When anyone makes a new home purchase, they had the understandable desire of securing stability, building equity, and being on time every single month. But a harsh dose of reality does indeed indicate that as one of the biggest debt items there is out there, mortgages can bestow a solid amount of risk along with that reward.
Somehow, multiple life events may have taken place that left you a bit behind, on the kitchen table is now a stack of important notices that claim you are dreadfully behind on payments. It may be student loans, divorce, or even medical issues that leave buyers in this boat, and fortunately, there is hope. Instead of facing foreclosure head-on, the element of a short sale can offer a little bit of monetary peace.
With an agent who wants you to come out ahead, a nice heaping of robust patience, and close attention paid to regulation, you can make use of this process to your advantage. Basically, a short sale takes place when your lender agrees to allow you the benefit of selling your home for less than is owed on the total mortgage.
Short sales began making their more consistent appearance around 2008, when they made up a fairly large 11% of home sales, and agents were enlisted to acquire a more thorough understanding of the transaction, while developing the skills to navigate the short sale waters.
With home prices growing and the economic resurgence over the last few years, short sales thankfully now made up only about 1% of total home sales during 2018. The most common form of short sale takes place when a homeowner faces themselves being underwater, meaning they now owe more on their total mortgage than the home’s total worth.
Although the short sale will allow you to in essence “walk away” from your mortgage without any penalty, a short sale can result in some negative implications that will affect you. The IRS actually treats forgiven debt as income that is taxable, and so even if you do not still owe the lender, you may still, in essence, owe the federal and state government. The lender will officially report the forgiven debt on a 1099-C form so pre-planning by attempting to set money aside to cover this increase is wise.
The lender may actually report your mortgage as a line of credit “not paid as agreed” which could result in a 7-year blemish on your history. For some, this will seem worth it as opposed to the final blow of foreclosure, and it depends on your own unique situation. Finally, your outstanding debt may be sold off to a collection agency that has the means and right to make things a bit difficult for you.
This process is ideal for you if you are underwater on the loan itself, behind on your actual mortgage payments, unable to refinance, or face long-term financial hardship. Needing to list the home in market conditions that are unfavorable and effect fulfilling the debt obligation in its entirety. Distressed sales such as this are quite different from the traditional home sale, and the true role of the agent is to handle the introduced extra element of unpredictable hostility vs. forgiveness.
Finding an agent that is a Certified Distressed Property Expert is of great benefit to you, as well as one who has completed the NAR’s Short Sales and Foreclosure Resource Certification program. Knowing right out of the gate that you are working with a professional who is seasoned in your particular hardship will make the journey much easier in the long run.
There will be many various documents that you will be submitting along the way, and the initial hardship letter is the most pertinent one in the bunch. You submit the letter officially to the bank along with some other documents, to prove that you are in fact financially unstable. Within the body, it’s important to be as clear as possible regarding why you are unable to make your mortgage payments in full and by the specified time monthly.
After the hardship letter is drafted with the assisting expertise of your real estate professional, the bank then needs a bit more documentation to understand the situation before a short sale takes place. The Letter of Authorization is what grants the bank permission to disclose personal information to the title companies, agent, and any other parties that will be involved. Here you reference the physical address, contact info for your agent, and the number of the loan being referenced.
The Preliminary Net Sheet is an in-depth personal snapshot show shows how much you will owe when the new sale closes. It outlines the outstanding payments, commissions, and fees including what the anticipated closing price on the property will be.
Proof of Income, Assets, and Bank Statements were documents that were needed when you were initially pre-approved for the loan, and now the lender needs to zoom in and check out items like other real property, investments, or any other means that would help put to rest the standing obligation. The lender simply needs in-depth transparency regarding the homeowner’s recent and deep-seeded difficulties.
Once the lender approves you for this process, your agent can handle negotiations between the prospective buyer, you, and the financial institution in question. If there is not a prospective buyer ready and willing right away, the agent will market the home as any property out there on the MLS and beyond.
One of the issues that buyers may encounter with a short sale is a legally-mandated disclosure packet that outlines every single defect with the home. The lender themselves are not required to prepare it, and so some buyers are approaching the short sale without the in-depth knowledge regarding some of these traits.
During the short sale process, it is also important to keep steadily up to date with any insurance, HOA dues, and utilities. Don’t let landscaping or any other maintenance that affects curb appeal fall into the “slacking” category, as these may just be other barriers that provide a slowdown for you meeting your goal.
Some of the most important things you can do during the short sale process are to be patient, and proactive. The bank may not provide an official response to the initial hardship letter for up to ten months, and you’ll want to pick an agent that knows these ropes well, and the trials they are privy to.
You don’t have to see this as a disaster, rather a time to learn, and become a more intelligent buyer when the optimum time comes down the road. If you find yourself in distress due to unforeseen circumstances, an expert such as Dorrmat may be willing to give you a reasonable offer, speed up the closing process, and even provide services such as extended-stay housing and movers to lighten your load during a stressful time!