Short Sales

In a typical mortgage transaction, a lender will not release its lien on a property until it has been paid in full.  This means that you are unable to sell your home unless you sell it for at least the amount still owing to the mortgage company.  

A short sale is a process by which a mortgage company agrees to allow a borrower to sell a property for a lesser amount than is owed on the property.  The mortgage company then may also agree to accept the lesser (short) amount in full satisfaction of the loan.  For example, a short sale would occur if a borrower owes $100,000 on a house, but a buyer is only willing to pay $90,000 for the property, and the bank accepts the $90,000 offer.

The obvious thing most lenders require in considering a short sale is that you owe more than the fair market value of the home.  This is because a lender will only want to accept a short amount if it is the best possible offer.  The best possible offer should be the fair market value of the home.  A fair market value will likely need to be established by an appraisal of the property.

Other usual requirements for short sale consideration are that 1) you are behind on your mortgage payments; 2) that you are facing some sort of a long-term hardship; and 3) that you have been unsuccessfully attempting to sell the home for more than is owed.

Be warned that short sales can be complicated and could be a time consuming process.  Most mortgage companies require an application and production of extensive financial information.  This application process itself can take a long time.  Even if the mortgage company agrees to entertain a short sale, the debtor must then go and find a willing buyer to submit a formal offer for the mortgage company’s consideration.  If you are already facing foreclosure, it could be a daunting task to arrange a short sale prior to the mortgage company proceeding forward with a foreclosure.

Many people wish to pursue a short sale because they fear a deficiency action against him/her resulting from a foreclosure.  A deficiency would occur if the lender sells the property at foreclosure for less than the amount owed on the loan.  First, a short sale does not automatically require a lender to forgive any deficiency.  A lender could possibly attempt to require a debtor to sign a new unsecured note for the difference between the amount owed on the property and the amount of the short sale.  Alternatively, a lender could sue for any remaining deficiency after the short sale.  Second, whether a state allows for a deficiency suit after a foreclosure is state specific and should be discussed with an attorney licensed to practice in the state in which the property is located.

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