Many people talk about short sales as a possible route for borrowers to get out from under the crushing mortgage debt that they incurred (especially when banks were pushing mortgages that many people truly could not afford). However, few people understand the actual impact of a short sale and what has to happen for this option to become viable. Here are some of the questions that we hear regularly from clients considering a short sale as an option to address their housing debt:
What is a short sale?
There are many misconceptions about what actually qualifies as a short sale. A short sale simply is a sale where the total proceeds of the sale fall short of being able to satisfy the total outstanding balance on the mortgage(s). This even may occur when the actual sale price is sufficient to pay off the mortgage, but the closing costs, including realtor fees, bring the total proceeds down below the level necessary to pay-off the loan. In this situation, the lender may approve the short sale because there is a relatively small loss compared to what would be incurred during a foreclosure action.
How does a short sale differ from a regular sale?
Although there are many similarities between a short sale and a regular sale, there are critical differences. During a regular sale, a buyer will make an offer that is accepted by the seller and they go into contract and proceed to closing. With a short sale, the seller must disclose this situation. When the potential buyer makes an offer, it is communicated to the bank and the parties must then wait for the bank’s approval before moving forward. This additional step and the involvement of a third-party, namely the lender, makes the process considerably longer.
One other thing that may be different for a short sale is that the seller is obligated to use a real estate agent under the terms of most short sale agreements with the lender. Therefore, offering a property for sale by owner usually is prohibited. While this does mean that there will be a realtor fee, the lender often wants the assurance of a real estate professional that the property is being marketed properly. An experienced real estate law firm can coordinate between the various parties for a smooth sale process.
Is a homeowner automatically eligible for a short sale?
No. In order to qualify for a short sale, the homeowner must be delinquent in making loan payment or is about to become delinquent based on financial circumstances that make it impossible to keep up with the payments going forward. It is very rare for a short sale to be approved by the bank where there is no delinquency because there is no evidence that the homeowner could not keep up with mortgage payments. Typically, a homeowner will have to present proof of economic hardship that triggered the inability to keep up with payments. This hardship may be the loss of a job, a medical condition that has resulted in substantial bills and an inability to work at the same level as before the medical condition, a divorce, or a death in the family.
In addition to demonstrating a reason for the inability to stay current on payments under the mortgage terms, a person also must not have other assets that could be used to stay current on the mortgage. Typically, retirement accounts will not be included in the calculation unless they are sizeable enough that it makes sense to draw down on them to satisfy the outstanding debt.
Is every lender willing to approve a short sale?
The short answer is that there is no guarantee that a bank will approve the sale, but if the circumstances justify it, it is normally more cost-effective to go through a short sale rather than a foreclosure. Although the lender expects a loss on a short sale, a foreclosure, with all the legal and other fees and the expectation of a depressed sale price, often involves much higher losses.
A skilled real estate attorney can ensure that the homeowner gathers all the necessary financial documents and other evidence in order to demonstrate to the lender that the approval of a short sale is the best option based on the unique facts of the situation. There are other times when an attorney can expedite the process to ensure that the lender does not deny the sale because of lengthy delays.
At what point should a homeowner consider a short sale?
It is critical to think about a short sale as quickly as possible once a homeowner has realized that the monthly payments no longer are sustainable. One thing that many homeowners do wrong is try to keep current on a mortgage at the expense of all other bills, leaving them in the midst of financial devastation. By exploring options right away, it may be possible to negotiate a loan modification. If this is not feasible, then a short sale can proceed before the homeowner has gone into default on many bills.
What makes a short sale better than a foreclosure?
A short sale has less of an impact on a homeowner’s credit score, so it may be possible to qualify for another mortgage within a shorter period of time. This is important if the homeowner is suffering from a short term financial setback or simply took on more of a mortgage than he really could afford at the urging of his realtor or mortgage brokers. Although a foreclosure does provide a time period in which the homeowner can become current during the course of the legal proceedings, if this is not a realistic possibility, then a short sale may be a better option. In addition, there is the possibility of a deficiency judgment after a foreclosure sale. During the negotiations with the lender during the course of getting a short sale approval, it is important to get an agreement that the deficiency will be forgiven after the short sale.
How will the short sale impact the homeowner’s credit score?
The reality is that a short sale will have a significant negative impact on the credit score and may lower a FICO credit score by 100 to 200 points, depending on the individual’s credit score, according to an article by Liz Weston of MSN Money. However, a foreclosure has the potential to lower a FICO score by significantly more.
How does a homeowner get started with a short sale?
The first thing that a person should do is to contact an experienced short sale attorney. Not only can the right attorney assist in going through the short sale process, but they can sit down with the homeowner and analyze the situation to determine if there are other options, including negotiating a loan modification that brings the monthly payments within the means of the homeowner. In addition, a homeowner may fear foreclosure if he does not go forward with a short sale and not understand that he has viable foreclosure defenses that can be asserted if the lender were to move forward with that legal remedy.
The Crisp Law Firm, PLLC Fights for the Rights of Homeowners
In the current real estate market, there are many people who face the possibility of not being able to make monthly mortgage payments. The experienced and dedicated New Hampshire Short Sale and Real Estate Attorneys at The Crisp Law Firm, PLLC are ready to explain all of your options and help you get the best possible outcome. To schedule an initial consultation with one of our seasoned Concord Real Estate Lawyers, call us at (603) 225-5252 today.