Not all mortgage-holders want to keep their properties after having fallen behind on them. While a loan modification can often help a borrower who is in distress, sometimes the mortgage is simply too expensive even after modification, or too large for a modification to be successful. Sometimes, a property has depreciated too much to be worth holding onto – the principal is hundreds of thousands of dollars above the value of the home, rendering it a money sink. Sometimes, your home simply isn’t right for you, but is worth less than your mortgage, making it impossible to sell. In these circumstances, a short sale may be able to help you achieve your goals when a modification wouldn’t.
Short sales are sales negotiated between the buyer, seller, and your mortgage-holders, where the sales price will fall short of paying off the mortgages. These sales are generally handled similarly to a loan modification – a document package, including tax returns, proof of income, proof of any assets available to the lender, and proof of occupancy (if the property is occupied) are submitted to the lender for their review, your financial circumstances are considered, and the lender makes its decision as to whether or not you are qualified for the sale. However, there are two additional wrinkles to this process. First, an independent buyer must also be found, and must be willing to pay the final price that the lender decides the property is worth. Second, once the buyer has been found, the sale must be approved by the lender and then settled on a date chosen by the lender, which will require the preparation of complex legal documents. Due to this, you will almost certainly need to retain a competent realtor, who can determine the true value of your property, list it for sale, interview different buyers, find a buyer who will be willing to participate in the often-long short sale review process, and retain a settlement agent who can prepare the complex documents required for a real estate transaction. While the recent HAFA Foreclosure Avoidance programs provide a more-streamlined method, which ideally will result in the lender offering a pre-approved price for your property, the process will generally go more smoothly if you are ready with a realtor ahead of time.
Once your short sale is approved, you will be able to sell your property to the buyer, resulting in title being transferred out of your name without having to go through a foreclosure. However, this does not necessarily mean you will no longer owe your lender the money originally loaned to you. Your lender has a right to pursue the deficiency, or difference between the sales price and the amount you owed, and may sue you to enforce this. While you will generally receive a release of liability from your lender, meaning that they will no longer attempt to collect on this deficiency, you must be careful to read the approval letter from your lender to make sure that they will release your mortgage. This is especially important when you have a second mortgage, as second mortgages are much more likely to collect on a deficiency, and less likely to release the deficiency in the first place.
Finally, your short sale may still have significant negative consequences for you. First, the sale of your property will be reported, which will have a negative impact on your credit. While the general view is that a short sale is not as bad as a foreclosure or bankruptcy, it may still reduce your credit score dramatically, and may result in an inability to purchase a new home for an extended period of time. In addition, any release of liability will be considered income to you under the Tax code. An ordinary homeowner will usually be able to have this excluded from their income, as they will be considered insolvent due to their debts exceeding their assets at the time of the sale; those with smaller deficiencies and substantial assets, or with multiple properties, may not be so lucky. In any event, it is vital that you consult with a tax professional to determine what effect, if any, your short sale may have.
Nevertheless, even with these negative consequences, if you know that you are unable to keep your home, or no longer want to keep your home, then a short sale may be your best financial option. A promptly-filed short sale may prevent a foreclosure, allow for the sale of your property for a better price than a foreclosure would net, allow you to exit your property with dignity and on your own terms, and even prevent you from having to repay the bank for this debt altogether. If your home is at risk of foreclosure, or if you no longer want to keep your home, then you should contact a qualified attorney to discuss your options immediately.