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Mortgage - Short Sale

Updated on April 27, 2012

Mortgage Short Sale - What you Need to Know

It is all over the web that lenders/servicers have been urged to offer a Mortgage Short Sale to their customers who own a property where the value has declined. This is for properties which are "underwater" and where the borrower cannot refinance due to this problem. It may sound easy and a way out of your current financial problem, but let me explain why it is more to it, than you may have been told.

Remember; nothing in life is free and without some sort of rectification. Even though you are having problems with paying your mortgage note presently and you need to get out of the mortgage but do not qualify for the Home Affordable Refinance or the Home Affordable Modification. This is not as simple as some people want to make it and there are some catches to it. Be aware and informed if you are thinking about trying to sell your home on a Short Sale.

I will enlighten you as best I can to some of the issues which can arise.

 

Can't refinance; value not sufficient!
Can't refinance; value not sufficient!

Alternative for the Short of the Sale

Definition

Short Sale: A short sale means that the lender is taking less money for the payoff of the loan than is owed. In other words; the property does not appraise for what it once did (due to declining property values). They allow you to sell your home at a reduced value so that they do not lose all of the money and come up short for the entire mortgage balance; should it go into foreclosure.

The lender must agree to this process before you obtain a Realtor to help you sell your home for less money than your mortgage payoff or what you really owe on it. Short means exactly what it says and you need to understand that most lender will not want to come up short; without a fight.

This process can be done, but here is what can happen. If the lender says that they will agree to a short sale; you must remember to get in writing what they have agreed to and what their guidelines are, for short sale. Always have anything you agree to; in writing. If they will not give it to you in writing; then you should walk away from the situation or find a way to get what you need and answers. They should always give you something in writing that is this important. Do not settle for anything less. Also you should talk to someone who is in authority; not someone who answers the phone. If you can get them to agree to the lower sale price/value of the property; you may still have to answer in some way for the remaining balance. It does not necessarily mean that you are done!

What about the "Short" of the Short Sale?

The next step is find out immediately if they will forgive the remaining balance and if not, what is the alternative. They may not and you can be liable for paying off the remaining balance. They may tell you yes; but we will give you a promissory note for the remaining balance that was short. The terms may be for a long period of time. Remember they do not like to come up "short."

It may be possible for you to help them see that you cannot afford the promissory note. You can inform them; if the loan is taken to foreclosure, and you file for Chapter 7 bankruptcy that the debt will be satisfied. They may change their mind if they realize that they get nothing and they cannot sell it for more than it is worth now, regardless. You must know if you are eligible for bankruptcy before you tell them this alternative. You should find out if this is their policy; or if they write off the dificiency. It will depend upon the lender and even if they do not make you pay the short amount; the dificiency; they may send you a 1099 income statement. This indicates you have income in the amount of the shortage and you may have to pay taxes on that amount. They may also place a judgement on your credit report which can or cannot say; paid in full. It will stay on your report for 10 years. These are things you should find out upfront.

It can hurt your credit; if you have to file bankruptcy; it will stay on your credit for 7 to 10 years. You may have a judgement on your report. You may have to pay the remaining balance and you may get a 1099 income statement for the deficiency. All of these things should be discussed and known before signing anything. It is also wise to get legal advice from a real estate Attorney.

Please Note

I do not suggest that anyone does a Mortgage Short Sale or bankruptcy. I am just giving you information as so much has been put out there that makes it seem so simple. It is not simple. In fact if you chose to go this route; it will probably take longer than a regular sale.

I am only giving some direction to those who have thought about it. Short Sale is for those you want to sell their home as they can no longer afford the payment, but cannot refinance their mortgage interest rate to a lower rate due to the declining value of their home.

Short Sale is an alternative but there can be repercussions for this just like foreclosure. It is recommended that you read and know what your alternatives are and do not jump into anything without having the understand of what is going to happen. The more you know; the better off you are. If you do not understand; ask questions until you do.

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