What Will Occur During a Short Sale of your home.
A “short sale” pertains to a scenario where the property owner does not have enough equity in the property and not enough cash or liquid assets to be able to sell the property, pay off liens and selling expenses (e.g., closing costs, property taxes, transfer taxes, real estate commissions) and still provide a clear title to the purchaser. In other words, there is more owed on the home than what it will likely sell for on the market.
Lenders use the term to illustrate this as a loan that is “upside down.” Although many short sellers are at-risk of foreclosure, a short sale can also occur to a seller who bought high and took out a lot of equity and might be forced to sell due to a divorce or job transfer. If a homeowner facing foreclosure cannot negotiate with the lender to work out a repayment schedule or loan modification, a short sale can be a viable choice. Many consider a short sale better down the road for the homeowner because it avoids foreclosure which will certainly damage a person’s credit standing and make it more difficult to buy another home in the foreseeable future.
A foreclosure may stay on the credit report for at least 10 years as it is a court action comparable to bankruptcy. However, foreclosure will do even more harm to a credit report than bankruptcy. Ultimately you must prove to the lender that the foreclosure happened due to something beyond your control like job loss or illness.
It’s ideal if the homeowner who chooses to sell can work with a professional REALTOR® before they are delinquent ninety days. During this short window of time, a REALTOR® might help with negotiations with the lender to place the property on the market and possibly save the buyer any equity left, and in some cases prevent a foreclosure on their credit report.
A few recommendations if you’re considering a short sale:
Be wary of scams. Consumer groups have discovered that advertisements that say “Cash for Houses/Any Situation” or “We Buy Houses for Cash” bait homeowners with the promise of rescuing them from imminent foreclosure. Unfortunately, the “rescue” often involves you signing over title of the house to another person or entity, thus, and the family ends up being evicted from their home.
It is important that sellers seek advise from a licensed Illinois REALTOR® to sell their home. REALTORS® are in the business of helping homeowners and have the expertise to assist them through a tough situation. A REALTOR® has the expertise to develop a reliable Comparable Market Analysis (CMA) to figure out the current fair market value of the home.
Be aware of the tax implications of the decision to sell short and seek advice from a tax advisor.
There will be paperwork and research required of you in this process. First you really have to locate your mortgage documents to understand the terms of your loan. If you have authorized an attorney or REALTOR® to act on your behalf in the sale of your home, the bank will need a letter of authorization. Other documentation necessary for the lender includes:
Financial Disclosure Form
One-page “hardship letter” explaining how you got in this position
Last two months pay stubs
Copies of most recent 60 days personal checking account statements for each borrower on the loan.
Copy of signed last two years’ personal income tax returns.
Yes, the short sale normally requires time and consultation with all the appropriate legal, tax and real-estate professionals. It can take from fourteen days to as long as 60 days to obtain an agreement of a short sale from a lender. But usually it’s a much better option than foreclosure given the impact to your credit standing.
Tom Dudzinski, Managing Broker
Illinois Star, Ltd. REALTORS