If you're considering selling your home and you expect that the total amount you owe on your mortgage will be greater than the selling price of your home, you may be facing a short sale.
A short sale is one where the net proceeds from the sale are less than the total of the mortgage obligation and closing costs, and there are no other sources of funds to cover the deficiency. A short sale is different from a foreclosure, which is when a lender takes the title of a home through a lengthy legal process and then sells it.
1. Consider Loan Modification First. If you are thinking of selling your home because of financial difficulties and you anticipate a short sale, first contact your lender to see if there are programs available that will help you stay in your home. Your lender may agree to a modification such as: Refinancing your loan at a lower interest rate; Providing a different payment plan to help you catch up or Providing a forebearance period if your situation is temporary. When a loan modification still isn't enough to relieve your financial stress, a short sale could be your best option. The following are signals that a short sale may be a good choice for you:
- Your property is worth less than the total mortgage you owe on it.
- You have a financial hardship, such as a job loss or medical bills making mortgage payments difficult or impossible.
- You have contacted your lender and they are willing to entertain a short sale.
2. Hire A Qualified Team. The first step in the short sale process is hiring a qualified real estate professional and a real estate attorney. Finding an agent who has worked through short sales in the past will be a huge benefit to you. You will want to work with someone who demonstrates a thorough working knowledge of the process and will not pressure you to take actions that are not in your best interest. A qualified real estate professional will:
- Provide you with a comparative market analysis (CMA) or broker price option (BPO).
- Help you set an appropriate listing price for your home, market and sell your home.
- Put special language in the MLS that indicates your home is a short sale and that lender approval is needed. (All MLS's permit, and some now require, that the short-sale status be disclosed to potential buyers).
- Ease the process of working with your lenders and buyers.
- Negotiate the contract with the buyers or buyers' agent.
- Help you put together the short-sale package to send to your lender (or lenders if you have more than one mortgage) for approval. You can't sell your home without your lender and any other lien holders agreeing to the sale and releasing the lien so that buyers will have a clear title.
3. Begin Gathering Documentation Before Any Offers Come In. Your lender will give you a list of documents it requires to consider a short sale. The short sale package that accompanies any offer typically must include:
- A hardship letter detailing your financial situation and why you need a short sale
- A copy of the Purchase and Sale Contract and Listing Agreement
- Proof of your income and assets
- Copies of your federal income tax returns for the past two years
4. Prepare Buyers For a Lengthy Waiting Period. Even if you're well organized and have all the documents in place, be prepared for a long process. Waiting for your lender's review of the short sale package can take several weeks to months. Some experts say:
- If you have only one mortgage, the review can take up to two months.
- With a first and second mortgage with the same lender, the review can take up to three months.
- With two or more mortgages with different lenders, expect up to 4 months of waiting.
When the bank does respond, it can approve the short sale, make a counteroffer, or deny the short sale. The last two actions can lengthen the process or put you back to square one. (Your real estate attorney and agent, with your authorization, can work your lender's loss mitigation department on your behalf to prepare the proper documentation and speed the process along).
5. Don't Expect a Short Sale to Solve Your Financial Problems. Selling your home through a short sale may ease your financial stress, but it may not solve all of your woes. Here are some things to keep in mind:
- You may be asked by your lender to sign a promissory note agreeing to pay back the amount of your loan not paid off by the short sale. If your financial hardship is permanent and you cannot repay the balance, speak with your real estate attorney to discuss your options.
- Any amount of your mortgage that is forgiven by your lender is typically considered income, and you may have to pay taxes on that amount.
- Having a portion of your debt forgiven may have an adverse effect on your credit score. However, a short sale will impact your credit score less than foreclosure and bankruptcy.
Further Questions? Please bring any questions and concerns to a Signature Agent. We are always willing to discuss your individual situation and help you decide which avenue is best for you and your home.