How to Do a Short Sale and Avoid Foreclosure
Homeowners who can no longer make their mortgage payments often enter the foreclosure process. Foreclosures result in loss of the home, a negative 10-year public record on the borrower's credit report and a possible liability on any loss incurred to the mortgage company. As an alternative to foreclosure, most lenders allow short sales of homes. A short sale involves selling the property at a loss with the lender's approval. Some lenders require the borrower-in-default to take some liability of the difference between the loan amount and the sale amount. Short sales occur if the expected proceeds from the sale are insufficient to pay the mortgage in full. For some borrowers who cannot make their mortgage payments, a short sale can be a good alternative to foreclosure.
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Instructions
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Contact the loss mitigation department of your mortgage company. Explain the circumstances of your situation and request consideration for a short sale. The representative will send short sale documents that you must complete to begin the processs.
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Complete the short sale application and paperwork. For short sales, you will need to provide copies of recent tax returns, W-2s, recent pay stubs, bank statements, proof of occupancy, homeowners policy information and tax bills. Short sale applications will require you complete information about your monthly budget, a hardship affadavit with information about the extent of your financial liabilities and a form permitting the company to obtain tax returns, credit scores and other legal information on your behalf. Some companies will also require you to write a narrative hardship letter outlining your financial difficulties and request for short sale.
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Hire a licensed real estate agent with a proven track record of selling homes quickly. Work with the agent to choose a price for the home that is competitive within the fair market value range for your area. Put your house on the market.
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Once you receive an offer on your property, have your real estate agent forward it along with other required documents to your loss mitigation representative. Once the offer has been received by the mortgage company, it must be approved before the sale can go through. Decisions may be delayed because of extremely low offers or because junior liens are held by other banks or individuals that also need to agree to the short sale. Depending on the type of loan, an insurer may also need to approve the sale.
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After you have obtained a short sale approval on your property, carefully read through the approval letter. A short sale may require you to pay back the amount of the shortage or the deficiency balance. Contact your loss mitigation specialist for more information and an explanation if a deficiency balance is due. Complete the sale according to the terms stated in the letter to end the short sale process.
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Tips & Warnings
You may need to find a real estate agent willing to work for a smaller commission, which sometimes makes the bank more willing to absorb the loss from a short sale.
Some third-party short sale negotiation companies will work to handle the sale on your behalf; however, mortgage companies often will not allow the company to deduct its fees from the sale of the home.
If you have filed for bankruptcy or are currently in bankruptcy, consult your bankruptcy attorney about the short sale. The sale of property must typically be approved by the bankruptcy trustee assigned to the case.
The final disposition of a completed short sale may be reported as "account paid in full for less than the full balance" on your credit report.
Tax liabilities can result from a short sale. In some circumstances, the IRS may view the lender's loss as taxable income for you.
Property taxes that are not escrowed as part of the loan payment must continue to be paid on the date due.
References
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