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; or 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:
o Your property is worth less than the total
mortgage you owe on it.
o You have a financial hardship, such as a job
loss or major medical bills.
o 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:
o Provide you with a comparative market analysis
(CMA) or broker price opinion (BPO).
o Help you set an appropriate listing price for
your home, market the home, and get it sold.
o Put special language in the MLS that indicates
your home is a short sale and that lender approval is needed (all MLS's permit,
and some now require, that the short-sale status be disclosed to potential
buyers).
o Ease the process of working with your lender or
lenders.
o Negotiate the contract with the buyers.
o 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:
o A hardship letter detailing your financial
situation and why you need the short sale
o A copy of the purchase contract and listing
agreement
o Proof of your income and assets
o 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:
o If you have only one mortgage, the review can
take about two months.
o With a first and second mortgage with the same
lender, the review can take about three months.
o 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:
o 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.
o 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.