A short sale is an action taken in agreement between a borrower (mortgagor) and a lender (mortgagee) that allows for the sale of a property with a loan balance that is more than what the property may be worth or can sale for. Short sales usually take place when a property is in foreclosure and the borrower has no means of either paying the monthly note or cannot sell the property for enough to pay off the total loan balance.
In the case of a short sale, the lender usually decides to work with the borrower by taking the position that it is financially more sensible to discount the balance of the loan, take the loss, rather than taking the property by means of foreclosure, which make take more time and create an even greater loss, especially if the borrower files for bankruptcy.
As far as the borrower is concerned, having the lender agree to a short sale saves him from having the property taken through the foreclosure process, especially when there is no other way to save the property. The short sale keeps the foreclosure off the borrowers credit history.
However, not all properties qualify for a short sale and not all lenders will agree to short sales. In some instances, a foreclosure might make more sense for the lender. In each short sale case, the lender can either approve or disapprove the sale.
Normally, the lender will make a decision whether or not to allow a short sale that is based on the economy, whether the conditions of the real estate market are good or bad, and the financial status of the borrower.
Short sales transactions are processed through the loss mitigation department of the lender, which in most cases will not entertain a request for a short sale until after a Notice of Default has been recorded against the property. Second mortgages or other liens holders may also have to approve the short sale, and some do not, thereby preventing the short sale.
•The Mortgage Forgiveness Debt Relief Act of 2007: When the lender decides to forgive all or a portion of a borrower's debt and accept less, the forgiven amount is considered as income for the borrower and is liable to be taxed.
•However, amendments have been made to remove such tax liability and allow the borrower and lender to work freely together to find a common solution that is beneficial to both parties.
•This protection is limited to primary residences so consultation with a tax advisor is necessary to ensure that a borrower qualifies.
The lender will require the borrower to submit what may seem like an endless list of documents and letters before approving a short sale, so the borrower should be aware and prepared.
•A hardship letter is required stating the reasons you got behind.
•A letter of authorization allowing the lender to solicit information about your financial well being.
•A net sheet that contains the expected sales price, loan balance, costs to sell, realtor commissions, and other costs. The net sheet is important because there may be costs that the lender will not allow, such as the total amount of the realtor's commission, termite work, or a home protection plan.
•Copies of bank statements with an accounting of deposits and withdrawals.
•Statement of Income and assets like other real estate, IRA accounts, stocks and bonds, mutual funds, and other valuable possessions.
•Listing Agreement showing when and how long the property has been on the market.
•Purchase Agreement and any counter offers showing the actual amount that was offered by the prospective buyer.
•The lender will also ask your realtor for a comparative market analysis to justify the price and terms you put the property on the market for.