What is a Short Sale?

For owners who can no longer afford to keep mortgage payments current, there are alternatives to bankruptcy or foreclosure proceedings. One of those options is called a “short sale. “When lenders agree to do a short sale in real estate, it means the lender is accepting less than the total amount due. Not all lenders will accept short sales or discounted payoffs, especially if it would make more financial sense to foreclose.

Short Sales: The Positives

While homeowners are forbidden from receiving any proceeds from the sale of their home, there are other benefits to “short-sales”.

1. A “short-sale” is the lesser of two evils. Inevitably, if the homeowner cannot afford to remain in premises, the lender will repossess the property through foreclosure proceedings. A “short-sale” can save the homeowner many months of stress, aggravation, embarrassment and uncertainty.

2. A foreclosure can be devastating upon the credit of a defaulting homeowner. With “short-sales”, the homeowner’s credit may be restored in as little as eighteen months.

Short Sales: The Negatives

If you are considering a short sale, there could be drawbacks.

1. The Note may not be considered paid in full and may remain fully in force. A lender who accepts a short sale may legally pursue the homeowner for the difference between the amount owed and the amount paid. This amount is known as a deficiency.

2. Be aware the I.R.S. will consider debt forgiveness as income. Therefore the lender can file a 1099-C (“Cancellation of Debt Form”) which may subject the homeowner to tax liability.

3. The lender may reserve the right to report this transaction to the appropriate credit bureaus which may negatively affect the homeowner’s credit.

Short Sales: What you can expect

Although all lenders have varying requirements and may demand that a borrower submit a wide array of documentation, the following steps will give you a pretty good idea of what to expect:

Hardship Letter: This statement of facts describes how you got into this financial bind and makes a plea to the lender to accept less than full payment. Lenders are not inhumane and can understand if you lost your job, were hospitalized, etc.

Proof of Income and Assets: Lenders will want to know if you have savings accounts, money market accounts, stocks or bonds, negotiable instruments, cash or other real estate or anything of tangible value.

Copies of Bank Statements: If your bank statements reflect unaccountable deposits, large cash withdrawals or an unusual number of checks, it’s probably a good idea to explain each of those line items to the lender. In addition, the lender might want you to account for each and every deposit so it can determine whether deposits will continue.

Comparative Market Analysis: Sometimes markets decline and property values fall. If this is part of the reason that you cannot sell your home for enough to pay off the lender, this fact should be substantiated for the lender through a comparative market analysis (CMA). Your real estate agent can prepare a CMA for you, which will show prices of similar homes.

Purchase Agreement & Listing Agreement: When you reach an agreement to sell with a prospective purchaser, the lender will want a copy of the offer, along with a copy of your listing agreement