Most realtors disagree on many points who do we believe?Do the rules change from state to state?Is it govern federally?

I’ve Heard It Before, But What Is a Short Sale?

Finding oneself in the situation of being unable to keep mortgage payments current can be immensely stressful and embarrassing. However, anyone not privy to the real estate vernacular may not realize that there is an alternative to foreclosure proceedings or bankruptcy: short sales. A short sale occurs when real estate sells for an amount less than the current owner owes on the mortgage loan. When a property sells for less than its current value, the seller’s lender is accepting a discounted payoff to release the existing home mortgage.

This is very different from a foreclosure, in which a lender obtains a termination of the borrower’s equitable right of redemption by court order, or from a REO property, which is a bank owned property that has failed to sell at a foreclosure auction. Although a short sale is typically rather stressful in its own way, it is often a much more agreeable situation than bankruptcy or foreclosure. Nevertheless, as short sales result in losses for the lender, the process of selling a home short is not the easiest process in the world.

How to Go About Selling a Home Short

It is reasonable to expect a certain degree of difficulty in selling a home short, since the short sale process will result in the lender or mortgage investor potentially losing tens of thousands of dollars; many times, it will make more sense from the lender’s viewpoint to foreclose. Also, not all sellers or all properties even qualify for short sales. Consequently, in order to get the lender to approve a short sale on a property, the borrower must prove to the lender that he or she is no longer able to afford the mortgage. How is this done? The borrower must submit financial statements to the lender demonstrating his or her inability to keep up with the mortgage payments. This way, there is physical proof of financial hardship causing the borrower to resort to breaking free of his or her mortgage.

Unfortunately, aside from providing the lender with financial information, there really is no standardized short sale approval process. Approval criteria vary from lender to lender and, sometimes, within one institution. In any case, it is a good idea for any mortgager looking to sell his or her home short to consult a real estate agent with short sale experience, an accountant or other tax professional, and perhaps an attorney.

Short sale refers to real estate properties sold “short” of the balance due on the mortgage loan. When borrowers fall behind on payments and cannot afford to maintain future payments, some mortgage lenders will allow the property to be sold to repay the loan.

Short sale transactions are multifaceted and require approval from the lender. Short sales are managed by the bank’s loss mitigation department. Employees who work in this department are known as loss mitigators and act as a mediator between lenders and borrowers.

Loss mitigators do not have the authority to approve or disapprove short sale requests. Instead, they gather and review financial documents provided by the borrower and make recommendations to the bank based on the borrower’s ability to make good on their loan.

There is no law requiring banks to engage in short sale transactions. However, lenders who received bail-out money are encouraged to offer short sales to eliminate non-performing loans from their books. The only way to know if your lender offers short sales is to contact them to discuss policies and procedures.

When real estate enters into foreclosure the property is ineligible for short sale approval. Borrowers who are struggling to maintain mortgage payments or have become delinquent on their loan should contact their lender immediately to discuss the option of short selling.

Two types of short sale options are available. The first and most common, is referred to as a Deficiency Judgment. This is the worst case scenario and should be avoided at all costs. The way short selling works is lenders allow borrowers to sell the home at a discounted price to attract buyers. Let’s say you owe $200,000 on your mortgage note and sell the property for $185,000. This results in a deficiency of $15,000.

When borrowers are unable to pay the deficiency amount, lenders issue a deficiency judgment for the balance. The judgment remains on your credit report until it is repaid. How long would it take you to repay $15,000?

Deficiency judgments can cause serious financial fall-out that can haunt you for years to come. Having an attached judgment places debtors in the “high-risk” category and can prevent them from obtaining credit of any kind. Those who can obtain credit usually pay a higher rate of interest and lower credit limits. Higher interest rates can amount to several thousand dollars over the course of time.

The second type of short sale is referred to as Payment in Full without Pursuit of Deficiency Judgment. This means the bank accepts the sale price as payment in full toward the mortgage note. Once the home sells, the borrower turns the keys over to the new owner and walks away from the property without owing additional funds. Obviously, this is the preferred short sale strategy.

Most banks require borrowers to have a buyer lined up before granting short sale approval. A few lenders allow borrowers to list their home through a realtor and provide a grace period of two to three months to locate a buyer.

Locating a realtor to list short sale real estate can be challenging. Short sales require a considerable amount of work. Oftentimes, realtors must accept less commission or forego their commission altogether in order to close the deal. Few realtors want to work harder for less money.

One under-utilized source for locating buyers is real estate investors. Many investors are attracted to short sale real estate because properties are sold below market value and can provide a good return on their investment.

An extra bonus of short selling to investors is many purchase real estate with cash. As everyone knows, cash is king. In this case, cash can expedite the transaction and help borrowers qualify for short sale approval.

Many elements are involved with short sale homes. The best defense for borrowers is to become knowledgeable about the process. If necessary, consult with a short sale specialist or real estate attorney for advice and guidance.