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While it is a stressful decision for many families, a short sale may be the best solution, short of foreclosure, for homeowners who owe more on their properties than they are worth. Technically, a homeowner is ‘short’ when the outstanding loan is more than the current market value of the property. A short sale occurs when the homeowner finds a willing buyer and then negotiates with the lender to accept less than the full balance of the loan at closing (typically to avoid foreclosure). Once the buyer closes on the property, the property is considered 'sold short' of the total value of the loan. The procedure requires stamina but it can yield favourable results for all. Organization and full disclosure will also help you manage through the process.
In the past it was rare for lenders to accept short sale proposals. With overwhelming market shifts, and changes in corporate policy, lenders have become much more willing to work with homeowners in distress, and since a short sale generally costs the lender less than a foreclosure, it can also be a way for the lender to reduce their losses.
To qualify for a short sale, homeowners must prove all of the following circumstances:
Financial Hardship - A situation is causing the borrower to have trouble affording their mortgage.
Monthly Income Shortfall - Basically the borrower has more expenses than income, which will, or already is, preventing them from affording their mortgage.
Insolvency - The borrower does not have significant liquid assets to allow them to pay down their delinquent mortgage.
This is a complex transaction, and if short sale is an option you are considering, an experienced REALTOR® can certainly help you make the best of this situation. When interviewing potential agents, be sure to inquire about their experience with short sales and find out if they hold any designations for buying and selling distressed properties. It is also recommended that you obtain legal advice from an experienced real estate lawyer and discuss short sale tax ramifications with your accountant. If you do not know any of these professionals, your REALTOR® can recommend experts in these fields. If you have determined that a short sale is right for your situation, you need to initiate the process with your lender. Note: Keep good records! Document all calls and keep photocopies of everything you send to the lender. With so many properties in distress, it is not uncommon for the lender to misplace your file.
Lenders typically have their own pre-determined requirements for short sale application, and may demand a wide array of documentation from homeowners; however, the following steps should give you an idea of the general expectations:
Your lender package may need to include the following:
It is important to understand that a short sale can damage your credit score, often appearing as a "settlement" which indicates that you paid less than you owed. As part of the short sale negotiation, you should request that the lender not report adverse credit activity to the credit agencies. Even though the lender is under no obligation to accommodate this request, they may be willing to work with you to minimize your financial damage. You could also be presented with a tax bill for the unpaid debt, which is generally considered as debt forgiveness, or income to you. A team of professionals may be able to avoid or, at the least, minimize these consequences. Please consult and seek professional help with an experienced REALTOR®, attorney and/or accountants.
This information is meant as a guide. Although deemed reliable, information may not be accurate for your specific market or property type. Please consult a REALTOR® professional for more information on making a written offer.