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The Skinny on Short Sales
By Susan Willets | June 11, 2008
A short sale is when a bank or mortgage lender agrees to discount a loan balance due to an economic hardship on the part of the borrower. 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.
Short Sale Process
Some lenders won’t accept a short sale because they are “shorted” and have to accept less than the total amount due. If your lender does agree to a short sale, they will have their own requirements/procedures. Here is an example of the process you will likely follow and items you may be expected to submit:
- Call the lender to find out who handles short sales.
- Write a letter of authorization to allow the lender to discuss personal information about your loan with parties involved.
- Have an estimated closing statement prepared by a closing agent or lawyer to show how much you expect to make on the sale.
- Items you will most likely need to submit:
- Hardship letter to offer details as to why you are unable to pay your mortgage
- Proof of income and assets
- Copies of bank statements
- Comparative Market Analysis to validate that the property value has fallen
- Purchase agreement when you have a prospective buyer
- Listing agreement to verify what has been included
Submission of all these items and following the process does not guarantee your lender will accept the buyer’s offer. You will have to work with your lender to come to a mutual agreement.
Short Sale Consequences
While a short sale may stop foreclosure there are consequences to the seller. One important fact to remember - the seller never profits from a short sale. The following are other consequences from short sales:
Tax Consequences - The amount that the lender is shorted is considered income for the borrower and is taxable. You may receive a 1099 from your lender for the shorted amount.
Credit Report - Short sales are noted on credit reports and will affect your credit rating. Even though a short sale doesn’t seem as bad as a foreclosure, the drop in the FICO score is the same. Damage to your credit score may make it difficult to get approved for future homes and other major purchases.
Paying Back the Difference - In some cases, your lender may legally require you to pay back the difference of the loan and what your house was sold for. Contact a lawyer to find out if you are protected from this or if you will be required to pay.
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