If you're
thinking of selling your home, and you expect that the
total amount you owe on your mortgage will be greater
than the selling price of your home, you may be facing a
short sale. A short sale is one where the net proceeds
from the sale won't cover your total mortgage obligation
and closing costs, and you don't have other sources of
money to cover the deficiency. A short sale is different
from a foreclosure, which is when your lender takes
title of your home through a lengthy legal process and
then sells it.
1. Consider
loan modification first. If you are thinking of selling
your home because of financial difficulties and you
anticipate a short sale, first contact your lender to
see if it has any programs to help you stay in your
home. Your lender may agree to a modification such as:
·
Refinancing your loan at a lower interest rate
· Providing a different payment plan to
help you get caught up
· Providing a forbearance period if your
situation is temporary
When a loan
modification still isn’t enough to relieve your
financial problems, a short sale could be your best
option if
·
Your property is worth less than the total mortgage
you owe on it.
· You have a financial hardship, such as a
job loss or major medical bills.
· You have contacted your lender and it is
willing to entertain a short sale.
2. Hire a
qualified team. The first step to a short sale is to
hire a qualified real estate professional* and a real
estate attorney who specialize in short sales. Interview
at least three candidates for each and look for prior
short-sale experience. Short sales have proliferated
only in the last few years, so it may be hard to find
practitioners who have closed a lot of short sales. You
want to work with those who demonstrate a thorough
working knowledge of the short-sale process and who
won't try to take advantage of your situation or
pressure you to do something that isn't in your best
interest.
A qualified
real estate professional can:
·
Provide you with a comparative market analysis (CMA)
or broker price opinion (BPO).
· Help you set an appropriate listing price
for your home, market the home, and get it sold.
· Put special language in the MLS that
indicates your home is a short sale and that lender
approval is needed (all MLSs permit, and some now
require, that the short-sale status be disclosed to
potential buyers).
·
Ease the process of working with your lender or
lenders.
· Negotiate the contract with the buyers.
· Help you put together the short-sale
package to send to your lender (or lenders, if you
have more than one mortgage) for approval. You can’t
sell your home without your lender and any other
lien holders agreeing to the sale and releasing the
lien so that the buyers can get clear title.
3. Begin
gathering documentation before any offers come in. Your
lender will give you a list of documents it requires to
consider a short sale. The short-sale “package” that
accompanies any offer typically must include
·
A hardship letter detailing your financial situation
and why you need the short sale
· A copy of the purchase contract and
listing agreement
· Proof of your income and assets
· Copies of your federal income tax returns
for the past two years
4. Prepare
buyers for a lengthy waiting period. Even if you're well
organized and have all the documents in place, be
prepared for a long process. Waiting for your lender’s
review of the short-sale package can take several weeks
to months. Some experts say:
·
If you have only one mortgage, the review can take
about two months.
· With a first and second mortgage with the
same lender, the review can take about three months.
· With two or more mortgages with different
lenders, it can take four months or longer.
When the bank
does respond, it can approve the short sale, make a
counteroffer, or deny the short sale. The last two
actions can lengthen the process or put you back at
square one. (Your real estate attorney and real estate
professional, with your authorization, can work your
lender’s loss mitigation department on your behalf to
prepare the proper documentation and speed the process
along.)
5. Don't
expect a short sale to solve your financial problems.
Even if your lender does approve the short sale, it may
not be the end of all your financial woes. Here are some
things to keep in mind:
·
You may be asked by your lender to sign a promissory
note agreeing to pay back the amount of your loan
not paid off by the short sale. If your financial
hardship is permanent and you can’t pay back the
balance, talk with your real estate attorney about
your options.
· Any amount of your mortgage that is
forgiven by your lender is typically considered
income, and you may have to pay taxes on that
amount. Under a temporary measure passed in 2007,
the Mortgage Forgiveness Debt Relief Act and Debt
Cancellation Act, homeowners can exclude debt
forgiveness on their federal tax returns from income
for loans discharged in calendar years 2007 through
2012. Be sure to consult your real estate attorney
and your accountant to see whether you qualify.
· Having a portion of your debt forgiven
may have an adverse effect on your credit score.
However, a short sale will impact your credit score
less than foreclosure and bankruptcy.
Note: This
article provides general information only. Information
is not provided as advice for a specific matter. Laws
vary from state to state. For advice on a specific
matter, consult your attorney or CPA.
Reprinted from
REALTOR® magazine (REALTOR.org/realtormag) with
permission of the NATIONAL ASSOCIATION OF REALTORS®.
