Some folks reach the ultimate level of frustration with their home and are so far behind on their mortgage payments that they feel like running away!
When a homeowner can no longer pay their mortgage, they are under immense financial and emotional pressure. Knowing that they owe more on their house than it’s worth and unable to make mortgage payments, they have two choices: be forced out of their home with a foreclosure or negotiate a short sale with the lender.
Simply walking away from your property without taking any action will result in a foreclosure, which stays on your credit report as a black mark for ten years! That’s a major penalty.
But there is another option: a short sale.
Before you decide what to do with your problem property, you need to understand if you qualify how the short sale process works and connect with a short sale negotiator that is experienced.
What Is a Short Sale?
For a sale to be considered a short sale, these two things must be true:
- The homeowner must have a demonstrable hardship or be about to have a hardship. This could include being so far behind on payments that they can’t catch up. It could also mean an impending hardship like a divorce where household income will be substantially reduced.
- The housing market either has gone down so much that the house is worth less than the remaining balance on the mortgage, or the “as is “condition of the house is so bad that its market value is at a price below the mortgage debt owed.
In most cases, the homeowners and their negotiator, with the agreement of their lender, will start the short sale process in order to avoid foreclosure.
Overall, there are a lot of misunderstandings around short sales. One common misconception is that lenders just want to be quickly rid of the property and will move quickly to get as much money back as possible.
That’s not true. You will have to negotiate with the lender and the better you negotiate, the more successful and shorter the process.
In reality, the lender wants to recover as much of the mortgage amount as they possibly can. It is up to them to determine if the buyer’s offer is acceptable. Therefore, negotiating with the lender is a critical piece in the process.
Short Sale vs. Foreclosure
Neither a short sale nor a foreclosure is a quick and easy way out for sellers who want to be rid of their home mortgage.
What is a Short Sale?
In a short sale accompanied by the help of a negotiator, the homeowner initiates the listing of their house, through an experienced Realtor. For a short sale to take place, the home must be worth less than the amount the homeowners owe. The listing must disclose that a short sale is in process. A yard sign does not have to state that it is a short sale.
Potential buyers will deal with the home sellers during the short sale process, but all of the details around the process must be reviewed and approved by the lender. The short sale cannot happen unless the lender approves it. At the lender’s expense, an appraisal will be done. The negotiator will advise the home sellers and work with the lender.
Because everything is dependent on the lender, the short sale process can be lengthy and unpredictable—even if the homeowner and the potential buyer agree on terms.
What is a Foreclosure?
On the other hand, after proper legal notices, a foreclosure occurs when a homeowner has failed to pay the late monthly mortgage payments within the time allotted by the lender. At this point, the property is auctioned by the local Sheriff.
This process is initiated by the lender. The lender’s legal representative plays a key role in the foreclosure process, filing the appropriate legal paperwork.
The bottom line is this: the lender will force the sale of the home in order to try to recover as close to the original loan amount as possible.
Either the lender or a buyer at the auction will take ownership of the home.
Most foreclosed homes have already been abandoned, but if the homeowners are still living in the house, the lender may have to eventually evict them after the completion of the foreclosure process. The lender will then attempt to sell the property either through an auction or through a real estate agent.
The foreclosure process typically takes about the same amount of time, in Missouri, as a short sale. In Illinois, a foreclosure can take much longer than a short sale.
Which is better? Foreclosure or Short Sale?
For homeowners, a short sale is typically preferable to a foreclosure for three reasons.
- First, a short sale is voluntary and brings an orderly closure to the relationship with the lender (while a foreclosure is forced).
- Secondly, after a foreclosure, most people are required to wait longer before obtaining another mortgage loan (while a short sale may cause you to wait for at least two years).
- Finally, in most short sales the homeowner [borrower] is forgiven any remaining unrecovered loan balance, whereas in a foreclosure there typically is a risk, for up to ten years, for a lawsuit by the lender for recovery.
Most lenders would prefer a short sale to a foreclosure process because it allows them to recoup as much of the original loan as possible without a costly legal process. In fact, in most cases a homeowner and lender will only pursue a foreclosure after an attempt to sell the home through a short sale process, or where the property has been abandoned by a non-communicative homeowner.
Why Lenders Do Short Sales
The only reason a lender would want to go through the short sale process—and, therefore, accept a mortgage payoff amount that’s less than the balance owed—is because they believe it’s their best chance to recoup as much of the mortgage loan balance as possible.
Because of that reason, a lender may not consider a short sale if:
- The default period on the loan is within two weeks of the auction, or the auction date has been set. The lender will have spent legal fees and other costs by this time, and more often than not, they will be reluctant to take a chance on repeating the cycle caused by the borrower’s delays and delinquencies.
[Related: When Is It Too Late For a Short Sale?]
- The homeowner cannot prove a hardship. If the homeowner is making regular payments, the lender has no reason to think they can’t continue making them. However, a good negotiator should be able to prove an “impending hardship”.
- The homeowner declares bankruptcy. Declaring bankruptcy “buys time” for the borrower and stops any foreclosure activity. Although negotiating a short sale is considered a collection activity, [collection activities are not allowed in bankruptcy], with the permission of the borrower’s attorney and their Trustee in Bankruptcy, a short sale is frequently permitted to be done while the borrower is in bankruptcy.
The main benefits to the lender are that a short sale is usually faster and less expensive for them than a foreclosure. Once it’s clear a foreclosure is going to be unavoidable, a lender is more likely to approve a short sale request.
Most lenders will give the borrower and the negotiator adequate time to complete a short sale.
What If There’s More Than One Loan?
It’s not unusual for a distressed borrower to have more than one loan or lien. It’s not unusual for there to be multiple liens, including trade bills owing, sewer and Home Owner Association charges.
These situations can be resolved by an experienced negotiation company, but it can be a juggling act to coordinate and synchronize all the approvals needed. The end result can be a tremendous relief to the borrower and a good start on the road to financial rebuilding.
Why Homeowners Do Short Sales
When a homeowner can no longer pay their mortgage, they are under immense financial and emotional pressure. Knowing that they owe more on their house than it is worth, they have two choices: be forced out of their home with a foreclosure or negotiate a short sale with the lender.
But not every homeowner will qualify for a short sale. The lender must be convinced that the short sale is the best option for them. The homeowners (or their expert negotiator) must:
- Prove they won’t be able to bring the mortgage current and that they have a hardship or impending hardship: no assets—cash, savings, marketable securities [not in retirement plans], etc.—that can be used to catch up on payments.
- Confirm the condition and “as is” value of the house will cause it to be priced below current market value. In some areas, the housing market has not recovered, resulting in the homeowner’s property being valued so low that the home won’t sell for enough to pay off the current balance of the mortgage.
- Provide most lenders a signed contract with a buyer to consider a short sale.
- Make sure the final Short Sale Approval Letter includes a waiver of the lender’s right to pursue the homeowner for the remaining balance of the loan.
In order for a short sale to take place, both the lender and the homeowner have to be willing to sell the house at a loss. The homeowner will make no profit, and the lender will actually lose money for selling the house for less than the amount owed.
Some lenders will provide the seller [borrower] with a Moving Allowance to assure that the house will be vacated in a timely manner.
How Does a Short Sale Work?
We have years of experience in performing short sales. We have a successful process for processing a short sale.
We begin with a phone call meeting to see if you qualify for a short sale. If we confirm that you have a financial hardship and that your home loan exceeds the value of your home, then you will usually qualify. Reasons for hardship could include medical issues, loss of employment, divorce, death of a co-borrower or even bankruptcy. We ask you a few simple questions. It’s important to show that you can’t afford your mortgage.
Then we meet in-person or virtually to review the short sale process and start the paperwork.
Once you complete your paperwork authorizing us to represent you, we will submit your Authorization to Represent to your lender[s]. From this point forward, we will negotiate on your behalf and represent you in the negotiations with the lender. A little later in the process, on your behalf, we will submit your Hardship Package and Hardship Letter to your lender. Your lender has to grant approval for you to do a short sale.
Your property has to be listed with a Realtor. If you have a Realtor with whom you’re already working, we will meet with them to be sure they’re comfortable going through the short sale process. If there is no Realtor involved, we know several that have the right expertise and experience.
The Realtor and Short Sale Specialists will coordinate your home appraisal, which will be ordered and paid for by your lender.
As offers come in, we will guide you through the process to agree upon a sale price. We carefully evaluate offers to be sure they will have the right features and price for your lender’s requirements. We will negotiate with the lender until a resolution is reached. More often than not, the lender will want to negotiate about the price, which can take some time.
When negotiations are complete, we will review the lender’s Short Sale Approval Letter and then submit it to you for review and signature. It is important that the Letter show that you will be released from further liability on your loan.
A short sale is not a do-it-yourself deal. A negotiator and a Realtor who are experienced in short sales are absolutely essential. Teamwork is important.
If you would like to find out if you qualify for a short sale, Contact Us.