Short Sale: Real Estate Option to Avoid Foreclosure

A short sale refers to a special agreement offered to borrowers facing foreclosure. When mortgage lenders enter into real estate short sale contracts they allow mortgagors to sell their property for less than is owed on the loan. Multiple aspects are involved and this type of transaction is best handled by a real estate lawyer or short sale specialist.

Entering into a short sale contract allows banks to save several thousand dollars over the cost of the foreclosure process. A report issued by Freddie Mac states real estate foreclosures cost lenders about $60,000 per property, while short sales cost less than $3,000. Short selling helps borrowers avoid foreclosure and can lessen damage caused to their credit report.

Before diving into the details of real estate short sales, it is important to realize that lenders approve less than 20-percent of short sale requests. Much of the rejection stems from borrowers not submitting required documents in a timely fashion or improperly filling out forms. Therefore, it is crucial for borrowers to work with professionals who possess a solid track record in negotiating short sale transactions.

Another major factor to consider is many lenders hold mortgagors responsible for deficiency amounts between the real estate sale price and loan balance. When borrowers are incapable of paying the difference, banks can obtain court-ordered judgments which are reflected on borrowers' credit report up to 7 years after the debt has been paid.

If a borrower owes $150,000 against his mortgage note and short sells his home for $125,000, the lender could hold him responsible for the $25,000 deficiency. This can be financially devastating for many people and could take several years to repay.

When engaging in real estate short sale negotiations it is crucial to obtain Payment in Full without Pursuit of Deficiency Judgment. This contract allows borrowers to sell their property and walk away without owing additional monies.

Unfortunately, there is no standardized short sale protocol. Instead, each mortgage provider establishes guidelines and protocol. Not all lenders participate in real estate short sales and those that do are not required to grant approval.

That being said, most banks follow a similar process and require mortgagor's to submit financial records to prove they do not hold assets which could be sold to pay off mortgage debt. Banks usually request documentation of earned wages, bank statements, two or more years tax returns, detailed list of income and expenses, and information regarding financial portfolios such as investment accounts or real estate holdings.

Lenders generally require borrowers to submit a short sale hardship letter. This is a very important aspect of obtaining short sale approval, so borrowers should take time to craft a well-written letter which explains the circumstances which caused them to default on their mortgage.

Borrowers cannot request the option to short sell unless they are a minimum of 31 days delinquent on their mortgage installments. They cannot have accrued home equity and the loan balance must be greater than the appraised value of the property.

There are advantages and disadvantages of entering into short selling. It is important to weigh the consequences and discuss available options with your bank loss mitigator to determine if this strategy is best suited for your personal situation. Becoming educated about the process is the key to making a decision which can affect you for years to come. Let's take a look at the most common rewards and risks.

Rewards of Real Estate Short Sale:

One of the best rewards of short selling is this strategy eliminates the foreclosure process. Anyone who has lost their home to foreclosure will tell you the process can be stressful, embarrassing and emotionally draining. While short sales do not allow you to keep your home, it does eliminate many of the messy details associated with foreclosure.

When borrowers work with a real estate attorney or short sale specialist, they can better negotiate the terms of the agreement. Lawyers have a better chance of convincing lenders to offer Payment in Full agreements which release borrowers from being held financially responsible for any deficiency between the sale price and loan balance.

Foreclosure remains on credit reports for ten years, while short sales are reflected for seven years. However, if a deficiency judgment is issued, short sales can remain on credit reports for up to 7 years after the debt is paid. In some cases, foreclosure is a better choice. It is best to obtain legal counsel to determine the financial ramifications based on the short sale policies of the lender.

Short sale real estate is usually listed through a realtor and the sale must occur within a specific timeframe determined by the lender. Borrowers might be able to convince their lender to let them list the home as For Sale by Owner which can help them avoid paying realtor commissions.

Mortgagors who enter into short sale contracts have a better chance of qualifying for a mortgage loan within a few years, whereas borrowers who enter into foreclosure may not qualify for home loan financing for up to ten years.

Risks of Real Estate Short Sale:

Real estate short sales are reported to the major credit reporting bureaus. Borrowers should anticipate a reduction of 100 points or more against their FICO score. Creditors assess interest rates based on credit scores. A significant drop often places borrowers into a lower credit bracket, which in turn will cause them to pay a higher rate of interest when obtaining credit of any kind.

The biggest risk stems from banks issuing deficiency judgments. Not only do creditor judgments reflect poorly on borrower's credit reports, they create financial hardship. After all, who wants to continue paying large sums of money against property they no longer own?

Submitting a short sale packet does not guarantee approval. As mentioned earlier, banks do not approve every short sale request. It can be painful to submit required documents, only to be denied the opportunity to enter into this type of real estate transaction.

Both foreclosure and short sale transactions can result in tax consequences. The IRS might consider the difference between the loan balance and short sale amount as taxable income. Taxpayers must report debt forgiven by mortgage lenders on their personal tax return. Borrowers should refer to the Mortgage Forgiveness Debt Relief Act to determine if their property will qualify for IRS debt relief.

Real estate short sales are handled by the servicing lender's loss mitigation department. Banks generally offer short sales as a last resort. When possible, mortgage lenders will work with borrowers to help them cure mortgage arrears. The most common options include loan modifications, mortgage forbearance, or mortgage refinance. Borrowers must be in dire financial straits and unable to qualify for other foreclosure prevention strategies.

Working with bank loss mitigators can be stressful. These bank representatives often work with hundreds of delinquent accounts. All real estate transactions require mountains of paperwork, so patience and preparation will go a long way in obtaining the best results.