A short sale is the process by which homeowners can sell their home and the sales proceeds do not full y pay off the existing loan(s) and the lender(s) accepts a discounted payoff to satisfy the loan.
This s accomplished by providing proper documentation to the lender(s) to convince them to reduce the payoff balance to allow the sale. If the sale is approved, the home can be sold for a price lower than the total debt on the property without the seller having to come up with immediate cash to cover the shortfall. The mortgage is either fully or partially satisfied and any foreclosure process stops.
There are several reasons why a mortgage company would agree to accept a short sale
- LEGAL CONCERNS – Mortgage lenders are under legal pressure to work with borrowers to equitably resolve situations where borrowers are unable to meet their mortgage obligation, particularly when the borrower makes an effort to arrive at a compromise solution.
- WALL STREET’S FAVORABLE OPINION – Mortgage lenders rely heavily on their ability to package and sell bundles of loans on the secondary mortgage market. They need to sell these bundles of loans in order to put the funds back to work by loaning the money again and collect loan fees along the way. If mortgages perform poorly after they are sole, it could impact the lender’s ability to sell their loans on the secondary market. A successful short sale will resolve payoffs quickly.
- ASSET MANAGEMENT EXPENSES – If a lender acquires a property through foreclosure, the property will be managed until it is repaired and resold. It is expensive to manage the real property assets. Keeping properties maintained, keeping utilities on, making repairs and the administrative costs attached to these activities are all costs the lender would prefer to avoid. A successful short sale eliminates most of these costs.
- RESERVE REQUIREMENTS – Delinquent and non performing loans place another burden on mortgage lenders. For all delinquent and non-performing loans lenders must set aside funds in reserve to deal with potential losses. These funds cannot be put to work generating new loan fees until the bad loans are resolved. A successful short sale lets the lender put more money to work.
What is a legitimate hardship in the eyes of a lender?
Generally, as long as the hardship is real and the lender believes the loan is likely to become delinquent as a result, the short sale request will be processed. The key to acceptance is a strong hardship letter. The following is a list of common hardships frequently accepted by lenders:
- Family illness or injury
- Job loss or significant income loss
- Divorce or split of domestic partners
- Death of a spouse
- Adjustment in mortgage payments or unforeseen increase in living expenses
How will a short sale affect my credit?
The most important objective is to avoid foreclosure. A short sale will affect your credit rating especially if you miss mortgage payments during the process. Foreclosure, however, is the most damaging to your credit rating.
Can I be considered for a short sale if I am current with my loan payments?
Yes. You must provided the required documentation along with a detailed hardship letter explaining your inability to continue or maintain you loan payments and the reason behind the short sale request.