Today, many homeowners are asking "
what is a short sale?" Short sales are a technique used by mortgage lenders in which borrowers are allowed to sell their home for less they is owed on their mortgage note. Not all properties or borrowers qualify for short sales and approval to engage in this type of transaction must be granted by the mortgage lender.
Nearly every day I am asked, "
what is a short sale and how does it stop foreclosure?" As an investor, I have worked with numerous homeowners who are trying to avoid foreclosure by engaging in short sales. It is important to realize that once properties enter into foreclosure they are no longer eligible for short sale. Therefore, if you are facing foreclosure, but have not yet been served notice, now is the time to contact your bank's loss mitigation department to determine if this option is available.
The next most frequently asked question is "why would a lender accept less than is owed on the home loan?" The answer is, short sales typically cost mortgage lenders less than foreclosure. According to mortgage financier, Freddie Mac, engaging in
foreclosure costs banks an average of $60,000 to $80,000 per property.
Allowing struggling borrowers to sell their property for less than is owed can be less detrimental to the lenders' profit and loss statement. Today, many banks are holding a large number of non-performing loans. Banks receive money from the U.S. Federal Reserve based on profit margins. When banks incur more loss than profit, the Fed can reduce or suspend funding. By engaging in
short sales, lenders can reduce their losses and keep their line of credit open.
Currently, there is no standard protocol in place for obtaining
short sale approval. However, certain criteria have been established to determine if properties qualify. The criteria requires borrowers to be at least 31 days delinquent on their mortgage note; owe more than the appraised value of the property; and not own assets which could be sold to repay the loan.
Borrowers must undergo a financial audit similar to those conducted by the Internal Revenue Service. Multiple financial documents must be submitted to the bank's loss mitigation department for review. These can include payroll records, bank and financial statements, previous years' tax returns, list of income and expenses, property taxes and insurance premiums.
Most mortgage lenders require borrowers to submit a
short sale hardship letter outlining events which caused the borrower to become delinquent on their loan. From personal experience, I believe the letter of hardship is one of the most crucial elements in obtaining short sale approval.
Banks engage in different types of short sale arrangements, so it is extremely important to determine which type is available through your lender. The preferred choice is referred to as
Payment in Full without Pursuit of Deficiency Judgment. Payment in Full releases the borrower from owing the deficiency amount between the sale price and loan balance. Once the home is sold the borrower can walk away without owing additional money.
The second type of short sale is referred to as a
Deficiency Judgment. This transaction holds the borrower responsible for the deficiency amount. Oftentimes this can amount to several thousand dollars and careful consideration should be given to entering into this type of short sale agreement.
Deficiency judgments remain on borrowers' credit report until paid in full. In many cases, this can take several years to repay and will wreak havoc on your credit rating. The judgment remains on your credit report until fully repaid and can prevent you from obtaining another mortgage loan or credit of any type.
If you are struggling to make your mortgage payments, now is the time to take action. Simon Volkov is a short sale specialist who has helped hundreds of homeowners avoid foreclosure through short sales. Learn more about the process of short selling and available options by visiting
www.SimonVolkov.com.
