What Exactly is a Short Sale?
The term “short” does not refer to the length of time it takes to complete the sale. In a short sale, the bank—and/or anyone else holding liens against the property—agrees to accept less payment from the sale of the home than what the buyer had agreed to pay for it. For example, if you owe $90,000 on your home, the bank might agree to accept a payment of $60,000 from a short sale. The bank, in effect, is allowing itself to be “shorted.”
It doesn’t sound like a good deal for a bank, but a short sale can actually be a smart move for a lender. If your home were to go into foreclosure, the bank might have to accept far less for the property at auction. So if you’re having trouble making your mortgage payments, your bank really does have a strong incentive to work with you.
Before you go any further with your home sale, see if your bank is willing to do a loan modification to change the terms of your mortgage. Your lender will probably want the following:
- Your monthly mortgage statement and information about any other mortgages on your home
- Recent pay-stubs, if employed and/or profit/loss statements if self-employed
- Any other sources of income, including benefits such as Social Security, disability, public assistance, etc.
- Recent bank statements, utility bills, and tax returns
- A letter describing your financial situation
You can find out more about your mortgage options through the federal Home Affordable Modification Program (HAMP)
Entering the Market
After exploring loan modifications, if you still feel a short sale is your best option, your first step is to talk to your lender. You’ll need to submit what’s known as a short sale packet. This packet includes documentation about the financial hardship that’s making it too hard for you to keep up with your mortgage payments. You will need to include documentation and/or copies of:
- Savings, checking, and investment account statements
- Documentation of your income
- Current bills and expenses
- All assets
Once your bank agrees to a short sale, you’ll need to find a real estate agent who really understands short sales and foreclosures. Working as both a real estate agent and a lawyer, I can provide you with a full range of services and counsel to help you set the best terms for your short sale, or advise you on other options.
After I’ve listed your property on the market, buyers will have a chance to make offers on your home. Offers are then submitted to your lender for approval. The terms of the offer are then negotiated until both lender and buyer come to an agreement.
If your lender approves your short sale under the U.S. Treasury’s Home Affordable Foreclosure Alternatives (HAFA) program, you might be finished with your sale in four months. Otherwise, the process can drag out.
Once your lender approves the sale, you can move out, the bank gets paid, and the remaining debt on the home is forgiven. If you qualify for HAFA, you may also receive $3000 for moving expenses. Not so bad!
Keep In Mind
The IRS will count your forgiven debt as taxable income. Your credit score will also be affected by a short sale, but not as dramatically as a foreclosure or bankruptcy. You might be able to apply for a new loan in as little as four years. As far as the bank is concerned, you’re a responsible person who asked for help when you needed it. The best part is probably that you can stay in your home until the sale is complete.