Would you like to sell your home but you owe more on it than it is worth?
Many people, including some real estate agents, use the term "short sale" loosely when referring to all circumstances where the owner has to offload the property for some financial distress reason or another. This is far from the truth and not all properties are actually short sales, nor would they even qualify as a short sale.
Why would a lender accept less than what is owed?
Lenders are in the business of lending money, not holding or even selling real estate. The last thing lenders want is to have to go through the trouble of foreclosing on a property. Not only is the procedure time consuming and cumbersome, but the process can be very costly to the lender. In addition to the legal fees and other costs related to foreclosing, once a lender acquires the property, they have to pay the costs of maintaining that property until sold. Upon sale, there are more closing costs and commissions. The longer this whole process takes, the higher the lender's carrying costs are, while not receiving any payments from the person who borrowed the money in the first place. It is often better for the lender to accept less than what is owed and move on.
What qualifies as a short sale?
Not all lenders agree to do a short sale, especially when it makes more sense to them financially to just take the property back and resell it on the open market at a better price. In addition, not all sellers qualify anyway. There are many hoops to jump through to qualify for a short sale. Here are just some of the general criteria needed (although individual banks also have their own criteria, which could change without notice):
1) Your mortgage must be in default.
2) You must be able to prove hardship to your lender. Certain things that would qualify are divorce, death, sudden illness, loss of employment and of course, these need to be proved to the lender.
3) You must have no other assets which could be used to pay off the difference. The lender will get proof of this.
4) The property value must have dropped to less than what is owed.
5) Although each case is different and there are exceptions, lenders generally will not approve a short sale unless the property was a primary residence, not an investment property or vacation home.
There is always substantial documentation that needs to be submitted, before a lender will consider a short sale.
Some other issues to consider You need to know that if you were not completely honest during the original loan application (which is more common when people put down larger deposits and got a "stated income" loan, where less documentation was required), then the short sale application process is the time when things will come to light and could even put you at risk for mortgage fraud.
Also, the lender has the right to issue you a 1099 for the amount of the debt that was forgiven. The IRS will consider this taxable income, although since an act was passed in late 2007, there may be some instances of exemption from that, but these are mainly for principal residences.
Your credit rating can also still be negatively affected by a short sale.
So how does this affect someone looking to buy my property?
Even if you and your property have been "qualified" or "approved" for a short sale, the bank may take several weeks and even months to actually approve a buyer's offer. In 2010 legislation was passed to try and cut down on this time substantially, but years later, expected timelines are still much longer than with normal sales.
Unlike a bank owned foreclosure, a short sale is still a contract between you and the buyer. The proper procedure, once you have accepted the buyer's offer, is for the contract to become a fully binding contract just like any other normal purchase, with the listing being noted as pending in MLS. The contract would then be submitted, along with all the other paperwork, to your bank for approval. The contract is fully binding from day one, only subject to the your lender approving the short sale (which is in reality a financing contingency on the seller's side). This is no different from a normal contract where the buyer is seeking financing and the seller take the property off the market for several weeks, awaiting bank approval on the buyer's side. During this time (whatever is stated in the contract, but usually several weeks), neither party can walk away from the sale, even though they are still unsure as to whether or not this sale will go through.