WHAT IS A BANK SHORT SALE?

Since the onset of the global financial crisis, many homeowners found themselves unable to fulfill their mortgage obligations. Many homes were lost and people found themselves owing more on their home than the home was worth.  In lieu of facing foreclosure, some homeowners opted to sell their home and seek the release of the debt owed to the bank via a short sale. So, what is a bank short sale?

A short sale occurs when the bank agrees the home can be sold for less than the amount owed and agrees to release their lien even though they have not received full payment on the lien secured against the property.   Although technically not required, many banks will not consider a short sale until the mortgage holder is at least thirty (30) days late on their payments.  To be approved for a short sale, most borrowers will be required to show proof of a “hardship,” typically a financial hardship.  Lenders will not consider a short sale if a borrower’s financial hardship has not recently occurred or is not one of several enumerated hardships (including medical issues/bills, job loss, a decrease in earnings, etc.).  Financial irresponsibility or the fact that the home is not worth what the borrower owes is not a sufficient “hardship” to warrant or qualify a borrower for a short sale.  Additionally, in some cases, a lender may feel foreclosure will gain more monetary proceeds than a short sale, especially if the mortgage is secured by mortgage insurance (or “PMI”).

Because a short sale involves selling the home for less than the amount owed, there will be a deficiency between the amount owed on the loan and the amount received through the sale of the property.   In some instances, the lender may seek repayment of this deficiency from the borrower, or even if they do not immediately seek reimbursement, they may indicate on your credit report that the obligation still exists, thus affecting your credit score and your ability to obtain credit and/or financing in the future.  However, even if the lender forgives the deficiency, the borrower may face a large tax liability due to this cancellation of debt.   Since the laws vary by state and vary depending on the type of mortgage (purchase money vs. non-purchase money; primary residence vs. investment property), it would be best to consult an attorney before beginning the short sale process. Many people wonder“What is a bank short sale?” Now that you have information about what a bank short sale is, you can speak to an attorney to see if it is right for you.

What is a bank short sale and is it right for me?

Although a short sale is similar to selling a home in the traditional method, the process can be long and complicated.   Having multiple liens against a property can drastically slow down the short sale approval process.  For the home to sell all lien holders must approve the sales price and all must agree to release their respective lien.  And although the primary lien holder approves the sale, secondary lien holders may not.   If the homeowner’s mortgage is backed by mortgage insurance, the insurance company is usually asked to make up some of the payment deficiency; and many times seeks contribution from the homeowner before it will approve the short sale.  If the homeowner is unable or unwilling to contribute any funds to reduce this deficiency, the insurance company and/or lenders could refuse to approve the sale of the home.

 

A bank approved short sale will also have an impact on the homeowner’s credit score.  The extent of this impact varies depending on whether or not the borrower is/was delinquent or late in making payments before and during the short sale process.  Additionally, if a homeowner is not successful in obtaining a written statement from the lien holders that they are releasing the homeowner from the underlying debt (including all deficiency amounts) the lienholder may report the debt as unpaid and this could prevent a homeowner from obtaining credit or another mortgage in the future.  Even if the lien holder agrees to release the borrower from the underlying debt, the lender will likely report the debt as settled or paid for less than what was owed.  This could also affect a borrower’s credit rating.

 

So, what is a bank short sale? It could be the answer you are looking for. If a homeowner is considering selling their home via a short sale, they should first meet with an experienced real estate attorney to determine if a short sale is a right option for them; and during the process to make sure the terms of the short sale are in the homeowner’s best interest.  If you are having a hard time making your mortgage payments, schedule a consultation with The Peddy Berg Law Firm to discuss your options.