Short Sales and You: Selling Short to Avoid Foreclosure
Selling short involves marketing and selling a property for a lower price than you still owe on the mortgage loan. Although certainly not the ideal situation, a short sale allows you to avoid foreclosure while marketing and selling your home yourself.
Applying for a Short Sale
Most lenders have a specific short sale application process. Because short selling has become much more popular in the wake of the recent housing crisis, more lenders than ever are willing to offer you a deal to sell your home and walk away.
Before you call your lender and explain the circumstances that lead you to want to sell your home short, check the lender’s website. Some lenders have extensive information about the short sale process, along with lists of the documentation they require and downloadable short sale applications online.
Your Finances Determine Your Eligibility
Don’t think that you can get approval from your lender to sell your home short if you aren’t suffering from extensive financial trouble. Lenders aren’t in the business of taking a loss so that homeowners can walk away from homes with negative equity. You’ll need to prove to your lender that you can’t afford the payments on your home before you can sell your home short.
Part of providing proof is submitting documentation of your financial situation. Different lenders have different requirements, but a copy of your bank statements, tax returns and pay stubs is a common request lenders make. You’ll also want to write a hardship letter detailing the reasons behind your short sale request.
Don’t try to hide assets during this process. Hiding assets from your lender during the evaluation process is short sale fraud. This is illegal and could land you in hot water down the road.
Get a Real Estate Agent
No matter how much you would prefer to negotiate your short sale on your own, your lender is unlikely to allow it. Most lenders require homeowners to hire a qualified real estate agent as representation.
Sound unfair? It’s strictly a business move. Lenders don’t want to waste time and money attempting to negotiate with frustrated and unknowledgeable homeowners. Doing so is counter-productive. The process goes much faster with a real estate agent at the helm. You will, however, need to provide your lender with a letter granting it legal permission to discuss your sensitive financial information with your real estate agent.
Prepare for the Credit Aftermath of a Short Sale
Contrary to popular belief, your credit score suffers just as much after a short sale as it does from a foreclosure. This fact has been verified by the Fair Isaac Corporation, the company that owns the FICO scoring formula. What you can avoid, however, is the presence of a foreclosure notation on your credit report. If you can negotiate with your lender to report the short sale in a more favorable light on your credit report, you can mitigate a portion of the damage.
Dealing With the Deficiency Balance
When you sell your home short, your lender doesn’t have to “forgive” the outstanding debt that remains after the sale. Depending on the state you live in, your lender can file a lawsuit against you in an effort to recover the remainder of your mortgage loan. If you have a steady income after the short sale, a lawsuit is likely. Discuss what will happen to your deficiency balance with your lender before agreeing to the short sale. If the home is your primary residence and the lender agrees to take a tax loss on the debt rather than attempting to force you to pay it, you’re eligible for a full tax pardon on the deficiency until December 31, 2012.
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