As mortgage payments are becoming more and more difficult for borrowers to meet, alternatives to foreclosure are more pervasive. As a foreclosure has more negative impact on credit scores, short sales have become an alternative in the real estate market. A short sale is understood as when a lender accepts a lesser amount of money than what is currently owed by the borrower when the home is sold. Hence, the home is sold at a price short of what is actually owed. Such sale has its benefits in the real estate market because it can help a seller who is in financial trouble avoid foreclosure and possibly bankruptcy, the buyer purchases the home at a price more inline with the current market, and it removes a non-performing loan from the books of the financial institution.
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When deciding whether to go through a short sale process, borrowers must carefully consider their current financial situation. The analysis should consider if the mortgage payments can no longer be met, if the borrower has encountered a financial hardship such as extraordinary medical expenses or job loss, and if alternative housing can be secured. The first step to such sale is the seller decides to sell the home and lists it with an agent. The price set by the agent and seller should be as close to the current market price as possible. If not, the lender is unlikely to approve the sale. Then the property should be listed and within the sales contract a provision should state that the sale is subject to the lender's short approval. The next step involves the seller completing a short sale package that can be provided by a short sale attorney. This will include an extensive financial disclosure including tax returns, plus a hardship letter explaining the nature of and need for the sale. This short sale package can be quite detailed and must be completed accurately. The package should be coordinated with a real estate agent and the hired attorney.
From the current state of the market, lender's will only approve a short if a signed contract on the property exists. An experienced real estate attorney can navigate the bank's approval process and decrease the period of time prior to approval. Once the lender has received the properly completed the package and a signed purchase agreement has been entered, the bank will assess the financial hardship and whether the offer on the property is within a current fair market value determined by a real estate agent hired by the bank. The short sale attorney will request from the lender certain release language necessary to remove the bank's right to seek a deficiency balance judgment against the seller. The negotiator from the bank will review the files and go through a series of negotiations with the seller's attorney.
A professional short sale attorney should not charge the seller for any work done and will only get paid from the closing funds. Of course, sellers or borrowers can attempt to complete a short sale with a bank negotiator, but because of the volume currently in the market and the experience necessary to navigate the often complicated bank procedures, it is nearly impossible to complete the approval process in a timely fashion without an experienced attorney.
Finally, after all of the waiting, phone calls, and emails, the seller may receive an acceptance of the short sale from the lender and can move forward with the closing. If the seller has hired a short sale attorney, they will coordinate with all interested parties regarding the approval letter delivered by the bank and move to close the sale. If the seller does get rejected, the seller or its attorney needs to discover exactly why so either the file can be resubmitted with the necessary corrections, or the seller will know for the next time what the lender is looking for in an offer.
Further, a taxable event to the seller can arise from a short sale transaction due to forgiveness of debt income arising from the balance owed on the mortgage. Certain exemptions exist to avoid paying taxes such as whether the home sold was the primary residence of the borrower. A short seller will need to determine whether a taxable event will arise by discussing the possible consequences with an accountant.
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