What is a Short Sale?
A short sale is when your mortgage lender(s) and/or lien-holder(s) agree to discount the loan, accepting less giving you an opportunity to sell your home at current market value. If your home is over-leveraged, underwater, or you are behind on payments and cannot sell your property for what is owed, then you may be eligible for a short sale. Lenders created short sales as a foreclosure alternative because they actually incur a smaller financial loss. By accepting less than what is owed on your property allows them to get their non-performing loans off their books. Your lender(s) are not in the business of owning real estate and would rather short sale your house then to foreclose on your property. Once a property is foreclosed upon the bank still has to go through the efforts of selling the property.
Why Short Sale ?
Homeowners have an option to "short sell" when their properties are worth less than what they owe to their bank(s). For example, your house is worth $400,000 but you owe your bank(s) $550,000 in loans, home equity lines of credit, etc. If you qualify for a short sale, you may be able to sell your property for less than what is owed, avoid foreclosure and walk away from the property with little to no remaining debt. A short sale is a far better alternative to foreclosure, both for you and your bank. It is significantly less damaging to your credit, and you’ll be able to buy a home much sooner after a short sale than with bankruptcy or foreclosure.
How much will a Short Sale cost me?
In a short sale, closing costs are paid by the lender from the proceeds of the sale. The homeowner in most cases, does not bring a penny to the closing. CT Property Network does not charge homeowners to negotiate the short sale. The Realtor gets paid at the closing from bank proceeds. In addition to paying off mortgages or liens on the house, the banks will usually pay:
Real estate commissions
Town and state conveyance taxes
Attorney Fees
Recording, wire and courier fees
Back real estate taxes
Back association fees
Overdue sewer and water fees
Payments to second and third lien-holders
Closing costs requested by the buyer
The lender pays for these costs because these need to get paid to convey clean and clear title to
the new buyer and distressed homeowners do not have the funds. It is financially advantageous
for the bank to pay these cost then to have the property foreclosed upon. Most of the time, the short sale is FREE to the homeowner. Note: by law, the homeowner is not allowed to receive money from a short sale. The banks will have you sign a paper stating that you did not receive anything at closing.
SHORT SALE vs. FORECLSOURE
The number one reason why we advocate pursuing a short sale vs. a foreclosure, is that a foreclosure will prevent you from obtaining a mortgage for a minimum of five to seven years, in addition to extensive damage to your credit, whereas a short sale will have far less damage to your credit in that most borrowers will be able to obtain a mortgage after two years of conducting a short sale. Also, the deficiency (or tax consequences) in the event of foreclosure, if is collectable, will be significantly higher than in a short sale (since properties sell at extremely discounted prices at foreclosure auctions). The second reason why we advocate short sales is that promissory notes and deficiency judgments before and after the sale are, for the most part, negotiable. In many cases, the deficiency owed can be negotiated to a percentage (ie. 10% of a Bank of America HELOC loan) or sometimes completely waived. The lender may forgive the balance in exchange for a small pay off or an affordable payment arrangement with the borrower. This largely depends on lender policy and type of loan. Sometimes, it is even possible to have the buyer pay the difference!
Again, should the lender reserve the right to pursue a deficiency, at least you have a short sale on your credit report vs. a foreclosure. Keep in mind that it is rare for the lender to actually pursue the deficiency and therefore the unsecured note will most likely be replaced with a 1099 issued by the IRS for the taxes owed on the sale. You will want to explore the Mortgage Forgiveness Debt Relief Act of 2007 to verify whether you are exempt from this tax.
Deficiency judgements: what will I be held responsible for the shortfall in a short sale? Most states are deficiency states which means that the lender that suffers a shortage in a foreclosure or a short sale has the right to pursue a deficiency judgment from the borrower. In a perfect situation all short sale approvals are full settlements of the account and frequently end up being just that. However some short sales are not full settlements and some lenders will in fact retain their right to pursue you for the deficiency after the fact, and may. if they believe it is in their best interest. This is especially so for second liens and Home Equity Lines of Credit (HELOCs) especially cash-out HELOCs. If you allow your property to go into foreclosure the lenders will sue you for the entire deficiency; therefore having a foreclosure on your record, then a lawsuit, often leading to bankruptcy. We try to avoid all of that by negotiating and selling your property short sale. In a short sale you will often have the opportunity to negotiate how the loan is settled. The terms of your short sale will be spelled out in your approval letter which will be obtained when your short sale is approved.
CT Property Network’s negotiators always seek to have the short sale approved as: account settled in full; terms most beneficial to you. Although some lender(s) will not waive their right to pursue a deficiency and then it will be your decision whether to go through with the short sale or not. When the approval is reached, if the terms are not to your approval, you will have the ability to personally renegotiate these terms with the lenders.
If the lender will not waive the deficiency, the lender will have to sue you to get this judgment so that they can collect. After your property is sold, this deficiency balance becomes an unsecured lien.
We still recommend selling your property short; as you do not have the majority of the mortgage payments or the loans and promissory notes and deficiency judgments before and after the sale are, for the most part, negotiable. In many cases, the deficiency owed can be negotiated to a percentage (ie. 10% of a Bank of America HELOC loan) or sometimes completely waived. The lender may forgive the balance in exchange for a small pay- off or an affordable payment arrangement with the borrower. This largely depends on lender policy and type of loan. Sometimes, it is even possible to have the buyer pay the difference!