Ryan’s Mortgage Blog:
A “Short Sale” is when a lender accepts to discount the balance due on a loan due to hardship. This is usually better than a foreclosure for all parties involved. For example…Martha lost her job and her new job pays half as much as her old one did. She can no longer make her mortgage payments and the lender can’t negotiate her payment any lower than it is. She owes $200,000 on the house but the house is valued at $170,000. The lender agrees to accept $170,000 as full payment instead of the $200,000 owed. As a note, she needs to be delinquent on a payment before a lender will consider accepting a short sale offer.
The borrower gets to avoid a foreclosure on their record and can lower the debt enough to sell the property without having to add cash. The lender can save money by avoiding foreclosure costs associated with taking over the home and selling it. The foreclosure process also takes time the lender doesn’t have, so it may be in their best interest to accept the short sale. The lender ultimately weighs the proposed discounted amount versus how much the foreclosure process would cost them and what they think they could get for the house. They also factor in the market conditions and what is going on in that specific neighborhood.
It sounds all good and dandy for both sides, but wait…keep in mind the lender has all the power in the short sale process. You can’t just go to them and say, “sorry I can’t pay my loan anymore, will you accept this much for it?” That is not going to work. A Hardship is required before a lender will approve of a short sale. A hardship would be considered a job loss, divorce, excess debt, illness, death, or a job transfer. Many documents need to be provided to show proof of your hardship.
A major reason why short sales fail is the length of time it takes to get the lender’s approval. You may put your house up for sale thinking the lender will accept the short sale because someone from their company told you they would…so when the buyer comes along, the bank takes 4 weeks to get back to you and the buyer was long gone. You are at the mercy of the lender and their time frame and customer service. Using a Real Estate agent with experience can help speed up the process by minimizing the back and forth delays with proper paperwork.
If you are looking buy a short sale because you think you are getting a killer deal, be careful. Just because it is listed as a short sale doesn’t mean you are getting a deal. The owner may owe $100,000 more than the house is worth and the bank will most likely only except a $50,000 discount so they may try and sell the house at a higher price to help cover there loss. This wouldn’t be typical practice but you never know. I always suggest working with an established agent instead of going at it by yourself.
There is also a consequence after the short sale takes place and that is dealing with the IRS. Many times the discount is considered income and you will be taxed on it, so consult with an accountant first.
To sum up… by all means opt for a short sale over a foreclosure if you are delinquent or default but be prepared to prove you can’t re-pay the full amount. Lenders don’t have to accept your short sale offer and can back out at the eleventh hour so be careful.
If you have any comments or mortgage related questions please contact me at RBaker@PeregrineLending.com or 805-540-0866.
PS – Congrats to all the Cal Poly Graduates this week!!!