Questions About Short Sales
What is a Short Sale?
The term "Short Sale" is used in the real estate business to describe a situation where the current fair market value of the property is less than the debt owing against the property. In other words, the Seller can't sell the property unless the creditors ("Third Parties") agree to accept a payment that is less than (or "short" of) the amounts actually owed to those Third Parties. The Third Parties may include mortgage lenders, mortgage insurers, bankruptcy trustees, and federal, state and local taxing authorities (such as the IRS or State Tax Commission) or other lien holders. In some cases, the difference is forgiven by the lender, and in others the homeowner must make arrangements with the lender to settle the remainder of the debt.
To put it simply, a short sale is a transaction where the lender, or lenders, agrees to accept less than the mortgage amount owed by the current homeowner. In some cases, the difference is forgiven by the lender, and in others the homeowner must make arrangements with the lender to settle the remainder of the debt.
What does Third Party Approval mean?
A Short Sale requires the written approval of the Third Parties. The Third Parties may include mortgage lenders, mortgage insurers, bankruptcy trustees, and federal, state and local taxing authorities (such as the IRS or State Tax Commission) or other lien holders. Consequently, the Seller of the property and any Buyer is advised that even if they reach an agreement with each other for the purchase and sale of the property the Buyer's obligation to purchase, and the Seller's obligation to sell, are respectively conditioned upon Third Party Approval of the Short Sale.
Why is the number of Short Sales rising?
Due to the recent economic crisis, including rising unemployment, and drops in home prices in communities across the nation, the number of short sales is increasing. Since a short sale generally costs the lender less than a foreclosure, it can be a viable way for a lender to minimize its losses.
A short sale can also be the best option for homeowners who are “upside down” on mortgages because a short sale may not hurt their credit history as much as a foreclosure. As a result, homeowners may qualify for another mortgage sooner once they get back on their feet financially.
What are the Tax and Legal ramifications of a short sale or foreclosure?
Anyone considering a short sale or foreclosure needs to understand that participating in a Short Sale transaction or having a property go through foreclosure may have negative legal or tax consequences. WE ADVISE YOU TO CONSULT WITH YOUR ATTORNEY OR TAX ADVISOR IF YOU DESIRE SPECIFIC LEGAL OR TAX ADVICE.
What is a Foreclosure?
A foreclosure is NOT a type of property. It is a legal process by which a defaulted borrower is deprived of his or her interest in the mortgaged property. A foreclosure will result in the borrower losing their home and any equity they may have had in the property. It will also result in lowering their credit score by 200 points or more. Moreover, it will remain on their credit history for seven years.
What is an REO?
This is an acronym standing for Real Estate Owned. REO is the status of the property when the foreclosure sale is not successful and when ownership of the property is transferred involuntarily to the lender. If you hear of people talking about a bank owned property, that would be an REO.
I have missed several payments, how long do I have before my home is foreclosed on?
The total length of time depends on the lending institution. Typically, a lender will file a notice of default (NOD) within 90 days of when you missed your first payment. After you receive a notice of default you will have a 90 day reinstatement period. During this time you have the opportunity to bring your account into good standing. If you fail to bring it current, at the end of the 90 days the lender will publish a notice of sale for three consecutive weeks in your local newspaper. The sale date is typically a week after that. Again, depending on the lending institution, the process could take five to six months or longer.
What is a Notice of Default (NOD)?
A notice of default is an official notice from the lender that the borrower has defaulted on the mortgage. The NOD formally begins the foreclosure process. The NOD also outlines the reinstatement period. In Utah, a borrower has 90 days after receiving a notice of default before the lender will publish a sale date. During the 90 days, also called the reinstatement period, the borrower may reinstate the loan by making the required payments and bringing their account into good standing.
What is a Notice of Sale?
If, after receiving the notice of default, the borrower does not or is unable to reinstate the loan, a notice of sale is recorded. The notice of sale explains when and where the foreclosure sale will be held. The sale date must be published in the newspaper for three weeks prior to the sale.
Why are Short Sales preferable to Foreclosure?
Short sales are considered preferable to foreclosures because short sales (1) lessen the impact a foreclosure can have on the surrounding community and (2) won’t damage the distressed owner’s credit as much as a foreclosure.
I am no longer able to pay my mortgage and I would like to pursue a short sale, when should I list my home?
The simple answer is the earlier the better. Short sales typically take a long time and are not always successful. To give you the best opportunity to work out a short sale with your lender we suggest calling today to discuss your personal situation.
How can I find out if I qualify for a short sale?
Ultimately, it will be the final decision of the third party(s). Just because you are willing to agree to a short sale does not guarantee the lender(s) will. Some questions to consider, however, are do you have a valid hardship? A hardship is an event or events that change your ability to keep current in your mortgage payments. LOSS OF EQUITY IS NOT CONSIDERED A HARDSHIP. Some examples of a hardship are job loss, business failure, illness and medical costs, divorce or death of a spouse, and natural disasters. Other questions are do you have enough time to accomplish a short sale before the foreclosure sale date? Have you sought the advice of your legal and tax professionals and what did they recommend? How much do you owe on your property and how does that compare to the current fair market value? Are you willing to cooperate with a real estate professional in completing the short-sale documentation and in maintaining the property for showings?