Before we get into the nitty gritty, let me start off by saying a few things about myself. My real estate career began after my employer, a boutique financial firm where I was CFO, closed abruptly. When the shock wore off, and I finished mourning, I picked myself up, dusted myself off and started over in real estate. It wasn’t easy, but now I find tremendous satisfaction in helping homeowners understand the options and the obstacles to getting back on their feet.
The point I’d like to make here is this: things happen, you can adjust, and you can start over. Yes, the economy is bad. We are at close to 10% unemployment. Your home value probably has dropped, and, if you owe more than your house is worth, a short sale may provide the relief you need to get your financial life back on track.
Here are the things you need to consider:
1. If you can’t afford to keep your home, and your home is worth less than the balance of your mortgage, you may be able to avoid foreclosure by participating in a short sale. In a short sale the bank agrees to allow you to sell your house for less than your mortgage balance as a first step toward settling your outstanding debt.
2. Short sales can be preferable to foreclosure in several ways. Unlike a foreclosure, a short sale puts YOU in control of the sale, not the bank. Your home sale will be handled like any other listing, with one exception. Before an offer is fully executed, the bank must agree to the price and terms.
3. A short sale can be preferable to foreclosure because it MAY cause less damage to your credit. A short sale MAY also result in a shorter waiting period before you are able to finance another home.
4. In order for a bank to consider a short sale you must prove that you have been subject to legitimate Hardship. Living beyond your means, buying another home, problems with neighbors or outgrowing your current home do not qualify. Hardship means hardship, and examples include unemployment, divorce, medical emergencies, bankruptcy or death.
5. Once you establish legitimate Hardship, the bank will consider other factors including the current Market Value of the home. You must produce hard comparable data to demonstrate that your home is worth less than the unpaid balance owed to the lender.
6. You mortgage must be in Near Default Status. It used to be that lenders would not consider a short sale if your payments were current, but that is no longer the case.
7. You must be able to demonstrate that you have no other assets with which to satisfy your mortgage obligation. Be ready to provide copies of your tax returns, pay check stubs and/or financial statements. Should your lender discover undisclosed assets, they will deny the short sale and expect you to apply those assets toward your mortgage balance.
8. No set standard applies to lender approved short sales, and a variety of outcomes is possible. Sometimes you can negotiate away the balance owed and eliminate your debt entirely. Other times, the bank will obtain a deficiency judgment against you. In that case, the sale of your home will satisfy only part of your mortgage obligation, and you will have to repay the balance at a later time. A bank can also forgive your debt but issue a 1099 Tax Form. The 1099 transforms the forgiven debt into taxable income for you. If this happens, however, you might qualify for tax relief on your primary residence under the Mortgage Forgiveness Debt Relief Act of 2007 (With the Emergency Economic Stablization Act of 2008 which extends benefits out to 2012).
9. Anyone who has participated in a short sale will tell you it is often frustrating and slow. On average, banks take 45-90 days to decide whether to accept or reject an offer submitted by the seller. Knowing what to expect makes the process a bit easier to manage.
10. A very high percentage of short sales never make it to closing. Lack of experience on the part of the seller’s agent is often to blame, and the result can be an unwanted foreclosure after the short sale fails. Choose your Realtor carefully.
If you stick with professionals who specialize in this area, you will give yourself the best shot at avoiding foreclosure and getting your financial life back on track. If you would like to have a confidential conversation about whether a short sale makes sense for you, please call.