Our economic crisis has created significant challenges for homeowners. They face job loss, negative equity in their homes and lenders unwilling to help or even listen.
Once the loan modification fails, homeowners face the threat of foreclosure, as well as the threat of a seven year black mark on their credit report. However, there is a way to dampen the effects of foreclosure and limit damage to the homeowner’s credit report – THE SHORT SALE.
A short sale occurs when the home’s sales price is not sufficient to satisfy the seller’s current mortgage obligations and closing costs. For example, the seller may owe $500,000 on a house he paid $550,000 for; but due to the depressed real estate market, the house is only worth $400,000. In a short sale, the lender would agree to accept a buyer’s offer of $400,000 and forgive the $100,00 the seller could not pay in lieu of potentially losing more money through foreclosure.
Although lenders lose money in a short sale, it may make more economic sense for the lender to agree to a short sale. Research from Clayton Holdings suggests that lenders lose on average only 19% of the loan amount with a short sale compared to up to 40% if they proceed with a foreclosure. Nevertheless, negotiating a short sale is never easy. A mortgage lender will only agree to a short sale if it makes more financial sense than foreclosure.
The homeowner can also benefit from the short sale. First, a short sale will have less impact on the homeowner’s credit than a foreclosure, as a foreclosure will stay on the homeowner’s credit report for seven years. Second, the short sale satisfies the debt owed to the lender. Third, the short sale allows the home to be sold, avoiding the stress that goes along with a foreclosure.
In cases involving one lender and only one mortgage/deed of trust on the property, the short sale process is relatively straight forward. Either the bank will accept the short sale and the loss that accompanies it or the lender will foreclose.
Cases involving multiple loans and multiple lenders are much more challenging. Lenders that hold second and third position liens on property are much more likely to negotiate. The problem usually lies with the first position lien holder. That lender may have little incentive to allow part of the sales proceeds to be paid to a second or third position lien holder.
Although each lender’s requirements are different, the short sale process usually begins with the homeowner listing the property for sale with the real estate agent. In conjunction with the listing, the real estate agent will prepare a market analysis to determine the current fair market value of the home.
Once a buyer is located, the seller (borrower) working with an attorney, will submit documents to the lender to obtain short sale approval. These documents typically include:
2 months of bank statements
1 month of pay stubs
2 years of tax returns
Balance sheet showing current assets and liabilities
IRS Form 4506 (Allows lender to obtain seller’s tax returns)
Executed Listing Agreement
HUD-1 Form (Estimated by Title Company)
Brokers Price Opinion (BPO)
Executed Purchase and Sale Agreement
Executed Short Sale Addendum to Agreement
Client financial updates every 30 days
Once all the documents are assembled, we submit them to the lender. We then work with the lender to have a negotiator assigned to review the application. We continue to update the lender each month. We work with the lender’s negotiator to have the short sale approved and to limit any possible deficiency exposure. We use our best efforts to obtain lender approval of the sale.
We typically handle short sale transactions for a flat fee of $3,000. The fee may vary depending on the number of junior lien holders on the seller’s home and the seller’s specific financial situation.