The Process of Selling a Home as a Short Sell: What You Need to Know Now
Once an obscure option for homeowners in financial trouble concerning home equity and value, real estate short sales are becoming more commonplace nationwide. Short sales allow owners to sell their home at a price below the remaining mortgage balance.
Proceeds from the short sale are paid to the homes lenders. And since it's a short sale (the home will sell for less than what is owed on it) there will likely be an unpaid mortgage balance after the sale, (more on that later.) All mortgage companies and lenders involved must agree beforehand to home short sales. Here is how to qualify for a short sale, the pros and cons of doing so and what to expect during the process.
Who Can Qualify for a Home Short Sale?
Selling a home as a short sale in lieu of foreclosure requires homeowners to meet one or more of the following situations.
- Refinancing or modifying the mortgage is not possible.
- Owners are behind on mortgage payments.
- Owners are facing long term financial hardships.
- The home's mortgage balance is more than its value—known as an ‘underwater mortgage.'
- The home has failed to sell for a price that will cover the mortgage balance entirely.
Those who qualify for a short sale may be able to enjoy some of the benefits of successfully selling their home. However there are also drawbacks that some sellers may face with a real estate short sale.
Advantages of a Real Estate Short Sale
Compared to the potential repercussions of the foreclosure or bankruptcy process, there are some upsides of a short sale. A top benefit is that sellers may actually be able to get out of the mortgage liability without having to pay a deficiency judgment. Essentially, deficiency judgments require sellers to repay the entire loan balance that remains after the sale of the home. However, many states prohibit these judgments, and some lenders might agree to waive the deficiency. While short sales do effect a homeowners credit rating, it may not suffer quite as much as it would due to a foreclosure or bankruptcy.
Another advantage of short sales is that many real estate agents know the short sale process well. They can typically guide most homeowners through the process. It is not recommended however, that home sellers try to sell their homes themselves through a FSBO (for sale by owner) if considering a short sale.
Disadvantages of Home Short Sales
One immediate concern many have with a short sale is knowing that they'll likely have to leave their home once the short sale is complete. And because there are no ‘profits' or money for the homeowners after a short sale, money could be tight trying to secure a new home. This is why some homeowners may opt to use the time-consuming foreclosure process to save money. Again, there may or may not be a deficiency judgment, but sellers will be made aware of this prior to the sale and lenders cannot instate one post-sale. Furthermore, the Internal Revenue Service can also consider any ‘forgiven' deficiency debt as income, hence making it taxable. Read more about the Mortgage Forgiveness Debt Relief Act of 2007 to learn more about these regulations.
The Home Short Sale Process
Each lender on the mortgage will have their own set of requirements and demands that must be followed to a tee to ensure a short sale is approved and can be successfully completed. If more than one lender is involved for the same home, these procedures will need to be completed for each one. Here is a brief overview of the short sale process.
Contact Lenders: All lenders need to be contacted, and the individual in charge of the short sale department are the ones who can get the ball rolling. These negotiators will be the primary contacts for the duration of the sale.
Letter of Authorization: This letter is submitted to the lender and gives their negotiators and staff permission to discuss the sell with authorized parties such as any involved real estate agents, title companies, inspectors and attorneys.
Preliminary Net Worth Sheet: This document lists unpaid loan balances, late fees, outstanding payments due, real estate commissions and an expected sales prices of the home in question.
Hardship Letter: This is where owners really need to lay down their financial troubles honestly and succinctly. After all, this is where one pleads their case and explains how they came into their existing financial bind.
Evidence of Assets and Income: In addition to 30 days of paycheck stubs or evidence, lenders also require applicants to disclose any account balances concerning:
- Money Market Accounts
- Negotiable Instruments
- Stock or Bonds
- Real Estate
- Other Assets of Tangible Value
Bank Statement Copies: Typically two to three months of back statements are required for any and all accounts listed above. Explain any unusually large transactions on the document to lenders to prevent delays.
Comparative Market Analysis: Many homes fall underwater due to fluctuations in market value. A real estate agent can assist in creating an analysis that evaluates current market conditions and comparable home values to help evidence reasoning for approving a short sale request.
Purchase Agreement/Listing Agreements: Once the short sale is approved and a buyer has committed to the deal and met the requirements on their end, the lender will need copies of the offer and any listing agreements made.
While the home short sale process may seem daunting, short sales are a viable alternative and may often the best option for many home sellers. The best guide in these situations is to consult with a reputable Culver City real estate professional who knows the ins and outs of home short sales.