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A short sale is when a bank or mortgage lender agrees to discount a loan
balance due to an economic or financial hardship on the part of the
mortgagor. This negotiation is all done through communication with a
bank's Loss mitigation department. The home owner/debtor sells the
mortgaged property for less than the outstanding balance of the loan,
and turns over the proceeds of the sale to the lender in full
satisfaction of the debt. In such instances, the lender would have the
right to approve or disapprove of a proposed sale. Extenuating circumstances influence whether or not banks will discount a loan balance. These circumstances are usually related to the current real estate market climate and the individual borrower's financial situation. A short sale typically is executed to prevent a home foreclosure. Often a bank will choose to allow a short sale if they believe that it will result in a smaller financial loss than foreclosing. For the home owner, the advantages include avoidance of having a foreclosure on their credit history and the partial control of the monetary deficiency. Additionally, a short sale is typically faster and less expensive than a foreclosure. In short, a short sale is nothing more than negotiating with lien holders a payoff for less than what they are owed, or rather a sale of a debt, generally on a piece of real estate, short of the full debt amount. Creditors, their surrogates, and those who politically benefit from the mortgage industry -- especially those in the real-estate, mortgage servicing, and banking -- wrongly portray short sales as difficult to complete or morally questionable citation needed. This is simply untrue if the value of the underlying asset, a home, has fallen dramatically and the debtor has limited assets. Short sales are extraordinarily common in standard business transactions in recognition that creditors are not doing debtors a favor but, rather, engaging in a business transaction when extending credit. When it makes no business sense or is economically not feasible to retain an asset businesses default on their loans (called bonds). It is not uncommon for business bonds to trade on the after-market for a small fraction of their face value in realization of the likelihood of these future defaults. Short Sale Negotiations Lenders have a department (typically called a loss mitigation department) that processes potential short sale transactions. Typically, lenders do not accept short sale offers or requests for short sales until a Notice of Default has been issued or recorded with the locality where the property is located. Lenders have a varying tolerance for short sales and mitigated losses. The majority of lenders have a pre-determined criteria for such transactions. Other distressed lenders may allow any reasonable offer subject to a loss litigator's approval. "Red tape" is very common in short sales, requiring potentially multiple levels of approvals and conditions. Junior liens - such as second mortgages, HELOC lenders, and HOA (special assessment liens) - may need to approve the short sale. Frequent objectors to short sales include tax liners (income, estate or corporate franchise tax - as opposed to real property taxes, which have priority even when unrecorded) and mechanic's lien holders. It is possible for junior lien holders to prevent the short sale. Recent Changes to Federal Laws Affecting Mortgages When the lender decides to forgive all or a portion of a borrower's debt and accept less, the forgiven amount is considered as income for the borrower and is liable to be taxed. However, after the signing of The Mortgage Forgiveness Debt Relief Act of 2007, amendments have been made to remove such tax liability and allow the borrower and lender to work freely together to find a common solution that is beneficial to both parties. This protection is limited to primary residences -- rental properties are ineligible for relief -- so consultation with a tax advisor is necessary to ensure that a borrower qualifies. More recent legislation provides for a specialized type of refinancing option, available for mortgages made after in 2006 or later, for owner-occupied homes. Under this program a debtor provides information similar to that necessary for a short-sale but rather than selling the house to a third-party an FHA guaranteed loan at a fixed-rate is available if the original lender is willing to write-off all but 85-percent of outstanding of the debtor's obligations (including principal, interest, late-fees, prepayment penalties, and all other fees). FHA-backed refinance packages are available beginning October, 2008, and carry a fee equal to 1.5% of the value of the house. Debtors who exercise this option must sacrifice 50-100 percent of equity that builds in a house, and may not participate in home equity loan programs. This program is only available to owner-occupied residences. This program requires consent from a lender: consent is not automatic and may be freely withheld, though withholding consent can result in a foreclosure with adverse financial results. Credit reporting A short sale does adversely affect a person's credit report, though the negative impact is typically less than a foreclosure. Short sales are a type of settlement. Like all entries except for bankruptcy, short sales remain on a credit report for seven years. Depending upon other credit information it is typically possible to obtain another mortgage 1-3 years after a short sale. While it is frequent if not common for a lender to forgive the balance of the loan in question, it is unlikely that a lien holder that is not a mortgagee will forgive any of their balance. Further, it is common for a lender to omit updating mortgage balances to reflect a zero balance after a short sale. However, willfully misrepresenting information on a credit report constitutes libel in many states, and lenders may be sued in civil court for engaging in this behavior. |
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| Short sale (real estate) Buyer brokerage (in the USA) Buying agent Estate (house) Real estate broker Housing bubble Immovable property List of real estate topics Master of Real Estate Development Neighborhood Watch Private Equity Real Estate Property rights Real estate broker (in the USA) and Estate agent Real estate appraisal Real estate economics Real estate education Real estate developer Real estate investment trust Real estate pricing Real estate transaction Real estate transfer tax Real estate trends Real property Realtor Short sale (real estate) Subprime mortgage crisis The Real Estate Wiki 1031 exchange International real estate Real Estate matters can take a lot of different forms, whether you are facing a home foreclosure, need a commercial lease drafted or reviewed, or are buying or selling a property. What all real estate matters in Florida have in common is that having the right lawyer to help you through your real estate issue Real Estate matters, Buying and Selling Real Estate, Foreclosures, Deed Transfers, Landlord Representation, Easements, Broker and Other Real Estate Litigation, Commercial and Residential Leases, Mechanics' Liens, Quiet Title Actions,Most other legal matters involving real estate. What is Foreclosure?When you purchased your home, chances are you took out a home loan and your lender took a security interest in the property. In the event that you cannot make your mortgage payments, this security interest gives your lender the right to foreclose--auction off your house and keep the proceeds in order to recover its investment. And, if your property cannot be sold for what is owed, a deficiency judgment could be pursued against you. Both a foreclosure and a deficiency judgment could seriously affect your ability to qualify for credit in the future. If you are facing the possibility of foreclosure, you know how frightening this situation can be. But now is not the time to panic. Now is the time to explore your options. But before we do that, take a moment to answer these questions. Are you unable to make your house
payments because of a temporary financial setback? If your situation is temporary, there are things you can do to ward off foreclosure and get back on your feet. On the other hand, if you're in over your head you need to acknowledge that fact and realize that giving up the house may be the best thing for you. That does not mean you should just sit back and let the foreclosure happen. But you should not try to hold on to it. Only you know the answers to these important questions. Keep them in mind as your read through the following foreclosure options. |
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