What is a short sale? Is a short
sale for you?
Question: We
are in financial trouble. Our house will not sell for enough money to
even pay off the mortgage, let alone a real estate commission. Our real
estate agent suggested that we do a "short sale".
What exactly is this?
Answer: This is a method of disposing of your home without having the
lender foreclose on you.
You are unfortunately what lender's call "upside down."
Let's take this example: you bought the house last year for $500,000,
and took advantage of the mortgage broker's sales pitch and
obtained a 100 percent loan. Now, the house will probably only sell for
$475,000, and you lost your job and cannot afford to continue with the
monthly mortgage payments.
A short sale is an arrangement with your lender whereby they will allow
you to sell the property for less than the amount of the current
mortgage.
Why would a lender permit this? First, you should understand that not
all lenders will allow a short sale. Their decision depends on a number
of factors: where is your house? How much loss will the lender suffer?
What is the possibility that a speculator/investor will buy at a
foreclosure sale?
Lenders have their own requirements, so I can only provide general
information; you will have to consult your specific lender to determine
what they need in order to move forward with the short sale process.
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We have professional short sale
negotiators that will consult with you and find out if a short
sale is right for you and if you will qualify. This is a
free service...there is no obligation!
Call Sandra 813-690-4125. |
Do not
contact the lender until you fully understand the potential risks
involved. Under Federal law, when a debt is forgiven, it can be treated
as ordinary income on which tax must be paid. Thus, if your lender
allows you to sell the property to $475, less a 2 percent commission,
you will pay off your $500,000 mortgage and have a deficit of almost
$35,000. According to many tax professionals, you will have to pay
income tax on this amount even though you did not actually receive the
money.
Furthermore, you want to make absolutely sure that, should the
lender approve the short sale, you will not be obligated to make up this
difference, which is called a deficiency. Unfortunately, most lenders
will not put their agreement in writing, so your legal advisors will
have to satisfy themselves -- and you -- on this matter.
In fact, many lenders have been known to use this "forgiveness of debt"
issue as a way of dissuading their borrowers from pursuing the short
sale approach.
After you are satisfied that you understand the concept and are prepared
to move forward, we recommend that you use one of our highly successful
legal advisors that specialize in short sales. You may also
elect to contact your lender yourself. If so, go up the corporate
ladder as high as you can and talk with the manager of the short sale
department. Typically, the lender has a "loss remediation" department
that handles these matters.
If you have authorized your attorney or your real estate agent to act on
your behalf, the lender will need a letter of authorization from you.
The Privacy Laws enacted after 9-11 prohibit lenders from discussing
personal and financial information with a stranger without such written
authorization. This letter will include your name, property address and
loan number.
You (or your legal advisor) should then prepare a comprehensive letter
explaining why you are requesting the short sale. Emphasize -- but not
as a "sob story" -- your hardship. It would also help if you include a
market analysis (we will provide this information for you) which will show what houses in your area are currently
selling for.
And finally, spell out your request in detail: what price
are you asking the lender to approve, what percent commission will the
real estate agent be allowed to accept, and what closing costs will be
associated with the settlement. Keep in mind that in many jurisdictions,
there is a recordation and transfer tax which is typically split between
buyer and seller.
Your proposal should be as specific as possible. You don't want to learn
at settlement that you still have to come up with a lot of cash, because
your lender did not authorize certain out-of-pocket expenses.
You should also request from your lender the amount of your outstanding
balance. The lender has a legal obligation to provide this to you on
request, and the burden is on the lender to provide an accurate
accounting. Review this carefully to make sure that there are no charges
which have been erroneously added. If you have missed some payments, you
will be assessed late fees. When you present your proposal to the
lender, try to get these charges deleted from the amount of the
outstanding mortgage balance.
Your proposal should also include your financial situation. Keep in mind
that many loans in the past few years were what are called "no-doc" --
in other words, the lender made the decision to fund your loan based on
the value of the property and not on your financial status. In your
case, since you lost your job, include proof with your letter.
The more documentation you can provide the lender, the faster the
decision will be. However, currently lenders are swamped with these
requests, since you are not the only one facing a possible foreclosure.
Thus, the earlier you can start the process, the better chance you have
of getting it approved.
But the lender's approval to proceed with a short sale does not end the
process. When we find a prospective
purchaser, the contract must state that it is contingent on lender's
approval. The contract is then sent to the lender, and it would help
if you would include an accounting of all expenses which you will have
to pay at settlement, and a final number that the lender will receive
when settlement takes place.
In fact, if you can have a HUD-1 settlement statement prepared, this
would be helpful and would expedite the process. Your lender will then
review the documentation, and may reject certain expenses. For example,
if the contract provides that you will give your buyer XX dollars for
"closing costs" -- or that you will pay some items which are
traditionally the buyer's obligation (such as title search and survey)
-- the lender may not allow such payments.
You want to go into the settlement knowing exactly all of the terms and
conditions on which your lender will accept the short sale, including
whether or not you will have to come up with money at the settlement
table.
You are in financial trouble. If you have already missed some payments,
your lender may already have reported this information to the credit
reporting companies. You should try to convince the lender not to report
any more delinquencies, but unfortunately, that's in your lender's sole
discretion.
The short sale process works, but is complicated, time-consuming and
uncertain. If you can start now -- before you are actually in default --
you will be ahead of the game.
Contact us for more information. 813-690-4125
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