Short Sale Process
When a seller owes more on their mortgage than the property’s current market value, they may need to proceed with a short sale, where the lienholder agrees to accept a discounted payoff. This process involves significant coordination with the lienholder, who will be central to all key decisions.
Firstly, the seller should understand that a short sale requires approval from the lienholder, who must consent to accept less than the full loan balance. This approval process can be complex and time-consuming. It usually starts with the seller providing the lienholder with financial documentation and a hardship letter that details why they can no longer afford the property. At this stage, the lienholder may either pre-approve a short sale listing price or wait for an offer from a prospective buyer before proceeding with approval.
Once an offer is submitted, the lienholder typically orders an appraisal or a Broker Price Opinion (BPO) to verify the market value of the property. This assessment helps the lienholder decide whether the proposed sale price is acceptable. It is important to note that, although the contract is between the buyer and the seller, the lienholder’s consent is essential. Without it, the sale cannot proceed. The Texas Real Estate Commission’s Short Sale Addendum (TREC 45-2) should be attached to the offer. This document outlines the contingent nature of the sale on the lienholder’s approval.
Throughout this process, sellers should be prepared for potential delays and setbacks. If the lienholder denies the short sale, the seller may face foreclosure. Additionally, lienholders sometimes require that the seller secure a purchase offer before they agree to initiate the short sale process. Sellers should also be aware that even after months of negotiations, the lienholder might counter the buyer’s offer or refuse it altogether. If the lienholder accepts the offer, they will provide a release of lien upon closing, which finalizes the discount payoff and allows the sale to proceed.
Engaging in a short sale requires patience and a willingness to comply with the lienholder’s procedures and timelines. Sellers should stay informed and prepared for various outcomes, including the possibility of a denial, and should work closely with their real estate agent and any relevant legal or financial advisors to navigate this complex process.
Here are common documents and items that a lienholder typically requests from the seller to approve a short sale:
Hardship Letter: A personal letter from the seller explaining the financial difficulties that prevent them from keeping up with mortgage payments. This letter should detail specific circumstances, such as job loss, medical expenses, divorce, or other financial hardships.
Financial Statements: A detailed breakdown of the seller’s current financial situation, including income, expenses, assets, and liabilities. This often includes bank statements, pay stubs, and a list of monthly expenses.
Tax Returns: Copies of the seller’s most recent federal and state income tax returns (usually the last two years) to verify income and financial situation.
Proof of Income: Documentation of all income sources, such as recent pay stubs, Social Security or disability benefits statements, or other income sources.
Bank Statements: Copies of the seller's bank statements from the past two to three months. This provides the lienholder with an overview of the seller's financial activity and cash reserves.
Listing Agreement: A signed agreement between the seller and their real estate agent, showing that the property is actively listed for sale.
Purchase Agreement: A fully executed contract between the buyer and seller that includes the sale price and terms of the short sale offer.
Preliminary Settlement Statement (HUD-1 or Closing Disclosure): An itemized list of closing costs, including the amount the lienholder will receive. This document is often prepared by the title company and shows the breakdown of all expected costs and proceeds.
Comparable Market Analysis (CMA) or Broker Price Opinion (BPO): A report showing recent sales of similar properties in the area, providing justification for the proposed sale price.
Authorization to Release Information: A signed document allowing the lienholder to communicate with the seller’s real estate agent or other authorized representatives regarding the short sale.
Additional Lienholder Documentation: If there are multiple lienholders, the primary lienholder may require proof that junior lienholders (such as a second mortgage) also agree to the short sale terms.
The specific requirements may vary by lienholder, but these are common items that most lienholders will request to evaluate and approve a short sale. Working with a knowledgeable real estate agent who can help prepare and submit these documents is essential to ensure a smoother process.
Here are five frequently asked questions and answers that sellers often have about short sales:
How does a short sale affect my credit?
A short sale will impact your credit, but generally less severely than a foreclosure. It may still remain on your credit report for up to seven years, potentially making it more difficult to obtain loans during that period. However, some lenders view a short sale more favorably than a foreclosure, which can sometimes help with quicker recovery in creditworthiness.
Will I get any money from the sale?
Typically, sellers do not receive proceeds from a short sale, as the lender agrees to accept less than the amount owed to cover the mortgage. The lender takes a loss on the loan, so any proceeds go directly to cover the debt. However, certain government programs, like the Home Affordable Foreclosure Alternatives (HAFA) program, may allow for financial assistance, depending on eligibility.
How long does the short sale process take?
Short sales are often time-consuming and can take anywhere from several weeks to several months, depending on the lender’s approval process. Many lenders have layers of internal reviews that must be completed, including appraisals and negotiations with all involved parties. It is essential to work with an experienced real estate agent who understands these complexities to help expedite the process.
Are there tax implications for completing a short sale?
Yes, debt forgiven during a short sale can be considered taxable income, as the IRS may treat it as “cancellation of debt” income. The Mortgage Forgiveness Debt Relief Act may offer some protection if the property was your primary residence and you meet certain conditions, but it’s wise to consult a tax professional for specific advice based on your situation.
Is a short sale guaranteed to stop foreclosure?
Not necessarily. Starting a short sale process does not automatically halt foreclosure. However, lenders may agree to delay foreclosure proceedings while short sale negotiations are underway, as it could be more beneficial for them than foreclosure. Still, there are no guarantees, and the foreclosure process might resume if the short sale is unsuccessful.
These FAQs can help sellers understand the basics, but each short sale is unique, and it’s advisable to consult with a real estate agent and a tax professional to navigate specific circumstances
