A SHORT COURSE IN REAL ESTATE SHORT SALES AND YOU
A short sale is a method whereby a lender on a piece of
real estate consents to it being sold for less than the remaining balance on the Mortgage Loan. Thereby avoiding foreclosure proceedings.
The lienholder, mortgage company, bank ,etc, is induced into accepting a lesser amount ( in full satisfactioin of the debtor’s obligation) on the grounds that there are insufficient proceeds from the sale to pay the debt in full.
Example; Mr. Jones purchased a home in 2005 for $400,000.00 with a five year interest only loan in the amount of $375,000.00 (94% financing). Assume that in
2007 Mr. Jones lost his job and has failed to make his mortgage payments for the last 12 months. Assume also that the market conditions have deteriorated and the property is now worth only $350,000.00, as per the contract of sale Mr. Jones and his realtor have from a qualified buyer. The lender is now asked to accept the short sale and receive a net amount of $326,000.00 (after real estate commissions, legal fees, realty transfer tax, property taxes, and other outstanding bills). If the lender does not agree to the short sale it is possible that the real estate could go into foreclosure, most likely at a greater loss to the lender.
Does the lender have to agree to a short sale. NO. The lender actually has other options, such as below.
1.) Lender can agree to the short sale.
2.) Lender can agree to the short sale and
require the borrower to enter
into a loan for the remaining balance or
request that the buyer
contribute to the shortage.
3.) Lenders do not generally view short sales
as a good alternative and may refuse to
consent to the short sale or seek other
alternatives such as the following:
(a) Loan modification. Like
extending term, reduced
Interest or adding
delinquent payments to principal
(b) Repayment plan. Like increasing
the monthly payment until the
loan is brought current.
The lender will consider many factors to help them with their decision, such as the following:
1.) The net amount anticipated to be received.
2.) The time and costs associated with
Foreclosure
3.) If the lender accepts the short sale, they
do not have to report the loan as non
performing which could negatively affect
the lenders ability to borrow money as well as
affect the reserves which lenders are required
to maintain to address foreclosures and
potential losses
4.) Political pressure.
5.) Secondary market pressure, because high
foreclosure rates negatively impact the sale of
future loan bundles.
If you are considering a short sale you must contact the lender at least 60- 90 days in advance of a closing to obtain a short sale package. The seller must contact the Loss Remediation Department, not the Customer Service or the Collection Department. Seller must submit a package generally containing the following information which must reflect the “financial hardship”:
(a) W-2 Forms
(b) Bank Statements
(c) Two years of most recent tax returns
(d) Financial Statements showing other debts.
(e) Hardship letter explaining the circumstances
preventing borrower from being able to pay
the loan in full
(f) Details of the sales transaction
Some negative effects of a short sale vs a foreclosure are that generally a short sale will lower the seller’s credit score (FICO) by 100 points, and a foreclosure will generally lower the seller’s credit score (FICO) by 250 points or more. Additionally, a foreclosure may force the seller to wait as much as 36 months before they can buy again vs a short sale where the seller could buy again generally in about 18 months.
Good news is that the Mortgage Forgiveness Debt Relief Act of 2007 allows taxpayers a new exclusion from federal taxable income for up to $2,000,000.00 of principal residence mortgage forgiveness debt discharged in 2007 through 2009, if certain criteria are met.
For more information about selling or buying a real estate short sale please contact:
“Col” Paul R Hauke BA MBA Realtor Associate/Auctioneer
PRUDENTIAL ZACK SHORE PROPERTIES
401 Spier Ave
Allenhurst, NJ 07711
Office 732-988-4499 ext. 123
cell 732-899-8952
web: www.mlsprh.com