Short Sale Financing 

    With the recent increase in property foreclosures, you may have heard the term “short sale” and are wondering what it means. A short sale is when the Bank/Lender will accept an amount or offer equal to "less than the total amount due on a mortgage, when a property is sold. Usually, the lender will accept the short sale to avoid the time and expense of a foreclosure.

When a borrower is in default on a mortgage, they not only owe the back payments but may also owe late fees, property inspection fees, attorney fees, etc. This can add up quickly to eat up all the equity the borrower has in the property. If the borrower is unable to bring the account current, the Bank/Lender will then foreclose on the property. If the Bank/Lender chooses to foreclose, they may actually lose money on the sale due to the declining real estate market and the extra costs involved with foreclosing on a property: attorney fees, court costs, lost interest, eviction costs, property maintenance costs, and sales commissions to Realtors. Foreclosing on a property can also take up to two years in some states. Therefore, it is sometimes in the best interest of the Bank/Lender to accept the short sale.

The short sale can also be in the best interest of the borrower. They will not have to endure the time and stress of a foreclosure and their credit may not be as adversely affected as it would be with a foreclosure. It is quicker and easier and does not subject the borrower to the public embarrassment of a foreclosure.

The first thing the borrower should do when they can no longer afford a property is to contact the Bank/Lender immediately. The last thing a Bank/Lender wants to do is to foreclose on the property. Banks/Lenders typically have departments that work with people who are behind on their payments to resolve the situation. If you cannot resolve the default with the Bank/Lender, you may want to see if they will accept a short sale.

The Bank/Lender will usually require the borrower to provide a lot of information in order to consider the short sale. The information required may include:

• Income Documentation - W-2's and pay check stubs to verify the borrower's income.
  
  
• Bank Statements to verify the borrower’s assets.
  
  
• Hardship Letter – This letter will describe for the Bank/Lender the reasons the borrowers are in the financial position they are in and will ask the Bank/Lender to accept the short sale. Borrowers are required to back up their story with any documentation they may have such as medical bills, etc.
  
  
• Fair Market Value for the Property – Depending on the Bank/Lender, they may require a Residential Property Appraisal Report, or may accept an opinion from a local Realtor as a Comparative Market Analysis (CMA).
  
  
• Preliminary Proceeds Sheet from the sale of the property - This will show the proceeds of the sale of the property after the mortgage is paid off and all other closing costs and fees are paid. This will be negative in the case of the short sale and this negative amount is the amount of the shortage.
  
  

Listing Agreement and Purchase Agreement (when they are available).

    When the Bank/Lender reviews all of the above documentation, they may or may not approve the short sale. If they do not approve the short sale they will proceed with the foreclosure. If they do agree to the short sale you will close on the sale of your property and the Bank/Lender will take the loss.

The borrower is not necessarily off the hook at this point. The Bank/Lender still has options to collect this shortage from the borrower. As a condition of the short sale the Bank/Lender may require the borrower to sign a note to repay the shortage. They may also file a collection or a judgment for the amount of the shortage. It is highly recommended to hire an attorney with expertise in this area of real estate for professional advice.

Also, the IRS may go after the borrower for income taxes on the amount of the shortage. If the shortage was forgiven, the lender may report the shortage as income to the IRS and report this on a 1099 form (unless the borrower can prove insolvency). The IRS will collect income taxes on this amount from the borrower. For the specifics on this issue, please consult a tax professional.

    Email Us for information on obtaining financing for a Short Sale