A shortsale refers to real estate that is being sold for less than is owed on the mortgage loan. Lenders engage in short sales for various reasons. The primary reason is short sales make more financial sense than foreclosure. Mortgage financier, Freddie Mac, states the average cost of foreclosure is between $60.000 and $80,000.
The shortsale process typically takes four to six months to complete. Foreclosure can take up to eighteen months. Although the lender accepts less than is owed, short sales are less detrimental to their bottom line than foreclosure.
Another reason banks engage in short sales is because they are limited on the number of real estate owned (REO) properties they can hold. Many are rapidly approaching their limit due to the constant influx of foreclosure homes.
Thirdly, banks receive money from the Federal Treasury based on their performance. If they are holding too many non-performing loans, the Feds will limit or cease their line of credit. Banks are in business to make money, not manage properties. They have no choice but to engage in short sales to liquidate their inventory.
The first step to entering into a shortsale agreement is to contact your lender. This process can be tedious, so be prepared to be patient and persistent. Banks aren’t jumping for joy to take a loss on loans. In most cases, banks will first attempt to modify your loan so you can prevent foreclosure.
Borrowers must prove they are financially insolvent and do not possess the financial means to repay their debt. Mortgage lenders require homeowners to provide a packet of information consisting of financial records, income and expenses, a short sale hardship letter, and various legal and real estate documents.
Some lenders will not engage in conversation regarding short sales unless the borrower has a qualified buyer in place. Others will grant borrowers’ time to list their property through a realtor. Occasionally, banks will allow property to be listed as “For Sale by Owner.”
Two types of short sale agreements exist: Deficiency Judgment and Payment in Full without Pursuit of Deficiency Judgment. If your lender issues deficiency judgments, it is imperative to understand the consequences. In some cases, it is less detrimental to allow the property to fall into foreclosure.
Deficiency judgments are issued in the amount between the sale price and balance of the loan. If the borrower has a second mortgage, the amount can be staggering. For instance, if you owe $150,000 on your loan and the property sells for $125,000, the bank will issue a judgment for $25,000.
Judgments remain on your credit report until paid in full. Foreclosure will haunt you for ten years. A shortsale will stick around for seven years. However, if borrowers are able to get back on track financially, they can obtain another mortgage loan within two years.
If the property does fall into foreclosure, it is important to obtain a Deed in Lieu of Foreclosure. This option allows borrowers to give the property back to the bank and walk away without owing additional monies. Without a deed in lieu, the property will be placed for sale through public auction and the borrower held responsible for the difference between the sale price and loan balance.
When structured properly, short sales can be a win-win solution for all parties involved. It is important to become educated about the process and weigh the pros and cons. When necessary consult with a real estate lawyer, realtor or real estate investor who possesses experience in orchestrating short sale transactions.