What Happens in a Short Sale
A “short sale” refers to a situation where the
owner of the home does not have enough equity in the
property and not enough cash or liquid assets to be
able to sell the property, pay off liens and selling
expenses (e.g., closing costs, property taxes,
transfer taxes, real estate commissions) and provide
a clear title to the purchaser. In short, there is
more owed on the home than what it will likely sell
for on the market. Lenders use the term to describe
this as a loan that is “upside down.” While many
short sellers are at-risk of
foreclosure, a
short sale can also occur to a seller who bought
high and took out a lot of equity and might be
forced to sell due to a divorce or job transfer.
If a homeowner facing foreclosure cannot
negotiate with the lender to work out a repayment
plan or loan modification, a short sale can be a
viable option. Many consider a short sale better in
the long run for the homeowner because it avoids
foreclosure which will damage a person’s credit
score and make it much harder to buy another home in
the future.
A foreclosure may stay on the credit report for at least 10 years as
it is a court action similar to bankruptcy. However,
foreclosure can do even more damage to a credit
report than bankruptcy. Ultimately you must prove to
the lender that the foreclosure happened due to
something beyond your control such as job loss or
illness.
It’s ideal if the homeowner who chooses to sell
can work with a professional REALTOR® before they
are delinquent three months. Within this short window of time, a REALTOR®
might assist in negotiations with the lender to
place the property on the market and possibly save
the buyer any equity left, as well as prevent a
foreclosure on their credit file.
- Be wary of scams. Consumer groups have
learned that advertisements that say “Cash for
Houses/Any Situation” or “We Buy Houses for
Cash” bait homeowners with the promise of
rescuing them from imminent foreclosure.
Unfortunately, the “rescue” often involves the
borrower signing over title of the house to a
different person or entity, thus, and the family
ends up being evicted from their home.
- It is important that sellers work with a
licensed
Illinois REALTOR® to sell their home.
REALTORS® are in the business of helping
homeowners and have the expertise to guide them
through a tough situation. A REALTOR® has the
expertise to develop a reliable Comparable
Market Analysis (CMA) to determine the current
fair market value of the home.
- Understand the tax implications of the
decision to sell short and consult with a tax
advisor. See
REALTORS® Applaud Elimination of "Phantom Tax."
There will be paperwork and research required of
you in this process. First you have to locate your
mortgage documents to understand the terms of your
loan. If you have authorized an attorney or REALTOR®
to act on you behalf in the sale of your home, the
lender will need a letter of authorization. Other
documentation required by the lender includes:
- Financial Disclosure Form
- One-page “hardship letter” explaining how
you got in this position
- Last two months pay stubs
- Copies of most recent two months personal
checking account statements for each borrower on
the loan
- Copy of signed last two years’ personal tax
returns
Yes, the short sale will require time and
consultation with the appropriate legal, tax and
real estate professionals. It can take from two
weeks to as long as 60 days to receive an approval
of a short sale from a lender. But usually it’s a
much better option than foreclosure given the impact
to your credit history.
Sources: Partnership for
HomeOwnership, Illinois Association of REALTORS®,
National Association of REALTORS®, REALTOR® Will
Weaver of the Floyd Wickman Team
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