SHORT SALE

One viable alternative to foreclosure is a short sale. In a market where prices are declining, or when a homeowner finds that his or her loan amount exceeds the value of the property, a short sale enables the property to be sold at market value with the lender taking a loss for the difference between the sales price and the amount left on the homeowner’s loan. Short sales do require the lender’s cooperation since the lender will be taking a loss on the homeowner’s mortgage.  Despite the loss, lenders agree to short sales because short sales are often much less expensive for them than foreclosures. These days, mortgage lenders are more willing to agree to short sales. This can be good news for borrowers who owe more than their homes are worth, also known as being underwater or upside-down in your mortgage.

The Obama Affordability Plan now offers mortgage lenders incentives up to $1,000 if they allow borrowers to sell their homes at a loss. Lenders can also get the $1,000 for accepting a deed-in-lieu, which releases the mortgagor from all future obligations on the loan in exchange for the deed. Second mortgage holders will also get $1,000 to release the borrower from obligations on these loans.

A short sale can stop the foreclosure process, but you don’t have to wait until foreclosure proceedings have begun to initiate a short sale. Short sales can take place at any time, as long as the lender authorizes the transaction.

The reason that short sales are a viable alternative to foreclosure or bankruptcy is because they have potentially fewer consequences to your credit.  Foreclosures can be very damaging to your credit rating.  If you’ve made the decision that you’re willing to move out of your home, a short sale can offer the relief of getting out of an unaffordable mortgage without having to go through a foreclosure. Remember, foreclosure is always the last resort option for homeowners that are unable to afford their mortgage payments.

How to Initiate a Short Sale

In the current economic climate, short sales are not uncommon. In fact, lenders have special “loss mitigation” departments set up to process short sales.

The first step is to contact your lender and submit a letter of authorization. This allows a lender to communicate and share your information. Some short sellers often work with a real estate agent or attorney. If you work with either an agent or attorney your letter of authorization should grant your lender permission to talk to those parties. Include their names and contact information, along with your basic information, such as your name, address and loan number.

You’ll need to prepare other documentation as well. These documents can include a hardship letter that tells how you got into the situation of needing to sell your home at a loss to the lender.  Your hardship letter should be honest and accurate. You’ll also need to document your income and assets, such as savings accounts, cash or other valuable items. Prepare to provide copies of bank statements, pay stubs and tax records.

If the lender agrees to a short sale, it’s up to you to come up with a buyer. Many short sellers enlist the help of a real estate agent or attorney to find a buyer. When you get an offer the lender will need a copy of it. The lender may argue over fees and commissions before approving your short sale.

Roadblocks to Short Sale

You and your lender may not be the only parties involved in a short sale and these other parties may offer roadblocks to completing your short sale.

If you have a second mortgage (sometimes known as a home equity line of credit, home equity loan or HELOC) or if your property carries other liens, like those from a homeowner’s association, those lien holders will have to approve the short sale. Mechanic’s lien holders and tax lien holders often object to short sales. If the borrower carried mortgage insurance, the matter can be further complicated.

Short sales are often difficult transactions, but they’re certainly worth a try if you want to avoid a foreclosure.  Because of their complexity and the number of stakeholders involved, short sales often fail, or don’t close in time to stop a foreclosure.

Short Sale Benefits and Drawbacks

The benefit of a short sale are that once the transaction is complete, your loan is considered closed. You will not owe any more money. Since foreclosures are considered a last-resort option, a short sale will probably not have as negative an impact on your credit rating. Although short sales can stay on your credit report for seven years, people who have completed a short sale have been known to obtain another mortgage in as little as one to three years, depending on other variables. By contrast, foreclosure could seriously impede your chances of obtaining another mortgage for up to seven years.

You may ask your lender not to report the short sale to the credit monitoring agencies, but they’re under no obligation to honor that request.

A short sale is only one of your options. You may also be able to refinance or do a short-fi.  There are also state assistance plans to help homeowners who are in danger of foreclosure.