Short Sales
A short sale is when a lender agrees to accept less than the full amount due on a mortgage when a property is sold. The lender will sometimes accept the short sale to avoid the time and expense of a foreclosure.
About 18% of home sales are actually short sales, according to the National Association of Realtors. But it can be extremely difficult to get these deals done because they require the approval of not only the buyer and the seller, but also the mortgage-servicing company.
Before deciding that this is the route to take, remember that this is not a road without bumps. In fact:
• It can take weeks or months to get mortgage companies to respond to an offer.
• Mortgage servicers may balk at the purchase price.
• Homeowners may have more than one loan on the property, slowing the process.
But I Want To Sell My House Today – Not In Four Months!
If your home is going into foreclosure, you don’t have the luxury of a lot of time to get the deal done. If it’s going to work it needs to work fast – and short sales just don’t work that way.
The most frequent frustration is the fact that servicers take an average of 41⁄2 weeks to provide an answer on a potential short sale, with some taking two months or more to respond.
Deals can fall apart because the mortgage company rejects the price that has been agreed upon by the buyer and seller. Long delays in getting an answer from the mortgage servicer are another obstacle.
Gathering all the information needed to evaluate a short-sale offer can take time – a lot of time. The loan servicer must first determine whether the homeowner really can’t continue meeting the loan payments, then get an appraisal or broker’s opinion of the home’s value.
Mortgage servicers also try to ensure that the proposed sale is an “arm’s length” transaction between two parties rather than, say, a sale to a relative on sweet terms. They must also determine whether the buyer has sufficient funds or the ability to get a loan. If all those hurdles are cleared, the servicer may still need to get approval from the investor that owns the loan.
The success rate for short-sale offers is very low - in fact, some industry figures estimate that 20% of short-sale offers in the area lead to completed sales, compared with 85% for more traditional sales.
More Than One Mortgage Means More Problems
There are additional complications if you have a mortgage and a home-equity loan. In that case, both parties must approve the deal - which is difficult if the sales price may not even be enough to cover the mortgage balance.
Your mortgage company may approve the deal, only to have it fall apart when it hits the home equity lender. With a foreclosure looming, the last thing you need is to have the short sale option disappear at the last minute.
Mortgage Companies Hate Short Sales
Some servicers don’t approve short sales because they want borrowers to look into alternatives to keep the home – and ensure that the mortgage gets paid. The servicer will do anything possible to keep you in the home rather than taking a loss. Many would prefer to see you in a Chapter 13 bankruptcy because at least they will get paid through the court Plan.
Short Sales = Credit Problems, Tax Problems
Also, the IRS may come after the borrowers for income taxes on the amount of the shortfall. If the shortfall was forgiven, the lender will report the shortage as income to the IRS and the IRS will collect taxes on this amount.
In addition, a short sale will wreck your credit the same way as a foreclosure. The only difference is that in a foreclosure situation you are going to have the chance to fight the mortgage company – in a short sale, you’re rolling over and giving them everything they want.