Short Selling
Nearly 100% of our Short Sales have been approved by the lenders!
In real estate, 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 mortgagor. 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.
Extenuating circumstances influence whether or not banks will discount a loan balance. These circumstances are usually related to the current real estate market climate and the individual borrower's financial situation.
A short sale typically is executed to prevent a home foreclosure. Often a bank will choose to allow a short sale if they believe that it will result in a smaller financial loss than foreclosing. For the home owner, the advantages include avoidance of having a foreclosure on their credit history. Additionally, a short sale is typically faster and less expensive than a foreclosure.
- In short, a short sale is nothing more than negotiating with lien holders a payoff for less than what they are owed, or rather a sale of a debt, generally on a piece of real estate, short of the full debt amount.
Lenders have a department (typically called a loss mitigation department) which processes potential short sale transactions. Typically, lenders do not accept short sale offers or requests for short sales until a Notice of Default has been issued or recorded with the locality where the property is located. Lenders have to approve of any buyer's or listing agent's commission in advance, a primary reason for non-brokered short sales with a specialist or facilitator to save on the margin.
- Any of these facilitators work with a private lending party for their financing, such as a partner or syndicate.
Lenders have a varying tolerance for short sales and mitigated losses. The majority of lenders have a pre-determined criteria for such transactions. Other distressed lenders may allow any reasonable offer subject to a loss mitigator's approval. "Red tape" is very common in short sales, similar to REO and HUD properties, requiring potentially multiple levels of approvals and conditions. Junior liens, such as second morgagees, HELOC lenders, and HOA (special assessment liens), may need to approve of the short sale. Frequent objectors to short sales include tax lieners (income, estate or corporate franchise tax - as opposed to real property taxes, which have priority even unrecorded) and mechanic's lien holders. It is possible for junior lien holders to prevent the short sale.
While it is frequent if not common for a lender to forgive the balance of the loan in question, it is unlikely that a lien holder that is not a mortgagee will forgive any of their balance. Further, it is common for a lender to omit updating the zero balance and settlement option on the mortgagor's credit report, or even flat refuse to do so "due to their financial loss."
Short selling can help out some homeowners
An article by Romi Carrell Wittman
Our house has been on the market for close to 60 days. When looking at that number through the lens of the 2004 housing market, it seems like an eternity. But in today's market, it's not even considered a blink of the eye.
We've had a number of showings and our Realtor is optimistic that we'll get an offer soon. Since we never took out a home equity loan and because we bought our home five years ago, we stand to make a nice little profit, which we intend to use as the down payment on our next home.
But others are not as lucky as my husband and I are. Many borrowers are falling behind on their payments and may face foreclosure. Housing experts predict that, with so many adjustable rate mortgages adjusting to higher rates, in the coming months we'll see a sharp rise in the number of foreclosures.
Many sellers are turning to what's known as short selling as a means of climbing out of their financial dire straits. Here's how it works: In a short sale, the lender allows the property to be sold for less than the total amount due on the loan. In some cases, the lender forgives the remaining debt.
When the housing market was booming and real estate values were appreciating in the near double digits, short selling was virtually unheard of. But with a slower market, more and more home owners are looking to this practice as a way to avoid a costly foreclosure.
The benefits of short selling over foreclosure are obvious. A foreclosure puts a long-lasting black mark on your credit history and the process can be long and costly. Short selling can be much faster and less expensive, and it doesn't look as bad on your credit report as a foreclosure.
Convincing a lender to short sell a property, however, can be very difficult. In addition, the amount of the loan that the lender forgives in a short sell could be taxable to the borrower, so don't think that short selling is the easy, cure-all for the borrower who has fallen behind in his payments.
Several Web sites can help you learn more about short selling, it benefits and its downsides.
- First, check out real-estate.lawyers.com. This site offers a nice overview of short selling and what's involved in the process.
- EHow.com also has a great overview of short selling offers an outline of the steps necessary in a short sale. Go to www.ehow.com.
- About.com has a lot of information about listing your home for sale and working with a real estate agent. Go to homebuying.about.com for more info.
Romi Carrell Wittman is a Tucson-based freelance writer. She has more than 10 years of experience in marketing, Web site strategy and corporate communications. She can be reached at r.wittman@cox.net.
Other Articles
Why Would a Lender Do a Short Sale?
See this article at homebuying.about.com
Ever popular short-sellers market experiencing growing pain
tampabay.bizjournals.com
Additional Information
Fact Sheet: The Mortgage Forgiveness Debt Relief Act of 2007 ?President Bush Signs Legislation Protecting American Families From Higher Taxes When They Refinance Their Homes
In Focus: Homeownership President Bush Signs H.R. 3648, the Mortgage Forgiveness Debt Relief Act of 2007 "When your home is losing value and your family is under financial stress, the last thing you need is to be hit with higher taxes. So I'm working with members of both parties to pass a bill that will protect homeowners from having to pay taxes on cancelled mortgage debt."
- President George W. Bush, 9/1/07
Today, President Bush signed the Mortgage Forgiveness Debt Relief Act of 2007, which will help Americans avoid foreclosure by protecting families from higher taxes when they refinance their home mortgages. This Act will create a three-year window for homeowners to refinance their mortgage and pay no taxes on any debt forgiveness that they receive. Under current law, if the value of your house declines, and your bank or lender forgives a portion of your mortgage, the tax code treats the amount forgiven as income that can be taxed.
This Act will increase the incentive for borrowers and lenders to work together to refinance loans and allow American families to secure lower mortgage payments without facing higher taxes.
This Act Is A Good Step To Address The Housing Market, But Congress Has More Work To Do Congress needs to complete work on responsible legislation modernizing the Federal Housing Administration (FHA). This bill will give FHA the necessary flexibility to help hundreds of thousands of additional families qualify for prime-rate financing. Congress needs to pass legislation permitting State and local governments to help troubled borrowers by issuing tax-exempt bonds for refinancing existing home loans. Under current law, cities and States can issue tax-exempt bonds to finance new mortgages for first-time homebuyers.
Congress needs to pass legislation to reform Government Sponsored Enterprises (GSEs) like Freddie Mac and Fannie Mae. GSEs provide liquidity to the mortgage market that benefits millions of homeowners, and it is vital that they operate safely and soundly. The President has called on Congress to pass legislation that strengthens independent regulation of the GSEs and ensures they focus on their important housing mission.
The Administration Has Moved Forward On Targeted Actions To Assist Homeowners That The President Announced In August The President and his Administration have launched a new initiative at the Federal Housing Administration (FHA) called FHASecure. FHASecure expands the FHA's ability to offer refinancing by giving it the flexibility to work with homeowners who have good credit histories but cannot afford their current payments. By the end of 2008, the FHA expects this program to help more than 300,000 families refinance their homes.
Treasury Secretary Henry Paulson and Housing and Urban Development Secretary Alphonso Jackson have assembled the private-sector HOPE NOW alliance. HOPE NOW recently mailed hundreds of thousands of letters to borrowers falling behind on their payments and is supporting a toll-free mortgage counseling hotline, 1-888-995-HOPE.
HOPE NOW has developed a plan under which up to 1.2 million homeowners could be eligible for assistance. The HOPE NOW plan will help subprime borrowers who can afford the current, starter rate on a subprime loan, but would not be able to make the higher payments once the interest rate goes up.
