sale as long as the basic criteria are met.
1. Property in foreclosure or in default
2. Little or no equity in the property
3. Personal financial hardship
4. At Least 60+ days to eviction (MI) or Foreclosure Auction (IL)
How long does a short sale take, I need to get out now!
A short sale takes approximately 90-120 days to complete and sometimes longer. This is very important. This complicated process takes time so to have the option of a short sale, you must act soon. If you wait until 1 week before eviction, no one can help you do a short sale. It is simply impossible. DO NOT WAIT.
I have heard that I could still owe taxes after a short sale, is this true?
Yes, this is true we encourage you to consult an attorney or CPA to discuss the tax consiquences as they differ depending upon how the property is titled. There has been some recent legislation regarding this matter so again we encourage you to check with a CPA and or attorney.
My house needs a lot of repair; can you still do a short sale?
Yes, though it can make the process more difficult because the price must be substantially lower. The key is to be able to show the bank's appraiser all the work that needs to be done. Let us know if this is the case with your home.
I have more than 10% equity in my house; can I still short sale the home?
Probably not. You are much better off seeking a normal open market sale or a refinance.
My husband/wife/brother is also on the deed with me but doesn’t want to sell; can I still do a short sale?
No. ALL parties listed on the current deed or mortgage must sign the short sale purchase agreement. There are no exceptions to this.
I have other liens (i.e. mechanics, IRS, court judgments) on my house; can I still do a short sale?
Yes, but again, it gets much more complicated and will take longer. If this is the case on your home, be sure to COMPLETELY list all potential liens you have. Each lien holder will have to be negotiated with individually. A short sale in this circumstance will take longer than 90 days.
I am an heir to an estate that has a mortgage it (or I) can’t afford to pay. Can I do a short sale?
Yes, this is common.
I have 2 or 3 mortgages on my house. Can I still do a short sale?
Yes, each mortgage or Line of Credit (HELOC) can be negotiated individually. It is important to know which mortgage filed the foreclosure or if more than one are in foreclosure, which filed first.
I want to Short Sale my house. Where Do I Start?
Give me a call for FREE NO OBLIGATION CONSULTATION. I Am Here to Help! 561-306-4334
***This information is provided as basic guide to common questions regarding the short sale process. Please be advised that we encourage you to contact an Attorney and CPA before doing a Short Sale.
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