A SHORT SALE PRIMER
I. WHAT IS A SHORT SALE?
A Short Sale is a sale transaction where the lender holding the mortgage on a property agrees to release its mortgage or deed of trust for less than the full amount they’re owed.
II. WHY WOULD A LENDER EVER AGREE TO A SHORT SALE?
a. Lenders Don’t Like To Foreclose.
If a borrower is in default on their mortgage payments, the lender has few options. Other than having their collection department call and harass the borrowers, foreclosure is the final solution. Even if a lender holds an 80% Loan To Value (LTV) loan, foreclosure is not always a desirable solution.
1. Foreclosures Cost Money:
A lender has to pay attorney fees, title insurance, inspection fees, public trustee expenses and other expenses.
2. Foreclosures Take A Long Time:
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3. Condition Of The Property:
After a lender takes title and possession under a foreclosure and prior homeowners leave, the property may not be in a condition to get the maximum value sale price.
4. Costs to Market and Sell the Property:
The lender will have to pay marketing costs, sales commissions and possible repairs, utilities, HOA dues and other costs to make the property ready for sale.
b. SHORT SALE PROVIDES THE LENDER WITH CASH RIGHT AWAY
A short sale provides the lender with immediate cash eliminating the holding period in which market values may change. It eliminates foreclosure costs and uncertainty as to the condition and value of the collateral at the end of the foreclosure process. Every day that goes by without payment is lost interest to the mortgage company.
III. WHAT IS THE PROCESS OF DOING A SHORT SALE?
Although all lenders have varying requirements and may require a wide array of documentation, the following steps will give you a pretty good idea of what to expect:
a. Call The Lender
Generally, you just call the lender’s toll free number, tell them the homeowner is trying to do a short sale and you need to speak with the department that handles the negotiation of Short Sales. With many lenders it’s the ‘Work Out Department” or the “Loss Mitigation Department.” When you reach the appropriate department, they will explain what documentation or forms need to be submitted in order for the lender to consider a short sale.
b. Submit Letter Of Authorization
Lenders typically will not disclose any of the borrowers information without written authorization from the borrowers. Generally all that’s required is a letter from the borrower authorizing the lender to speak with the real estate broker, buyer, title company transaction coordinator, or whoever is going to be in contact with the lender regarding the short sale. The letter should include the following:
· Property Address
· Loan Reference Number
· Borrowers Name(s)
· Names of parties who can discuss the loan with the lender
· Borrowers signature(s)
c. Preliminary Settlement Statement
This is an estimated closing statement showing the sales price you expect to receive and all costs of sale including real estate commissions, title company fees, government fees, taxes and any closing costs paid by seller on behalf of the buyer. This shows the lender how much money is available from closing to pay off the loan. The lender will often ask for a reduction of some closing costs such as realtor commissions and seller concessions to the buyer, and an increase in the sales price. Your realtor should be able to provide you with the estimated closing statement.
d. Hardship Letter
This is a letter from the borrower explaining their individual circumstances as to why they are unable to continue making payments or haven’t been able to make payments: changes in income or expenses, necessity of selling the property due to relocation, loss of job, medical and hospital expenses and drop in the value of the property. Lenders will look more favorably on understandable changes in life circumstances than dishonesty or criminal behavior.
e. Proof Of Income and Assets – Bank Statements
Most lenders will require last 2 years income tax returns along with W-2s as proof of current income. Lenders also want to know of all assets the borrower has available to pay the loan including bank accounts, money market accounts, stocks, bonds, negotiable instruments, savings accounts, cash and any other real estate. Keep in mind that while a lender may approve a short sale, it may still go after the borrower for the difference between the net sale price and the loan balance.
f. Comparative Market Analysis (CMA) or Broker Price Opinion (BPO)
Some lenders require a CMA, sometimes called a BPO, prepared by a licensed real estate agent to be submitted. Other lenders will order their own automated appraisals or an actual physical appraisal to determine fair market value of the property. Lenders are certainly aware that values have declined in certain markets, which contributes to the need for short sales. The CMA should include:
· Homes Currently On The Market
· Pending Sales
· Sold in the Past 6 Months
g. Listing Agreement & Purchase Agreement
When you reach an agreement to sell with a prospective purchaser, the lender will want a copy of the offer along with a copy of your listing agreement. Be prepared for the lender to renegotiate commissions and refuse to allow payment of certain items, such as home protection plans or many inspection items. Most short sales have a stipulation to the buyer that the home will be sold “As-Is,” though lenders will sometimes agree to fix items which make the home unsafe or unmarketable.
If all goes well, the lender will approve your short sale. As part of the negotiation you might ask that the lender not report adverse credit to the credit reporting agencies, but the lender is under no obligation to accommodate this request.
IV. How Does A Short Sale Affect The Borrower?
Even though a lender decides to release its $200,000 Deed Of Trust for $150,000, that does not mean the borrower is now off the hook. The borrower is still legally obligated by the promissory note for any discounted amounts. Of course, forgiveness of these amounts can be negotiated as part of the deal but it certainly is not automatic. Borrowers should ask the lender to sign documents releasing the borrower from the obligation on the deficiency. Even if the lender refuses to sign, they may decide to not pursue the deficiency. However, though some believe there is a 6 year Statute Of Limitations on this debt, it appears that this may not be the case and the lender may attempt to collect up to the loan's maturity date, which could be more than 6 years. NOTE: You may want to consult an attorney for a legal opinion on this.
Until recently, if the lender did not pursue the deficiency they could send the borrower a 1099 for the deficiency and report the amount to the IRS. Then the deficiency amount was considered income and the borrower liable to pay income taxes on it. In 2007 Congress passed the Mortgage Debt Forgiveness Act, which was signed by President Bush to eliminate income tax on debt forgiveness income for homeowners who have had a loan forgiven or foreclosed due to not being able to make their mortgage payments.
If you believe you are a candidate for a Short Sale, call Bob to discuss your situation.
