What Is a Short Sale?
Sometimes you’ll see homes for sale with a little tab on top of the “For Sale” sign that reads “Short Sale.” What exactly is a short sale?
When a homeowner arranges a short sale, it means they have made an agreement with their mortgage lender that means the lender is accepting a smaller amount than the amount due for a transfer of the home. Short sales (think of them as “discounted payoffs”) only make sense for the mortgage broker if the value of a foreclosure is lower than the amount agreed upon for the short sale.
Short Sale Warnings
There are a few things to consider before buying a short sale property. Since a short sale is a special kind of purchase agreement, you should be careful about rushing in without knowing the details.
Your first step is to get legal advice about the short sale in question from a qualified real estate lawyer. These people deal in short sales all the time (especially these days, as the real estate market forces more short sales) and can help you identify any potential problems.
You should also talk to an accountant to figure out if there are any tax problems involved in buying a short sale property. Why would there be a tax issue? Under some circumstances, the I.R.S. considers any type of debt forgiveness as personal income. To make matters worse, not every state gives buyers protections against lenders who want to pursue their lost income in the courts. That means you could buy a short sale property and end up being sued for the difference. Only a qualified lawyer and CPA can help you figure out if your short sale property qualifies for what is known as a “deficiency judgment” or claim against you by the lender who made the short sale.
Short Sale Requirements
Every lender and every purchase situation is different, but in general these are the requirements when you want to set up a short sale with a property you own.
Talk to the Lender
The mortgage lender you’ll be dealing with won’t want to give you the information you’re looking for–they’ll want to pass you off to a low-level employee. Instead of messing around with new hires, ask directly for the person responsible for handling short sales. That means you want to talk to the supervisor who can actually make decisions on short sales.
Submit Letter of Authorization
Financial rules are funny, and most lenders don’t want to proceed any further with a short sale until you send them a written letter of authorization to share your personal financial information with the other people involved in the loan. Your letter of authorization should include the following details:
- Property Address
- Loan Reference Number
- Your Name
- The Date
- Your Real Estate Agent’s Name and Contact Information
You knew it was coming–it is time to really pile it on. Write a hardship letter to the lender, the more sad details you include the better you are. A hardship letter is a “statement of facts” about your lending situation, including what happened to cause you to be in a financial bind and need a short sale. The hardship letter is a plea to the lender to accept a short sale. Acceptable reasons for short sales are generally pretty tragic–losing a job, having serious health problems, or anything else dramatic.
Proof of Income and Assets
You’ll need some way of proving to your lender that you really can’t handle this mortgage any more. Write an honest appraisal of your income and assets, including all savings accounts, money market accounts, stocks and bonds, job income, cash savings, or anything at all of real value. The idea here is to prove to the lender that you simply can’t meet your mortgage payment.
Copies of Bank Statements
Naturally you’ll need to show the lender your bank statements. They’ll be looking for red flags, like large unexplained deposits, frequent cash withdrawals, a high number of checks, or anything else fishy. Your lender is looking for a snapshot of your financial history, and you’ll want to help them see as much as they want.
Comparative Market Analysis
Also known as a “comp”, this sheet details the rise and fill of property values in your neighborhood. If you are unable to pay your mortgage due to information found on the comp, your lender may be more likely to work with you. Ask your real estate agent for a copy of the CMA for your neighborhood. It will show houses in the area that are active on the market right now, pending a sale, and sold in the past six months.
A short sale is no one’s idea of a good time, and is often the last attempt before declaring bankruptcy that a person makes to save their financial future. If you handle it correctly, a short sale is an easy way to get out of a troublesome mortgage, provided you fit all the various financial requirements.
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