The eligibility and necessary documentation required for a short sale varies according to the seller’s lender and any investor guidelines that may apply in the particular situation. Yet, the short sale process is similar for most sellers. Before proceeding, a seller should consult with his lender, attorney and accountant.
When a property owner sells real estate for an amount insufficient to pay all the debts on the property, the sale is short. In a short sale, the lender may forgive the unpaid balance on the loan, or demand payment of the amount from the seller by issuing a deficiency judgment after the completion of the short sale.
The purpose of a short sale is to give the borrower a way to sell the property when she owes more than what the property is worth. One reason for this occurring is when property values drop and the borrower is upside down in the loan, meaning she owes more than the balance due on the loan.
Before proceeding with a short sale, the borrower must get permission from the lender. Typically, the lender requires the borrower to prove that the real estate’s current market value is less than the balance of the loan, and that the borrower is unable to financially continue paying on the loan. After the seller lists the property and accepts an offer from a qualified buyer, the offer goes to the lender who approves, rejects or counters the buyer’s offer. The process typically takes longer than a traditional real estate transaction, and the lender may require the buyer to complete additional paperwork. The buyer often has more opportunity to cancel the offer during the lengthy process, before the lender gives the final approval.
To determine the current market value of the property and assist in the short sale process, the borrower usually seeks the assistance of a real estate professional. The California Department of Real Estate warns consumers to be mindful of scams from companies soliciting short sales from distressed property owners, with an intent of flipping the properties by means of an unscrupulous agent or a short sale negotiator. The department advises seeking the help of a qualified licensed agent, an attorney and a public accountant.
Some sellers assume the lender’s agreement to proceed with a short sale implies the lender is forgiving a portion of the debt. Forgiveness of any portion of the debt is a separate issue to negotiate with the lender prior to proceeding with the process. Under some circumstances, a seller may be liable for income tax on all or a portion of any forgiven amount.
The federal government’s Making Homes Affordable Program gives incentives to borrowers and lenders, in some situations, to enter into a short sale as an alternative to a foreclosure. While it is assumed the seller’s credit will be less damaged from a short sale than a foreclosure, according to the Experian credit reporting agency, the extent of damage to the borrower’s credit depends on how the lender reports the short sale to the credit reporting agencies.