Lenders will often approve a short sale if the homeowners are behind on their payments or facing foreclosure. In tough economic times the term ‘short sale’ is thrown around and often people do not know the true meaning or impending consequences of offering their home up for a short sale until it is too late.
What is a Short Sale?
A short sale is considered to occur when the mortgage holder(s) accept less than the full amount owed on the property when the home is sold. They must be approved by lenders and not all lenders will agree to a lesser payoff amount. A short sale can transpire with a primary or secondary mortgage or both.
For example, a homeowner, behind on their payments and facing foreclosure owes $100,000 on the mortgage and after several months on the market they receive an offer well below their asking price at $85,000. This means the current owners would have to come up with $15,000 plus closing costs to make the sale. In this situation the mortgage company may approve a short sale and accept $85,000 for their payoff to avoid the costs of foreclosure.
Qualifications for a Short Sale
One of the many misconceptions of the process is that anyone can advertise their home as a short sale and the lender has to accept the terms. This is far from the case. In actuality the homeowner and the home securing the mortgage must qualify and be approved.
Lenders will be looking for the following criteria to be met by both the home and homeowners before considering a short sale:
- A financial hardship must exist and be proven. Loss of a job, loss of income, relocation, illness of the borrower(s), divorce, death or declining local market property values are types of hardships most lending institutions will be looking for.
- Borrowers must be experiencing a monthly shortfall. Borrowers may be asked to provide a monthly profit and loss statement or complete a financial worksheet to prove that there is not enough income to pay all the household bills.
- Homeowners requesting to be considered for a short sale must not have the means to repay the deficit. Lenders may request copies of tax returns or other financial statements to determine whether or not a borrower has other means besides income to pay off the short fall.
Consequences of a Short Sale
Another common misconception of the process is that once the distressed property sells, everything is will go back to normal. This simply is not the case and for many borrowers the consequences of selling their home short is quite a shock.
In some areas where prices have drastically fallen some homes cannot even sell when being offered as a short sale. Other properties are is such bad shape the offers the bank receives are far below their bottom line price. In these instances offers are not accepted by the lender and a sale never takes place.
When a property is approved, an offer is made by a new buyer and accepted by the existing mortgage holder and closes, the lender may issue a 1099 to the seller for the shorted amount. Under the Mortgage Forgiveness Debt Relief Act of 2007 some debtors who receive forgiveness of a debt may be obligated to pay taxes on the amount forgiven.
Short sales also have a negative effect the seller’s credit report. They are deemed by most creditors as a pre-foreclosure. Though not as bad as a foreclosure, having sold a previously owned property via the short sale process will dramatically reduce one's credit rating.
For those considering the short sale process as a means to remedy their indebtedness or inability to sell their home, it is wise to consult with an attorney prior beginning the process. Hiring a real estate professional who has experience with short sales is certainly a must in this situation as well.
Katrina Rief-Derrico - Katrina has over 19 years experience in the housing industry and is forever the student. Holistic health and wellness is her passion.
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