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What is a Short Sale?
Short Sales are becoming increasingly common in parts of the country where home values have dropped substantially. A short sale is when a seller facing the threat of foreclosure enters into an agreement with their mortgage lender to accept a price for the property that is less than the amount they actually owe on it. The seller makes no profit on the sale but avoids many of the problems that would come from a foreclosure.
With a short sale, sellers avoid having to go through a lengthy foreclosure process and prevent the impact of a foreclosure on their credit score. However, please note, there is truly NOTHING SHORT about a short sale! Short sales take an average of 90 days before an approval is given from the lender and only given when an offer is presented. The time frame varies on each lender and how they process their short sales. In a short sale, the seller and the lender work together to determine the details of the agreement, but typically sellers who complete a short sale also avoid owing the balance of the loan.
Please be advised the lenders have a right to a deficiency judgement for up to 6 years after the short sale transaction is complete. This is when the bank can pursue the homeowner for the difference of what is owed and how much the house sells for. Please consult with an attorney regarding a deficiency judgement. Typically, since the homeowner is making effort to resolve the problem with the distressed property by doing a short sale, they will not move forward with a deficiency judgement. It is more common when a homeowner abandons a home and carelessly foreclosures that a bank will pursue a deficiency judgement. It is also difficult for a bank to pursue a homeowner that has NO assets to expect them to pay the difference. If it does happen, you may want to consult with a lawyer as there are options to eliminate the judgement.
Advantages for the bank on Short Sales
Of course, mortgage lenders can benefit as well. With a short sale, lenders don't have to worry about getting involved in a long foreclosure process. More than anything else, lenders want their money back so they can re-lend it out. Banks generally want to steer clear of taking responsibility for selling a home as they are not in the real estate business. So, a short sale can actually be good for them.
Effects on Credit Scores Foreclosure vs. Short Sales
Although the seller is avoiding a foreclosure, even a short sale may affect their credit score to some extent. So, sellers should discuss this issue with their lender to figure out how the process will be reported to the credit agencies. It should be noted that negative ramifications from a short sales is less damaging than those associated with foreclosures and/or bankruptcy. Typically, credit scores will decrease by 90 -110 points with a short sale, not nearly as bad as a foreclosure which can be as high as 400 points. Short sales do carry less negative effects than foreclosures. Short sale sellers are widely seen as less risky than foreclosed sellers. However, it is neither an easy or short process, and sellers should seek thorough legal and tax advice when considering the short sale route.
At its best, a short sale can be a win-win for both parties. For the seller, a short sale provides the opportunity to avoid foreclosure and the dreaded implications that a foreclosure brings, in addition to being able to return to home ownership sooner; alternately, the lender receives most of the value of the loan sooner, and avoids incurring additional legal or carrying costs while the foreclosure process plays out, which can sometimes even take years. The net-net of this topic - short sales do present a better option for distressed sellers than foreclosures. However, it is neither an easy or short process, and sellers should seek thorough legal and tax advice when considering this route.
Tax Ramifications from a Short Sale or Foreclosure. Is there relief?
The bank has a right to 1099 the homeowner on the difference of what the house sells for and what is owed. If a homeowner receives a 1099 at the end of the year they sold their home, please be sure to consult with a tax expert. There is relief available for homeowners. Please refer to www.irs.gov and search for "Mortgage Debt Forgiveness Relief Act."
What is the Short Sale Process?
Upon receipt of a complete short sale package, (Please Click this link for required short sale documents), we will fax the complete Short Sale Package to the lender and confirm receipt in 3 - 7 days. Why 3 - 7 days? This is the amount of time it takes for the bank to upload the packages onto their system. Once they confirm receipt, we ask the lender with the first mortgage to order an appraisal or a Broker Price Opinion (BPO), and request that a negotiator be assigned. When BPO/Appraisal is ordered we personally go to ALL of these appointments as they are the most important part of the approval process.
Once a negotiator is assigned they have 30 business days to review the offer. During this time we continue to check back regularly to get a status so that we can keep everyone informed. Once they deem the offer as Bona Fide, they submit the offer to the investor (the actual owner of the mortgage) for final approval. This can take up to 30 business days.
After an Approval is Issued, How Do We Close?
Once the approval is received, the lender's approval will give the parties a maximum of 30 days to get the deal closed. Sometimes, if you are getting an FHA loan you will get additional time with no penalty towards commission. If you need an extension banks will typically honor them but may not. For this reason, it is very important to close on time. We will give you an indication that an approval is forthcoming so that everything can close in the time allotted.
Short Sale Documents
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