Understanding Short Sales: What Sellers Should Know

If you're carrying a mortgage balance that's higher than what your home would actually sell for, a short sale is a path that may be worth inquiring about, even if you never end up needing it.

A short sale happens when a property sells for less than what's owed on the mortgage, and the lender agrees to accept the sale proceeds as satisfaction (or partial satisfaction) of the debt rather than requiring the seller to make up the full difference at closing. The name refers to the sale falling "short" of covering the loan balance, not to the timeline, which is often anything but short.

Why Lenders Agree to Short Sales

It might seem counterintuitive for a bank to accept less than it's owed, but there are practical reasons lenders often prefer a short sale over letting a loan go all the way to foreclosure:

• A short sale often nets the lender more money than a foreclosure would, once foreclosure costs are factored in.
• Foreclosure creates ongoing liability and expense for the lender. As the property owner post-foreclosure, the bank becomes responsible for taxes, insurance, and upkeep until it resells.
• A lender that forecloses often has to make repairs to get the property back into sellable condition, an expense a short sale avoids entirely.

Why Sellers Agree to a Short Sale

From the seller's side, the motivation is usually some combination of:

• Potentially a less severe impact on credit history than a completed foreclosure
• Avoiding the process, and for many people the stigma, of foreclosure
• The possibility of negotiating a release from further liability for the shortfall, rather than remaining on the hook for a deficiency

That last point is worth sitting with a lender and, ideally, an attorney to discuss your options.

The Short Sale Process

It's sometimes described as applying for a loan in reverse: instead of proving you can pay, you're demonstrating to the lender that you can't, at least not on the current terms. Every lender has its own requirements, but a short sale application package may include:

• A letter of authorization allowing your agent or attorney to speak with the lender on your behalf
• Two years of tax returns
• Recent bank statements
• A personal profit and loss statement
• A hardship letter explaining the circumstances behind the shortfall
• A comparative market analysis (CMA) supporting the proposed sale price

The more prepared a seller is, and the more they can demonstrate the true need for the short sale, the more likely it is to get the lender to accept.

Why a Seller May Avoid a Short Sale

Traditionally lenders will require a borrower to be at least 30 if not 60 days delinquent before they can apply for a short sale. While the impact to the credit score is not as great as a foreclosure, major late payments can still hurt a borrower for years to come.

Ask the lender for their specific requirements before deciding if a short sale is right for you or your clients.

Considering a short sale? Luminary Title Group can refer you to an experienced real estate agent and help make sure the title work and closing logistics are handled with the highest level of care and expertise.