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sellers who decide that their home won't sell at the price they had
imagined often start to wonder if they should do a short sale. A
short sale is an option to consider, but you should consult your Realtor
and lender first.
is a Short Sale?
A short sale happens when the lender is shorted on a mortgage, meaning the
lender accepts less than the total amount that is due. If your mortgage is
$100,000, but your home is worth, say, $90,000, you are $10,000 short, not
including costs to close the sale such as real estate commissions,
recording fees or title, taxes and escrow charges.
Sometimes, to avoid going through the costs of foreclosure, a lender
will sanction a short sale by letting a buyer purchase the home for less
than the mortgage balance while the home is in pre-foreclosure stage. A
pre-foreclosure stage is one of the three stages of foreclosures.
Here are sample steps of a short sale:
1) Seller signs a listing agreement with a real estate agent subject
to selling as a short sale with third-party approval.
2) The agent finds a buyer who makes an offer for less than the
amount of the mortgage.
3) Seller accepts the buyer's purchase offer.
4) Seller's lender accepts the buyer's purchase offer.
5) Transaction closes when the buyer delivers the funds, the lender
releases the lien and the seller delivers the deed.
In fairy-tale land, everybody lives happily ever after. Except the seller.
There are consequences.
Qualifications for a Short Sale
Before you begin, you should consider the following to determine
whether you may qualify for a short sale;
1. The Home's
Market Value Has Dropped.
comparable sales must substantiate that the home is worth less than
the unpaid balance due the lender. This unpaid balance may include a prepayment
penalty. Click here to find comparables.
2. The Mortgage is
in or Near Default Status.
used to be that lenders would not consider a short sale if the payments
were current, but that is no longer the case. Realizing that other factors
contribute to a potential default, many lenders are eager to head off
future problems at the pass.
3. The Seller Has
Fallen on Hard Times.
seller must submit a letter of hardship that explains why the seller can not pay the difference due upon sale, including why
the seller has or will stop making the monthly payments.
A few examples that do NOT constitute a hardship are:
1) Bad purchase decisions. Blowing your paycheck on a home theater
system with surround sound does not qualify as a hardship.
2) Unhappy with the neighbors. Even if every home on your block has
turned into pot growing houses, that will not qualify as a hardship.
3) Buying another home. The lender will not care if you have decided
the home is no longer suitable for you or your family.
4) Pregnancy. Increasing the size of your family or starting a
family is not considered a hardship.
5) Moving into an apartment. If you decide to move out of your home,
that is a lifestyle decision and not a very good reason to abandon your
Examples of hardship are:
Medical emergency / sudden illness
4. The Seller Has
The lender will probably want to see a
copy of the seller's tax returns and / or a financial statement. If the
lender discovers assets, the lender may not grant the short sale because
the lender will feel that the seller has the ability to pay the shorted
difference. Sellers with assets may still be granted a short sale but could
be required to pay back the shortfall.
For example, if the seller has cash in a savings account, owns other real
estate, stocks, bonds or even IRA accounts, the lender will most likely
determine that the seller has assets. However, the lender might discount
the amount the seller is required to pay back.
Many entities profit from short sales, but there is no seller short sale
Short Sale Consequences
A short sale is dependent on a buyer making an
offer to purchase. If you do not receive an offer, you will not qualify for
a short sale. So even if you meet all the other criteria, it is possible
that no one will buy the short sale. It is also dependent on the
lender accepting the buyer's offer. If the lender rejects the offer,
a short sale will not take place.
Qualifying for Short Sales @ About.com
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