What is a short sale?
A short sale is a sale of real estate in which the proceeds from selling the property will fall short of the balance of debts secured by liens against the property and the property owner cannot afford to repay the liens’ full amounts, whereby the lien holders agree to release their lien on the real estate and accept less than the amount owed on the debt. Any unpaid balance owed to the creditors is known as a deficiency. Short sale agreements do not necessarily release borrowers from their obligations to repay any deficiencies of the loans, unless specifically agreed to between the parties.
A short sale is often used as an alternative to foreclosure because it mitigates additional fees and costs to both the creditor and borrower; however both will often result in a negative credit report against the property owner.
What should be taken into consideration when deciding upon a short sale?
Lenders will often times “reserve the right to pursue the deficiency” after the closing or issue an IRS Form 1099C for the amount of the deficiency. Even though the lender states that they will “release the mortgage,” it does not necessarily mean that the homeowner will be released from the deficiency between the original amounts owed per the Note/loan. It does not forgive the remaining balance unless indicated on the short sale acceptance offer. Sometimes these letters are not clear and it is important that the homeowner be aware and seek legal advice and guidance from a CPA.
Process and Timing of a Short Sale
Often creditors require the borrower to prove they have an economic or financial hardship preventing them from being able to pay the deficiency.
Creditors holding liens against real estate can include Primary Mortgages, Junior lien holders—such as second mortgages, Home Equity Lines of Credit HELOC lenders, Home Owners Association HOA (special assessment liens)—all of whom will need to approve individual applications for a short sale, should they be asked to take less than what is owed.
Most large creditors have special loss mitigation departments that evaluate borrowers’ applications for short sale approval. Often creditors use pre-determined criteria for approving the borrowers and the terms of the sale of the properties. Part of this process typically includes the creditor(s) determining the current market value of the real estate by obtaining an independent evaluation of the property from an appraisal, a Broker Price Opinion (abbreviated BPO), or a Broker Opinion of Value (abbreviated BOV). One of the most important aspects for the borrower in this process is putting together a proper real estate short sale package. The package should be well organized along with a hardship letter telling the creditor why a short sale is needed.
Due to the overwhelming number of defaulting borrowers due to mortgage failures and other causes as part of the financial crisis of 2007–2011, many creditors have become adept at processing such short sales applications; however, it can still take several months for the process from start to finish, often requiring multiple levels of approval.
Documents usually required by lenders
- Signed Third Party Authorization
- Copies of last two months of all bank statements
- Copies of last two years of income tax returns
- Copies of last two months of pay check stubs
- Hardship letter for each lender which is dated, signed and includes: o Property address
- Loan Number
- Hardship (list 2-3 bullets of why they can no longer afford/keep home)
- Contact info of owner
- Any other document the lender wants submitted.
- Listing Agreement (not expired) from listing agent
- Property History from listing agent
- Signed contract
- Loan Commitment/Approval Letter (watch) for buyer from selling agent
How we can help:
Once you have decided that a Short Sale is the option you would like to take, we can list your home on the open market for sale. After receiving an acceptable offer, we then engage EWM Title or attorney of your choice, to begin the process with your Lender, which includes acquiring necessary documentation they will need to determine if they will approve the short sale of your home. In most cases, the Seller does not incur any additional fees, as they are absorbed in the settlement with the lender/lien holders.
Upon receipt of written authorization from the Seller, we will contact the Lender/s to obtain the name and contact information of the loss mitigation specialist assigned to the file and request a short sale packet. We will provide the contact information and short sale packet to the Listing Agent and Seller so that the Seller may compile all requested documentation and submit it to the Lender/s for Lender/s approval. We will perform the title search, title examination, and lien search necessary for preparation of the Preliminary Net Sheet.
Once the title search, title examination and lien search have been performed, we will prepare a Preliminary Net Sheet and will forward it to the Listing Agent and Seller so that the Seller may submit it to the Lender/s as part of the short sale package.
Once Seller submits the short sale package to the Lender/s, we will continue to monitor the file and will follow-up with the Lender/s on a frequent and regular basis pending approval of the short sale. We will keep all parties abreast of new developments. Call each lender and have them explain that they will be submitting a contract for short sale consideration. They need to get the phone number and fax number of where to submit the information (for all of us to have).
Important – Some lenders have their own additional forms which need to be completed. The owner needs to ask if they have such additional papers and have the lender send those to be completed by the lender to the owner ASAP. These documents/forms need to be completed and ready to submit along with the fully executed contract.
Please note that Columbia Title of Florida, Inc. Is neither a law firm nor an accounting firm and the information herein contained is not to be taken as legal advice.
Below is the Short Sale Kit needed when working with EWM Title: