Maybe you’ve heard that a short sale was a fast way for you to walk away from the responsibilities of your mortgage because of a financial, social, or other hardship.
What is a short sale?
A short sale is the process of getting the bank or lender to take less than what you owe on the mortgage and selling the home for less. Ready to sell and get this over with?
Not so fast you’ll need to answer some questions first:
- Has the home’s market value dropped?
Lenders want to see proof that the home is now worth less than the unpaid balanced due.
- Is the mortgage in or close to default status?
In the past lenders wouldn’t consider a short sale if the payments were current but things change lenders now acknowledge that other contributing factors may indicate the sellers ability to pay.
- Can you prove that a hardship exists?
You have to provide a letter explaining that a hardship is happening and that you cannot meet the financial obligations of paying the home.
- Are you void of assets?
If you have savings, own other properties, have stock or an IRA, the lenders might think that because you have assets you aren’t a short sale candidate.
If you can prove to the lenders that you really can’t pay them, they might let you list the property as a short sale. Now that doesn’t mean that you’re off the hook because now the lender is the on accepting the offers and will reject any offers that don’t meet their requirements.
Unlike a conventional sale with a short sale a buyer is less comfortable because the lender is now the decision maker and they typically have to wait weeks or months for the lender to give their final approval.
Short sales oftentimes have deficiency judgments and tax implications, all of which make the sale more stressful.
Buyers’ agents might steer their clients toward a more favorable conventional sales which are less likely to be affected by last minute title, judgment, and lien issues.
Locking in an interest rate on a conventional home is much easier. In a short sales situation, the actual close date is so elusive that rates are subject to fluctuating market conditions.
Proof of hardship include:
Job loss / unexpected unemployment
Sudden illness or medical emergency
Death in the family
Loss of second income
Excessive debt obligations
Inability to pay an adjustable rate mortgage
Unanticipated major expenses
Realtors might be discouraged to take you on because they won’t make their commission for months or sometimes they won’t many any. Sometimes the seller will have to enlist the help of an attorney to help and navigate the waters of a short sale, which means for money out of pocket for the seller and some sellers have more than one mortgage meaning having lenders agree to the new lower price is more difficult.
The next important question is what type of loan does the seller have? If the loan is much more restrictive and less flexible the lender will be less receptive to taking a loss.
Apart from attorney’s, knowledgeable realtors and a strong will, a seller even after a short sale will be liable for a few things. If the lender only forgave a portion of the loan the seller is still on the hook for the remainder and may be asked to sign a promissory note to pay back the difference.
The IRS will consider the forgiven loan as new income and you’ll have to pay taxes on it.
Considering selling your home to avoid foreclosure or your home is selling as a short sale give us a call and get a fair offer, 773-340-0736 fill out the consult form.