Snapshot of a Short Sale

Written by Alan Brown

A short sale is a form of pre-foreclosure sale and occurs when the mortgagee (lender) agrees to accept less than the loan amount to avoid foreclosure. This alternative can be a win-win when the banks can get the property off their books, the seller gets to save their credit, and the buyer gets a discounted purchase price. With the recent upsurge in foreclosures, short sales are considered to be a better option then going through foreclosure.

A Short sale will have some impact on the seller's credit. The loan will show up as "paid" on their credit report; however there will be a notation that says "settled for less than originally owed" or something of the likes.

There are professionals that can help in a short sale including investors, agents, and brokers. Do your homework carefully to screen qualified people to help with a short sale because it can be long and very frustrating exercise. The REIA in your area is an excellent place to locate prospective investors.

If you are going through bankruptcy, most mortgagees won't consider a short sale. Why? Because negotiating a short sale payoff is considered a collection activity. Collection activities are prohibited in bankruptcy. Make sure you seek legal advice regarding bankruptcy regulations in your area.

If you successfully negotiate a short sale offer, remember that seller cannot profit (monetarily) from a pre-foreclosure short sale.

Typically, lenders would be willing to do a short sale after the home owner missed their payments for 90 days. Lenders will send a BPO or full appraisal of the property before making their decision to accept or reject the short sale offer. This is their only way of assessing the value of the property. To prepare yourself for a short sale, the lender will need from the seller the following documents:

A completed Financial Worksheet (Every Lender is a little different so talk with your Realtor and your Lender to coordinate all of the necessary paperwork)
Current proof of income reported. Usually two or more pay check stubs or a work contract.
Brief letter of hardship. Why do you HAVE to sell? What's going on in your life that you're asking a lender to lose sometimes up to $100,000. Make it real and make it good.
Copy of your most recent Tax Returns.
Listing agreement to sell the property. It MUST be listed before they will negotiate....and usually you must have an offer in order for them to even talk to you.
Signed purchase agreement or Sales Contract.
Seller Net Sheet or a HUD-1 statement.
Pre-qualification letter for the buyer who put in the offer or proof of funds if it is a cash deal.

In cases where the lender believes that there is a considerable equity regarding the property being considered for the short sale, they might prefer to foreclose and later resell at a price closer to the property's original value.

From a legal point of view, you will need to know the implications of the "Due on Sale" Clause. The definition of a DOS Clause is that in a mortgage or deed of trust calling for the total payoff of the loan balance in the event of a sale or transfer of title to the secured real property. What this means is that the loan must be paid when a house is sold (a change in ownership).