Should I Consider a Short Sale?

A short sale is an alternative to foreclosure in which a homeowner faced with losing their property sells their home for less than the remaining debt owed. The mortgage lender accepts the sale price as payment of the mortgage balance, even if it is less than the amount the borrower owes.

Bank approval for the short sale process can take longer than a typical home purchase. A short sale can mean a good deal for the borrower and lender, though the process also presents additional complications for the unprepared.

Short sales can also depend on state and local property laws. An experienced real estate attorney can explain the short sale vs. foreclosure differences and which is your best option.

Short Sale: Issues for the Buyer

As a potential buyer, it’s important to research a short-sale home before making an offer. There are potential risks of buying a short-sale property. For example, it can be more time-consuming than a traditional sale. There could be a heightened risk of needed home repairs and renovations, as well as liens or property claims.

Some real estate agents will try to steer you away from a short sale because it can be more time-consuming than a traditional sale. If you want to buy a short sale property, make sure you have an agent familiar with short sale transactions.

How Much Is Still Owed to the Lender?

You’ll want to know how much of the mortgage debt is still owed to the lender. Buyers should also know the market value of comparable properties in the area that have recently sold. This information gives you a sense of what the lender might reasonably accept. Don’t go in thinking that a lowball offer will score you a great deal.

A lender wants to secure the best deal it can. Lenders will only accept a short sale offer after concluding that it provides an equal or better deal than a foreclosure sale. They will require financing preapproval for the homebuyer. Banks and lenders also want documentation, such as verification of the housing value and seller information. Incomplete documentation can slow down or derail a short sale altogether.

Are There Liens or Encumbrances on the Deed?

It’s critical to know whether there’s a second mortgage loan, other liens, or encumbrances on the deed. Have a title search conducted on the property to avoid unpleasant surprises. If there is an additional mortgage loan or lien, that adds complications to a short sale transaction. The creditor will need to agree to the settlement as well as the short sale price.

The more parties involved, the longer the process is likely to take, and the less likely all parties will approve the deal. The bank will have to settle for less in a split of the purchase price with additional lienholders.

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When To Submit a Short Sale Proposal

The optimal window for submitting a short sale proposal is generally within 30 days of the foreclosure notice. The foreclosure process will continue as a short sale offer is being assessed.

Placing an offer as early as possible is crucial. Note that the amount you offer will probably be countered by the lender and that they’ll follow a prescribed process.

Short Sale: Issues for the Seller

As a seller, you’ll want to find out before presenting a short sale whether your lender will consider such an offer. If you have any equity in your home, they probably won’t. A foreclosure sale is generally more favorable. The amount of housing stock available in your market and the number of Real Estate Owned (REO) properties your lender has in their portfolio will also influence whether or not they’ll give short sale approval.

Another option for property owners is a deed in lieu of foreclosure, which means you deed the home back to the lender without relying on an approved sale. The lender then sells the home and applies the proceeds to the remaining balance. This is generally an option for borrowers if their short sale options fall through. Make sure you know whether the transaction satisfies the debt or the lender still wants to collect on the remaining home loan amount.

Getting the Short Sale Approved

To have the short sale approved, the lender will require a full assessment of your financial situation, including a financial hardship letter explaining why you cannot continue making mortgage payments. Because the level of financial disclosure required can expose you to risk, it’s important to have an experienced attorney help you assess if a short sale works for you.

You may not consider a short sale if you have filed for bankruptcy, as it would be considered a prohibited collection activity. You also cannot transact a short sale with any family member or friend.

Effect of a Short Sale

Real estate laws in a few states prohibit deficiency judgments on an approved short sale, including junior lienholders who agreed to the sale.

For example, the lender’s approval of a short sale in California is a release of the remaining loan amount. Lenders also may not require a seller to sign a promissory note or contribute escrow funds as a condition of the short sale. However, this can have tax implications. The amount of debt forgiven is taxable as regular income.

Impact on Your Credit Scores

Finally, a short sale is not a means to rescue your credit score. A short sale will likely appear in your credit report as a settled debt. A settled debt is a more favorable rating than a foreclosed home.

However, most damage to your credit score occurs in the first three months of nonpayment on your mortgage. The credit report difference between foreclosure and a short sale will be relatively minimal.

Find Experienced Legal Help

Whether you are a buyer or a seller, a real estate attorney with short sale experience can help you through real estate transactions. Your real estate lawyer can help with document preparation, like an approval letter and negotiation. They can also help you decide between pursuing a short sale, loan modification, or other refinance options.