Short Sale
If you are a borrower asking what is a short sale?, you may have gotten to a point where you are overburdened with mortgage debt and can't meet the increasing demands of creditors, we know how you feel. So what is a short sale? A short sale is when a lender accepts a reduced payoff on a mortgage to avoid a foreclosure auction. Instead of the transaction being strictly between a buyer and seller, in a short sale scenario, the lender has to sign off on accepting less than a full payoff. What is a short sale example: homeowner, who is unable to make mortgage payments, has an existing mortgage of $400,000, however the property has declined in value and is only worth $300,000. This "what is a short sale" scenario is very common these days. Since the transaction will only net the lender approximately $300,000 (ignoring costs and commissions for simplicity), the lender must approve the loss of $100,000 and provide escrow with a lower payoff demand in order for this simple "what is a short sale" example to close. Once the lender agrees, we now have a short sale.
When asking what is a short sale, you may also ask, why would the lender take such a discount? The answer is simple..that's all the property is worth. The lender can jump up and down all they want, it's not going to change fair market value. The lender's choice becomes to take the manageable loss now, or face a much larger loss (after paying foreclosure costs) down the road if they conduct a true foreclosure sale. Lenders know they could lose a lot more money if the property goes to a foreclosure auction. There are so many fees involved if the property goes to auction, that they would be better off taking the discount early and be finished and get the property off their books. There is an old saying in banking "your first loss is your best loss". This rings true today. If a lender can get out quick and easy with a short sale, they will typically consider it, but only if the request is proper and complete. That's why it's critical to work with an expert in the field of short sales, such as short sale attorneys McFarlin & Geurts, and our affiliated brokerage Clear Point Real Estate Services.
Negotiating a Short Sale with the lender is a technical and frustrating process, generally because it is very hard to find the "decision maker" who has the authority to negotiate the loan discounts. You can expect the process to involve a lot of waiting on hold and being bounced around an endless maze of automated voice mail systems. Once you get in touch with the right person, then the hard work and the negotiating can begin. Unless you have a substantial amount of time to commit to what is a short sale process, it is wise to work with qualified real estate attorney experts. McFarlin & Geurts offers a free consultation to further discuss and answer any additional questions you may have and can elaborate further on "what is a short sale".
WILL A SHORT SALE HURT MY CREDIT?
Of all the questions posed regarding short sales, will a short sale hurt my credit, is probably the most common. The simple answer is yes. A short sale will have a negative impact on your credit score and will indeed damage your credit. Anyone who tells you different is just trying to "make a sale" and not being straightforward with you. As compared to a foreclosure however, a short sale is much better. After a short sale, the mortgage lender will certainly notate on the credit report trade line that the account was not paid according to the terms of the contract, however, it very well may say "settled", which certainly is better than foreclosure.
Additionally, while you are working on the short sale and late with your payments, the lender will report these mortgage lates to the credit bureaus. The greatest credit damage actually stems from the delinquencies prior to the consummation of the short sale transaction in most cases. So, will a short sale hurt my credit, yes, it very well may...but it is probably substantially better than the alternatives.
One recent development in the world of "will a short sale hurt my credit" however is some lenders are now actually considering short sales where the borrower is not even late. This creates a possible climate for the completion of a short sale with very little, if any, negative credit impact. Stay tuned to the will a short sale hurt my credit portion of the McFarlin & Geurts sample results to see if this scenario becomes more common, or call us anytime.
- Research and determine current market value of the property. If you are selling the property through a real attorney or broker, your representative will run a title report and provide you with an estimate of fair market value. If you are selling the property yourself, do a thorough market analysis by comparing properties in the area.
- Determine Costs. If you are using the services of a real estate attorney or broker, you will be provided with an estimate of closing costs. If you are selling the property on your own (for sale by owner), you might call a local title company or escrow company and ask how to do a short sale and what the closing costs will be.
- Determine the total amount of all liens. This will be the total of all loans against the property as well as any judgment liens, HOA liens or other encumbrances.
- Calculate the "net". Subtract the total amount owing against the property (including all loans and other liens) from the estimated proceeds of the sale. Since you are asking how to do a short sale, this will be a negative number.
- Break the news to your lenders. Talk to someone in the loss mitigation or workout department and explain the situation. They may direct you to another department. Be patient, the process takes time and can be quite frustrating.
- Ask the lender for their "lender guidelines" on short sales and how to do a short sale for that particular lender. Some lenders will be willing to work with you, while others will give you the cold shoulder. If you have both a first and second mortgage (especially if they are with different companies) the how to does a short sale process become much harder?
- Stay positive and don't give up.
Since you have asked how to do a short sale, we feel obligated to tell you it's not easy, and certainly not as easy as it has been made out to be. For homeowners who simply can not meet the demands of creditors and have suffered a mortgage adjustment or loss of job or other hardship, asking how to do a short sale is a good first step to recovery. For owners who can no longer afford to keep mortgage payments current, there are alternatives to bankruptcy or foreclosure proceedings. One of those options (as you know) is a "short sale".
A larger and larger percentage of real estate sales throughout the country are short sales, they are becoming ubiquitous when a few years ago, they practically didn't exist. Things have changed fast.
When borrowers ask how to do a short sale, and lenders agree to actually do a real estate short sale, it means the lender is accepting less than the total amount due on the mortgage(s). Each individual's circumstances are different and no two deals are alike. Not all lenders will accept short sales, especially if it would make more financial sense to foreclose. Additionally, not all sellers, and not all properties qualify for short sales.
Although each lender is different with their short sale requirements we can offer you an idea of what to expect in furtherance of answering, how to do a short sale:
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Call the Lender. You may need to make a many calls before you get through to the right person handling short sales. Unfortunately, the lender is calling the shots at this point, and you have to jump through the hoops they have set up for short sale requests.
Submit the Preliminary Net Sheet or Estimated HUD-1. This is an estimate of the closing statement that shows the sales price you expect to receive and all the costs of sale, unpaid loan balances, outstanding back payments due and late fees, including real estate commissions, if any, back property taxes and HOA dues.
Hardship Letter. The more genuine and sympathetic you are the better. This personal statement outlines the cause of your current financial circumstances (unable to pay mortgage payments). The most common hardships are medical issues (either yourself or in the family), loss of job or cutback in wages (lost commissions), divorce or death.
Proof of Income and Assets. It is best to be straightforward and honest about your personal financial situation and disclose everything. The lender is seeking to verify that you are not secretly "hiding" assets but have truly experienced a hardship. Keep in mind, lenders are fairly resourceful in verifying asset statements, they can always run credit reports, and you may have (somewhere along the process) authorized them to receive your personal information from brokerages, etc.
Copies of Bank Statements. If your bank statements reflect unusual activity involving large amounts of deposits and withdrawals, it's going to require some explanation. 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. This may be difficult for an individual acting on their own behalf to get as they may not have access to the multiple listings, but it is common for a lender to send out its own representative, called a BPO (broker price opinion) to determine market value.
Listing and Purchase Agreement. When you locate a buyer and get the property into escrow, the lender will want a copy of the fully executed purchase agreement, along with a copy of your listing agreement. Be prepared for the lender to renegotiate terms and to refuse to pay for certain items such as home protection plans or termite inspections. Lenders are also notorious for cutting real estate commissions.
If everything goes well, the lender will approve your short sale, and "how does a short sale work" will have been answered by doing. As part of the "how does a short sale work" negotiation, you might ask that the lender not report adverse credit information to the credit bureaus, but the lender is under no obligation to honor this request, that would be the icing on the cake. McFarlin & Geurts would be happy to consult and advise you on "how does a short sale work" and other related questions you may have. We are also happy to list your property for sale for you through our in house brokerage Clear Point Real Estate Services if you would desire.
