1) What is a Short Sale?
A short sale occurs when the Lender allows the Borrower to sell the property upon which the lender holds a mortgage for less than the mortgage amount owed by the Borrower. A short sale is a privilege granted by the Lender. It is not a right. Not every Lender will agree to do a short sale. Short Sale Chart.
2) Should We Choose a Short Sale Over a Foreclosure?
A short sale can be completed while a foreclosure case is pending in the courts. Thus, you do not have to choose between a short sale and a foreclosure.
If you are in default (behind on your mortgage payments) and you are not interested in staying in the home and applying for a loan modification with your lender, you should consider short selling the property before the lender initiates a foreclosure action. By doing this, your credit report will not have a foreclosure on the property listed, thereby lessening the negative effects on your credit score.
If your Lender has already filed a foreclosure action against you, you should immediately contact an attorney who specializes in foreclosure defense and retain competent legal counsel to defend the foreclosure action. You may not be aware of certain defenses and rights which will allow you to stay in the property for up to thirty-six months (on average) while your foreclosure counsel defends your rights in the foreclosure action. This will allow your attorney time to take all necessary steps to submit a short sale request to the Lender, including: negotiate a proper Listing Agreement with a Real Estate Agent, allow your Real Estate Agent to show the property, receive a proposed Purchase Contract, and have your legal counsel submit the Purchase Contract, along with required financial documents.
Once the proposed short sale Purchase Contract and all financial documents are submitted to the Lender, the Lender has several choices. They can:
1. Approve the short sale as presented without agreeing to waive any deficiency amount owed by the Borrower.
2. Approve the short sale and waive their right to pursue a deficiency judgment in the future.
3. Present a counter-offer for a higher purchase price.
4. Approve the short sale but require a monetary contribution from the Borrower to complete the short sale.
5. Deny the short sale altogether with no counter-offer.
Should the Lender approve the short sale, IT IS VERY IMPORTANT that you understand what you are agreeing to BEFORE selling the property in a Lender approved short sale. Your goal should be to receive a COMPLETE RELEASE of all amounts owed to the Lender under your mortgage documents. This means that you want the Lender to agree that after the short sale of your property you no longer have any personal responsibility/liability for any amounts that the Lender could claim were not satisfied by the short sale purchase price.
Mortgage balance = $285,000
Lender approved short sale offer = $165,000
Deficiency amount = $285,000 - $165,000 = $120,000
In this example, the deficiency amount, or "short" is $120,000. This is the difference between what the Borrower owes and what the property will sell for. Unless this deficiency amount has been waived by the Lender, in writing, prior to the short sale of the property, the Lender will retain the right to file a deficiency claim against you in a court of law. If successful, the Lender will have the right to go against you for the deficiency amount, plus fees and costs.
CAVEAT: If you had previously listed the property in a bankruptcy and did not affirm the property, very often the lender will have no right to go against you for a deficiency judgment.
CAVEAT: You should always retain legal counsel to represent you in a short sale. A real estate agent, unless licensed to practice law, may not provide legal advice. In addition, you should consult with your tax advisor before completing a short sale to fully understand any tax implications regarding the waiver of the deficiency amount. This is especially true for the short sale of a second home, vacation home, or investment property.
3) What Price Should I List My Property At For A Short Sale?
Your Real Estate Agent should prepare a "BPO" which is a Brokers Price Opinion. The BPO will give you a good estimate of the current market value of your property. An appraisal will provide you with a more definitive estimate, but it is more costly, and a Lender will typically prepare its own BPO on the property as well.
Since you will only be submitting one Purchase Contract to the Lender to consider for a short sale, you will only need one current market value offer from an interested buyer. If you are in a hurry to sell, you should consult with your Real Estate Agent and consider listing the property slightly below the lowest comparable property used for the BPO.
If the Purchase Contract price is too low, you risk having the Lender denying your request for a short sale outright, without making a counter-offer. The Lender is unlikely to accept a low offer, or they will only accept it if the Borrower agrees make a monetary contribution to the short sale closing. Obviously you want to avoid this scenario.
4) Should We Stop Making Our Mortgage Payments to Do the Short Sale?
Typically, in order for a Lender to agree to a short sale, they must have evidence that you are unable to continue making your monthly mortgage payments. If you are current on your mortgage, the Lender takes that as evidence that you are financially able to continue to making monthly mortgage payments. Thus, they will very often deny a short sale for a Borrower who is current on their monthly mortgage payments.
If you decide to default on your mortgage in order to increase your chances that your lender will agree to the short sale offer, but you do not want to risk your Lender filing a foreclosure action against you, we recommend that you only go two months past due.
You made your December payment.
You did not make your January payment.
You did not make your February payment.
At the end of February you are now sixty days (two months) past due.
You make one mortgage payment, plus late fee, between March 1 and March 15th (the grace period).
Your Lender will apply this payment to your past due January payment. Thus, you will still be two months past due, February and March.
Every month thereafter, you will continue to make one mortgage payment (plus late fee) and you will continue to be sixty days past due. This strategy should continue until the short sale is completed.
5) Will the Lender Come After Us for the Difference?
This is the strongest reason to be represented by legal counsel during the short sale process. One of the main reasons to do a short sale is to get a release of personal liability, yet not every Borrower is released. Some loans carry a personal guarantee in some states. Some hard-money loans in certain states allow for deficiencies. In order to be fully released of personal liability for the deficiency amount the Lender must provide such a release in writing prior to the closing of the short sale. Your legal counsel will manage the negotiating of language in the short sale agreement with your Lender so that you are fully released from any personal liability for the deficiency.
6) Will a Short Sale Ruin My Credit Rating?
According to FICO, your credit rating suffers more when there is a deficiency remaining. With a deficiency, the affect on credit for a short sale is almost identical to that of a foreclosure. Without a deficiency the affect on your credit score is less. Lenders typically report a short sale on your credit report as "paid in full for less than agreed," but there are other reporting options. The average drop in credit score during the default and short sale process is one hundred fifty points. After your short sale is complete, you should see a gradual increase in your credit score over the following twelve to eighteen months, assuming that you are making payments to all of your other creditors in a timely fashion.
7) How Can We Do a Short Sale With Two Loans?
A short sale can be successful with more than one mortgage, lien or HELOC (Home Equity Line of Credit) on the property. However, if the lien is from the IRS or other governmental agency, that lien must be resolved before the short sale can be completed. However, if the other lien is simply a mortgage, loan or civil lien, they can often times be negotiated during the short sale process. These negotiations are done by your legal counsel, wherein they work with the first mortgage holder to negotiate an amount which will be received by the other lien holder at the short sale closing. Typically, the lender in first position will allocate a small percentage of proceeds to junior lien holders. However, Borrowers can also be asked to make a “contribution” to the short sale, wherein the Borrower agrees to contribute a monetary amount to the sale. Although this is rare, a Borrower may be required to contribute to the sale when the Borrower is evidencing a surplus after subtracting the Borrower's monthly expenses from net income or the Borrower has substantial liquid assets.
8) Do We Need a Lawyer for a Short Sale?
As you have learned from the discussion above, there are a multitude of reasons why it is important to retain competent legal counsel to represent your interests in a short sale transaction. These reasons include:
a. The negotiation of the real estate Listing Agreement with your Realtor. An attorney's review and negotiation of the Listing Agreement will insure that your Realtor earns their commission only if the short sale closes, not if they bring you a ready, willing and able buyer. You may not be able to agree to close if the Lender does not agree to release you from the deficiency.
b. The negotiation of the real estate Purchase Contract. Again, you want your legal counsel to insert language into the Purchase Contract that will clearly state that you, the Seller, will not be responsible for any out-of-pocket expenses or fees at the closing of the sale.
c. Your attorney will negotiate with the lender on all terms of the short sale Purchase Contract, including any Seller Contribution, fees and costs. Your attorney will also negotiate with your Lender to insure that the short sale results in a deficiency free sale. Remember, the goal is to walk away from the short sale with no further personal liability under the mortgage and note. This is not always possible, but always the goal.
9) Do We Need a Financial Hardship to Do a Short Sale? Most Lenders require that the Borrower provide some evidence that they have suffered a financial hardship. This could include something as simple as showing that your Net Income, minus Household Expenses, results in a deficit every month. Being underemployed having a spouse who lost a job or had their hours reduced, medical expenses, or other extraordinary expense will also qualify as hardships. Due to the increase in requests for short sales and the number of homeowners who have serious negative equity on their homes, some Lenders have loosened their hardship requirements.
10) Why Would the Lender Reject Our Short Sale?
The Lender could reject a short sale for many reasons which they will not disclose. Each Lender has their own Net Present Value (NPV) test that they calculate to determine if it makes financial sense for them to allow the short sale to go forward. Lenders will not disclose the formula that they use to determine NPV and each Lenders formula may be different.
In addition, most lenders such as Bank of America, Wells Fargo, JP Morgan Chase, Citi Mortgage, Aurora, Ocwen, GMAC, etc., are typically not the owner of your mortgage, they are simply the servicer of the mortgage. That means that they have been contracted by the owner of your mortgage to collect the mortgage payments, process loan modification and short sale applications, and various other servicing responsibilities. Thus, your Lender does not have the authority to decide if a short sale will be granted, and if so, under what conditions. This decision is left to the individual investor, or investor group that owns your mortgage.
Therefore, it is possible that two individual short sale applications submitted to Bank of America, which are identical in every way, may have completely different results. This may happen because although both mortgages are serviced by Bank of America, they have different owners/investors, who have different guidelines for agreeing to do a short sale.
If you have further questions, or require further information, do not hesitate to contact the law offices of Morris | duPont, PA to schedule a free one hour consultation to discuss the particulars of your situation. Call toll free 800.974.2712.