With all the media focusing on the real estate market these days, it’s hard to disseminate some of the information that’s bombarding you. There are many ways to lose a home but signing away ownership in a manner that destroys credit, embarrasses the family and strips an owner of dignity is one of the hardest. 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". Let’s investigate what a short sale is and how it works. A short sale means a bank or other mortgage lender agrees to lower the balance of a loan due to hardships on the part of the borrower. The borrower sells the property for less than the outstanding balance of the loan, and then turns over the proceeds of the sale to the lender, who considers the loan "paid in full".
A short sale typically is obtained to prevent a home foreclosure. A bank or mortgage lender will choose to allow a short sale if they believe that it will result in a smaller financial loss than the foreclosing process. For the borrower, the advantages include avoiding a foreclosure on their credit history. Additionally, a short sale is typically faster and less expensive than a foreclosure, a short sale could take anywhere from 60 to 100 days or longer, depending on the mortgage company.
Banks and mortgage lenders have a loss mitigation department which processes most potential short sale transactions. The lenders do not accept short sale offers or requests for short sales until a Notice of Default has been issued or recorded with the district where the property is located. Lenders have to approve of any buyer's or listing agent's commission in advance, a primary reason for non-brokered short sales with a specialist or facilitator is to save on the margin. Many of these facilitators work with a private lending party for their financing, such as a partner or syndicate.
Lenders have a varying tolerance for short sales and mitigated losses. The majority of lenders have a pre -determined criteria for such transactions. Other distressed lenders may allow any reasonable offer subject to loss mitigation’s approval. "Red tape" is very common in short sales, similar to REO and HUD properties, requiring potentially multiple levels of approvals and conditions.
While it is common for a lender to forgive the balance of the loan in question, it is unlikely that any additional lien holders will forgive their balances.
When the lender decides to forgive all or a portion of your debt and accept less, the forgiven amount is considered as an income for the borrower and is liable to be taxed. However, after the signing of The Mortgage Forgiveness Debt Relief Act of 2007, amendments have been made to remove such tax liability and allow the borrower and lender to work freely together and find a common solution that is beneficial to both the parties.
Again, a short sale is not a magic cure. It’s also not some mystical solution that only an elite few know about. If you’re curious about selling your home as a short sale, you should contact your lender and get information in writing. It’s usually not easy, and hardly ever will truly “win”. In some cases, it can leave you much better off than the alternative of foreclosure and bankruptcy. If you’re an investor, there are much better ways to obtain undervalued homes.
Remember that this is a complex process and you should always seek the help of a professional when considering a short sale.