What is a short sale?
A short sale is a sale of real estate in which the proceeds from selling the property will fall short of the balance of debts secured by liens against the property, and the property owner cannot afford to repay the liens’ full amounts and where the lien holders agree to release their lien on the real estate and accept less than the amount owed on the debt. Any unpaid balance owed to the creditors is known as a deficiency. Short sale agreements do not necessarily release borrowers from their obligations to repay any shortfalls on the loans, unless specifically agreed to between the parties.
How does the process work?
Most creditors require the borrower to prove they have an economic or financial hardship preventing them from being able to pay the deficiency. Creditors holding liens against real estate can include primary mortgages, junior lien holders—such as second mortgages, home equity lines of credit (HELOC) lenders, home owners association HOA (special assessment liens)—all of which will need to approve individual applications for a short sale, should they be asked to take less than what is owed.
Most large creditors have departments to evaluate borrowers’ applications for short sale approval. Often creditors use pre-determined criteria for approving the borrowers and the terms of the sale of the properties. Part of this process typically includes the creditor(s) determining the current market value of the real estate by obtaining an independent evaluation of the property with an appraisal, a Broker’s Price Opinion (BPO), or a broker opinion of value (BOV). One of the most important aspects for the borrower in this process is putting together a proper real estate short-sale package, including hardship letter explaining why a short sale is needed.
Depending on each creditor’s policy and the type of loan, creditors may accept applications from borrowers even if the borrower is not in default with their payments. Due to the overwhelming number of defaulting borrowers due to mortgage failures and other causes as part of the 2008–2012 global financial crisis, many creditors have become adept at processing such short sales applications; however, it can still take several months for the process from start to finish, often requiring multiple levels of approval.
A short sale negotiation resulting in a reduction of the amount a borrower owes towards a debt acts as a type of settlement or renegotiation of a borrower’s debt. Should the creditor report the debt reduction to credit reporting agencies, it can adversely affect a person’s credit report. Despite significant misreporting on the topic, damage to one’s credit due to a short sale is really no different from that of a foreclosure. After a short sale, borrowers may find it difficult to obtain a new mortgage because lender’s underwriting guidelines might reject lending to a borrower who has obtained a short sale in the past. As of 2011, national and state laws and industry standards for both real estate sales and lending are in an ongoing and rapid state of change. Borrowers interested in pursuing a short sale should consult first with a HUD-approved mortgage counselor for up-to-date and specific advice as it applies to their situation. Also, borrowers need to obtain up-to-date information from multiple professionals, including an accountant, an attorney, and a real estate broker—all of whom should be specialized in loss mitigation and should be licensed to practice in the state where the real estate is located.
Steps can be taken by homeowners after doing a short sale to get them back on track to getting a mortgage again. The homeowner is advised to obtain a letter from the lender confirming that the loan closed in a short sale, not a foreclosure; and to order a copy of his/her credit report from all three bureaus. Lastly, the homeowner should get pre-approved. This is where the lender will check current guidelines to see if the homeowner is qualified to obtain a mortgage. It is also important for a homeowner considering a short sale to consult an accountant or tax attorney as well. Since a successful short-sale will ultimately reduce the debt of a homeowner, the IRS considers the reduction of debt as income, resulting in certain tax implications.
*Cited from wikipedia