How do Short Sales Work
What is a Short Sale?
A short sale occurs when a lender agrees to accept less than the full balance of the amount owed in order to release their lien on real property. Short sales have become a popular solution for homeowners who wish to sell their property but owe their lender(s) more than their home is worth.
- You may want to seek legal and/or tax advice before initiating a short sale.
- If you are interested in pursuing a short sale, you must document your financial hardship. You must be able to prove to your lender that a situation exists making you unable to afford your current mortgage payment, your current income does not allow you to afford your monthly payment, or you are financially distressed.
- Possible outcomes of an approved short sale include, but are not limited to:
- Your Lender will issue an IRS Form 1099 on the amount "forgiven", which may be taxable. (The Mortgage Forgiveness Debt Relief Act of 2007 applies to owner occupied properties.)
- Your Lender may accept an amount to release the lien but keep the account "open" to charge off or send to collections; meaning you remain personally liable for the unpaid balance.
- Your Lender may seek a deficiency judgment against you for the unpaid balance.
- Your Lender may require that you bring some funds to closing; and/or require that you enter into an unsecured loan.
- There may be credit implications- these usually pertain to late payments. Your account will be shown as settled which is not as severe as credit implications arising from a foreclosure of your property.
- Lenders will want to see financial records (i.e. bank statements, paystubs, tax returns etc.)
- House should be listed at market value
- Contact your lender(s) to:
- Get a fax number for their short sale and/or loss mitigation department.
- Obtain/submit Third Party Authorization form allowing your Agent to help monitor the status of your loan and communicate with the lender(s) throughout the process.
- Monitor loan status until closing
- Contact your title agent as early in the process as possible and they may:
- Order loan payoff(s)
- Get HOA Dues and County Property Tax status
- Order preliminary title examination to verify any liens filed since your acquisition of the property.
- Prepare preliminary HUD-1 Settlement Statements for your lender’s review/approval.
- Additional pertinent information
- Have you received foreclosure notices?
- Are you currently in bankruptcy?
- Are you U.S. Citizen or resident alien?
Buyers and Sellers
COMMON TERMS OF A SHORT SALE CONTRACT
- Advisable not to allow pre-occupancy or rentbacks
- The property should be sold in its "AS IS" physical condition as of the contract date- Use the NVAR Contingencies/Clauses Addendum.
- Home Inspections at Buyer’s expense and should be for informational purposes only
- Termite Inspection/Treatment and repairs at Buyer’s expense
- Well and Septic Inspections and repairs at Buyer’s expense
- Home Warranty paid by Buyer
- Final Walk-Thru permitted for convenience but not for additional negotiations
- Must show Third Party Approval required- Use the appropriate Short Sale Addendum.
- A contract is ratified once it is signed by the seller and buyer. Third party approval is only a contingency as the lender(s) do not sign the contract; they provide their own separate approval of the terms of the transaction.
Patience and Persistence…
- It is recommended that the Agent follow up with the lender(s) every 2-3 days to see how things are moving along, even if they tell you not to call that often.
- Update Selling Agent and Buyer at least once a week. Communication is imperative.
- Lender(s) will assign their files to a negotiator approximately 2-4 weeks after the package is received. This person will handle the file through the approval process.
- Lender will order their own BPO (Broker Pricing Opinion/Appraisal). They may counter the contract offer based on the value of the BPO.
- Approval/denial usually comes within 2-6 weeks of BPO approval.
- The average turnaround time for approval or denial is 45-60 days. However some have taken up to 90 days.
- Carefully review all terms contained in the approval letter from each lender before settlement.
Additional Information for Buyers
- Ask your Agent to interview the Listing Agent to make sure they know what they are doing. Important questions to ask:
- Have you handled many or any other short sales?
- Is there a 1st and 2nd lien on this property? Are they with the same lender?
- Has a preliminary title search been done?
- Have you checked the seller for bankruptcy?
- Has a foreclosure date been set?
- Is this the first contract on the property?
- IF YES: Do you have all of the required documents from the seller to submit to the lender(s)
- IF NO: Has the lender(s) done their appraisal?
- Do you have an estimated timeframe that you expect to get approval; or were you on the verge of approval when the last contract fell through?
- Expect the lender(s) to counter your offer.
- Patience is a must on short sale - it can be a slow process. If you are in a "have to move" situation, then a short sale is probably not right for you.
- Suggested Terms in the Contract
- Buyer reserves the right to cancel contract at any time prior to 3rd party approval.
- Consider delaying other contingencies (appraisal, financing, etc.) until 3rd party approval is received.
- Indicate earnest money deposit will be given and deposited upon 3rd party approval.
Virginia Land Title Association extends a tremendous amount of appreciation to VLTA Member, Myrna Keplinger, Principal of the The Settlement Group for sharing all of the materials found under the Consumer section of this website. All materials are copyrighted under The Settlement Group and VLTA has received "reprint" permission for its use.