What is Short Sale?

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A short sale is a sale of real estate in which the sale proceeds fall short of the balance owed on the property's loan. It often occurs when a borrower cannot pay the mortgage loan on their property, but the lender decides that selling the property at a moderate loss is better than pressing the borrower. Both parties consent to the short sale process, because it allows them to avoid foreclosure, which involves hefty fees for the bank and poorer credit report outcomes for the borrowers. This agreement, however, does not necessarily release the borrower from the obligation to pay the remaining balance of the loan, known as the deficiency.

Process

In a short sale, the bank or mortgage lender agrees to discount a loan balance because of an economic or financial hardship on the part of the borrower. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender. Neither side is "doing the other a favor;" a short sale is simply the most economical solution to a problem. Banks will incur a smaller financial loss than would result from foreclosure or continued non-payment. Borrowers are able to mitigate damage to their credit history, and partially control the debt. A short sale is typically faster and less expensive than a foreclosure. It does not extinguish the remaining balance unless settlement is clearly indicated on the acceptance of offer.

Lenders often have loss mitigation departments that evaluate potential short sale transactions. The majority have pre-determined criteria for such transactions, but they may be open to offers, and their willingness varies. A bank will typically determine the amount of equity (or lack thereof), by determining the probable selling price from an appraisal, Broker Price Opinion (abbreviated BPO), or Broker Opinion of Value (abbreviated BOV).

Lenders may accept short sale offers or requests for short sales even if a Notice of Default has not been issued or recorded with the locality where the property is located. Given the unprecedented and overwhelming number of losses that mortgage lenders have suffered from mortgage failures that in part triggered the financial crisis of 2007–2011, they are now more willing to accept short sales than ever before. For "under-water" borrowers who owe more on their mortgage than their property is worth and are having trouble selling, this presents an opportunity for them to avoid foreclosure as a result.

Additional parties

Multiple levels of approvals and conditions are very common with short sales. Junior lien-holders - such as second mortgages, HELOC lenders, and HOA (special assessment liens) - may need to approve the short sale. Frequent objectors to short sales include tax lien holders (income, estate or corporate franchise tax - as opposed to real property taxes, which have priority even when unrecorded) and mechanic's lien holders. It is possible for junior lien holders to prevent the short sale. If the lender required mortgage insurance on the loan, the insurer will likely also be party to negotiations as they may be asked to pay out a claim to offset the lender's loss in the short sale. The wide array of parties, parameters and processes involved in a short sale makes it a relatively complex and highly specialized type of real estate transaction. Not surprisingly, short sale deals have a high failure rate and often do not close in time to prevent foreclosure when they are not handled by a knowledgeable and experienced professional. Short sale negotiators, Realtors who are short sale certified (a National Association of Realtors designation), loss mitigation specialists, and real estate lawyers who specialize in short sales are often brought in to handle these deals. Quite often, the average consumer is not aware that the lien holder pays the Realtor commissions, often exacerbating the difficulties.

Consent

Short sales are different from foreclosures in that a foreclosure is forced by a lender, whereas both lender and borrower consent to a short sale. However, this consent may be revoked at any time as short sales are entirely voluntary transactions for both parties. The borrower may decide to remain in the property and attempt a refinance or modification of their mortgage loan, or may refuse to cooperate with the lender's demand for financial documentation or a cash contribution, and thereby ensure foreclosure. Similarly, lenders can refuse to evaluate or approve a short sale offer, generally due to disapproval of either the buyer's offer amount or high closing costs, which reduces the lender's net proceeds. All short sale contracts should include a contingency clause specifying that the contract is contingent upon approval of the seller's lender(s).

Changing consent can present a perilous situation for potential buyers. It can waste considerable time and money for a prospective buyer who anticipated a sale. Typically, deposits with the bank will be refunded but money for paid inspections or other services cannot be.

There are several defenses against this. If the seller has moved out of a property, that is a clue that they have no intention of staying or negotiating further with the bank. "Bank Approved Short Sales" are advertised by real estate advertisements, indicating that a real estate broker has verified the selling bank's position. This still does not guarantee acceptance, and it often does not take junior lien holders into account, but it is better than situations where the bank holding the mortgage has only been lightly involved in the borrower's decision.

Credit implications

Short sales are a type of settlement, and they adversely affect a person's credit report. The negative impact may be less than a foreclosure, but in some cases the effect is the same. Unlike bankruptcy line items, short sales DO show on a credit report like Experian, TransUnion, or Equifax and remain on your credit report for 7–10 years. Some people may have some credit available to them within 18 months or so. Depending upon other credit information, it is possible to obtain another mortgage 1–7 years after a short sale.

While lenders sometimes forgive the remaining loan balance, other lien-holders likely will not. Further, it is possible for a lender to omit updating a credit bureau to zero out a mortgage balance after a short sale. However, willfully misrepresenting information on a credit report can constitute libel in some jurisdictions, and lenders may be sued in civil court for engaging in this behavior.

Approval timeline

Short sale time frames vary from state to state, bank to bank and file to file. Each lender has their own process for review of a short sale and the amount of documentation that is required. The collection and review of each file can vary depending on the borrower’s financial situation and supporting documents the lender requires. Other factors that can significantly affect the approval time frames include the number of lien holders, the investor that owns the loan, if there is Mortgage Insurance (MI) on the loan and the amount of the write off.


source: wikipedia

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