What is a Short Sale in Real Estate?

A short sale is called as as a short sale because the money fetched from the sale will not be meeting the outstanding mortgage. It usually takes place when a homeowner can no longer afford to continue paying the mortgage. However, the homeowner needs the lender’s permission to conduct the short sale. There are also certain things that the homeowner should secure and submit to the lender to approve the short sale.

In many instances of short sale, the lender usually clears the owner of the property of the obligation to pay the remaining mortgage. The owner will not get a penny from the sale of the mortgaged property, but he/she will be free from paying his/her monthly obligation to the lender. Take note that the lender still has the option to push for a deficiency judgment, wherein the borrower or mortgagor must pay all or part of the remaining balance to the lender.

The Short Sales Process in Real Estate

There are certain steps that a homeowner should follow to ensure a successful short sale. Understand that it usually takes between 4 and 6 months to complete. The waiting period to complete the transaction, which may take even longer than 6 months, commences from the acceptance of the offer.

1. Consult a tax professional and a real estate agent.

In many cases of short sale, the lender cancels the debt once the deal has been closed. If you are the homeowner/mortgagor, you may still need to pay taxes on the pardoned debt. It is prudent to ask a tax professional about the things you need to do or accomplish to avoid the possibility of paying taxes on the pardoned debt.

You also need to consult a real estate agent to ensure smooth short sale transactions. The short sale process is more complicated than you think. The real estate agent can help you gain the fast approval of the lender to proceed with the short sale and even help you find interested buyers.

2. Set a reasonable asking price for the real estate property.

It is very vital to set up an asking price which will invoke the interests of possible buyers and also fetch the approval of the lender to go ahead with the short sale. While it’s true that the agent and homeowner are the ones who will set the asking price, the lender has the final say.

If the set price is too high, it might drive the buyers away. If the set price is too low, the lender may not give his approval. It is prudent to know the current market price for similar properties and the prices of the recently purchased properties within the same community.

3. The homeowner/borrower must furnish documents or evidence that show his/her inability to pay the monthly obligation.

It is a fact that a lender will incur losses in the short sale. If the loan amount is $400,000 and the set price is $300,000, the lender will lose $100,000 when the deal is closed. No lender will want to incur losses. Before he considers a short sale, the lender will require the borrower to submit financial documentation that will show the homeowner’s inability to continue paying the monthly mortgage.

The borrower should submit the following documents to the lender:

– financial statement that shows the borrower’s present assets and liabilities

– bank statements

– paystubs

The lender may require other documents from the borrower. The lender needs to see that the borrower is no longer capable of paying his/her monthly mortgage. The most common reason is a decrease in income when the borrower loses his/her job.

If the person who has borrowed the money has liquid assets, the lender may make it mandatory for the borrower to pay the remaining balance or a part of it from the short sale. For the lender to permit the borrower to have a short sale, he/she must prove that he/she has no liquid assets or other sources of income that can help pay for the monthly mortgage.

4. Submit a hardship letter.

The borrower should also submit a hardship letter stating the reason why the lender should approve the short sale. The letter should be convincing enough to gain the approval of the lender. It should state clear reasons with proof.

5. Look for a buyer.

The real estate agent can help a lot in this department. A seasoned real estate agent will know how to market the property and where to get the potential buyers.

6. Send the proposal to the lender.

When both the buyer and seller have reached a level ground, next up is to submit the proposal to the loan approver to give a green light to the transaction. It is submitted together with all the other documents that the lender requires.

When you can no longer pay your monthly mortgage, a short sale may be your best option.