How to Apply for a Short Sale?
How to Apply for a Short Sale
Short selling a house is selling a house for less than the value of the mortgage. In some circumstances, a lender will allow you to pursue a short sale, but it isn't typical. The lender has to be convinced that you are experiencing undue financial hardship and that you could short sell the home for more than they could get at a foreclosure auction. Although some individual lenders might look more favorably on a short sale than a foreclosure, the transaction will damage your credit and expose you to higher income taxes. A short sale is not an endeavor to be taken lightly.
Applying for the Short Sale
Document your inability to repay the mortgage.In order to agree to take a loss on a short sale, the lien holder must be convinced there are no other viable alternatives for the homeowner. Gather documents showing your income, assets, and employment status over the past few months or years. This information will then be used as support for your claims in the hardship letter. For example, you might gather documents such as:
- Recent pay stubs.
- Tax returns.
- A worksheet showing monthly earnings and expenses.
- Bank account statements.
Determine the market value of your home.Short selling your home can be a risky proposition for you and your lender. Therefore, find out the value of the home before you even approach the bank. If you do find that the value is less than the mortgage, knowing the exact amount can improve your bargaining position later on. Use the following tools to find out the value of your home:
- Compare the value of your mortgage to the sale prices of similar homes in your area that were recently sold. Look for this info in places like Realtor.com, Zillow, and Trulia.
- A certified appraiser will make a detailed inspection of your house, resulting in an appraisal which is more exact. Contact your bank to get a list of reputable appraisers in your area.
- Realtors use their experience and comparisons with other houses in your neighborhood to set a value. It will be called a Broker Price Opinion (BPO). Think of it as a middle ground between an appraiser and Zillow.
Estimate the loss to the lien holder.Gather you most recent loan statement(s), take the value of what is owed on your mortgage, and subtract that amount from the value of your home.
- If you’ve gotten your home appraised from multiple sources, use a range of market values, as the bank will do their own appraisal.
- Lien holders agree to short sales because they believe the home owner might get a better price and eliminates the bank having to use its own employees.
Write the hardship letter.Although you want the hardship letter to engender sympathy and be convincing, it is first and foremost a financial document. It shouldn’t read like a memoir. Make sure it includes:
- Your name, the address of the property, and the mortgage loan number.
- The financial hardship itself. Most lenders are going to want to see some sort of change in your status. Factors like medical emergencies, long term illnesses, loss of employment, divorce or death of a partner, or a ballooning interest rate.
- Finally, the hardship letter should ask for a complete release from the mortgage debt. Unless they accept the proceeds from the sale as satisfaction on the debt, you can still be held liable for the remainder, a “deficiency judgement.”
- Remember that there is always he possibility of personal bankruptcy if the short sale or a loan modification is not acceptable. However, lenders prefer to avoid the bankruptcy process if possible.
Contact your lender.When you've written your hardship letter, contact your bank’s loss mitigation department. While the basic outlines of a short sale are similar at all lending institutions, each bank has its own set of procedures in place to review short sale requests.
- Some lenders won’t consider a short sale until you have a prospective buyer, but those are in the minority. Usually, they’ll ask you to complete a short sale package, which is like an application process for the short sale.
Gather the information to complete the short sale package.The short sale package paints a detailed portrait of your personal financial situation. The lender wants the information to determine whether your situation is likely to improve in the future and if the short sale could help them. Gather the following:
- The current value of the house (with your written appraisal) and the difference between the value and what you owe.
- Tax returns and W-2s going back two years.
- Two or three months’ worth of paystubs, along with bank statements for the same period.
- Property tax bills.
- All information you may have about any additional assets or liabilities. If you have boats, retirement accounts, auto loans, etc., you need to disclose them.
- The hardship letter. Since the short sale is granted at the discretion of the lender, they want compelling reasons to allow it.
Wait for the lender’s reply.The lender will work to verify all of the information in the short sale packet, scrutinizing the hardship letter in particular. Once it’s been verified, they’ll determine the least amount they can accept for the property, although they’ll keep that number confidential. If they think you can sell the house above their required minimum selling price, they will most likely authorize the short sale.
Completing the Sale
Employ an attorney.Once the lender has agreed to a short sale, you will need an attorney to protect your rights and ensure that all procedures are properly followed. This also lets the lender know that bankruptcy remains a possibility if certain conditions, such as a deficiency, arise. Search online to find a well-reviewed and experienced real estate attorney in your area.
Find a realtor.If your bank agrees to the short sale, they’re going to insist upon you using a realtor to market the property—no for sale by owner allowed. Select a realtor who can market your home aggressively, is familiar with the short sale process, and has a proven track record of success.
- Your lender is going to want a copy of a signed and completed listing agreement between the buyer and the realtor.
- While your bank will pause the foreclosure process while you try and complete the short sale, they won’t hold off indefinitely (the time limit is usually 120 days). That’s why it’s important to set a competitive price and market aggressively.
Negotiate with the buyer.Once you have permission to short sell the house, the process of selling it is similar to a conventional sale. However, the short sale negotiations require a finer balancing act.
- You have to be aware of the need to get the highest price possible, balancing that against the clock that’s ticking on the bank delaying foreclosure proceedings. The higher the price, the more likely the bank will accept it.
- Get any serious offers in writing. This helps you keep the possible buyers on an appropriate pace, it helps you determine what the bank might be willing to accept, and it indicates to the bank that you’re making every effort to sell the house.
Keep the bank aware of all offers.You never know exactly what the bank will be willing to accept—remember, they keep their minimum price confidential. They have their own considerations, and they may accept something much lower or higher than you would have anticipated.
- If the bank does accept the offer, get their acceptance in writing, wait for the buyer’s financing to come through, and close the deal.
Make sure you get a settlement statement from the lender.A settlement statement is just written acknowledgement of the bank’s acceptance of the loan modification. It states that you have satisfied the terms of the mortgage and are released from any further obligations connected to it.
- The sale should not include any personal liability for sale fees and complete release of liability. Have your lawyer review the settlement before signing.
Resort to deed in lieu of foreclosure.If the bank doesn’t receive any satisfactory offers, you run the risk of them restarting foreclosure. Should that happen, see if the bank will simply accept the deed to the house--the deed in lieu of foreclosure. It will negatively affect your credit, but not to the same extent a foreclosure will.
Preparing for the Consequences of a Short Sale
Don't sell your home at a “deficiency.” The deficiency is the difference between the price of the sale and value of your mortgage. The reason why it’s so important to explicitly spell out that the short sale cancels the total mortgage debt is that the bank can hold you liable for the deficiency otherwise.
- If the amount of the deficiency is large and the bank holds you liable, you might have been better off offering them the deed or declaring bankruptcy.
Calculate any income taxes due on forgiven debt.Under some circumstances, the amount forgiven in the deficiency is considered income by the IRS, adding insult to injury. If you were in good financial shape, you wouldn’t have to short sell the house to begin with—paying extra in taxes is like taking two steps forward, one step back.
- The deficiency is considered income by the IRS, while the capital loss on the house is a capital loss, so there may be taxes due.
Expect the short sale to impact your credit score.While many individual lenders might regard a short sale as superior to a foreclosure, they have an equal effect on your FICO score—and that’s according to the company that invented FICO scores, Fair Isaac.Bad debts fall off your credit report after 7 years and bankruptcies after 10 years.
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