Jan McNulty

Broker, CDPE, SFR, CRS

Housing Counsel: Short Sale



Housing Counsel: What's a "Short Sale"

What is a Short Sale?  It is one method of disposing of your home without have the lender foreclose on you. You must be thinking that with the Market Correction in the past two years, your "upside down" on the loan. I can only explain things in general, because I do not know your lender or your situation.But here's my try at education:

For example, you bought a home for 350,000 and obtained a 95% LTV. Now, conditions in the market are dictating a $280,000 sale price and you've lost your job and cannot afford to continue with the monthly mortgage payments. Obviously, your in a terrible financial situation.

A short sale is an arrangement with your lender whereby they will allow you to sell the property for less than the amount of the mortgage. Why would a lender allow this? The cost of foreclosure is a great burden to a lender and it involves alot of time in Illinois. But be forewarned, Not all lenders will allow a short sale!

The lender will consider many factors in their decision: Where is your house? How much loss will the lender suffer? What is the possibility that a speculator/investor will buy in a foreclosure sale? You need to consult your specific lender to determine what they need in order to move forward with a short sale process.

The Steps that Need to take Place

1. Contact your financial and legal advisors. Do not contact your lender until you fully understand the potential risks involved. Things have changed with Federal law, but the old law said that when a debt is "forgiven", it can be treated as ordinary income which taxes are paid. In the case above, With closing costs expenses you could have a $35,500 short fall on the sale, and an addition to your income tax liability. According to some tax pros, you will have to pay income tax on this amount even though you did not receive actual money.

2. You have to make absolutely sure that even should the short sale was approved by the lender that you will not be obligate to make up this difference, called a deficieny. Your attorney will be able to find the answer to this. Call me, I'd be happy to give you the name of attorney's that have the resources and time to devote to a short sale. This is not a normal transaction and requires more time and being on task.

3. Contact the lender at this point and see if you can talk to the "loss remediation" department or the short sale department.

4. The lender will need a letter of authorization from you to authorize your attorney or real estate agent to act on your behalf.. The Privacy Laws enacted after 9-11 prohibit lenders from discussion personal and financial information without a written authorization. Be sure to include your name, property, address number and loan number.

5. You or one of your agents should prepare a comprehenive letter explaining why you are requesting a short sale. Emphasize your hardship. Include a market analysis or appraisal, which will show what houses are in your area and currently selling for. Spell out your request in detail: What price are you asking the lender to approve, what percent commission will the real estate agent be allowed to accept, and what are the closing costs that will be associated with the settlement. Your attorney can prepare a "mock" respa settlement statement. Keep in mind, city, state and county transfer stamps and association or homeowner fees.

6. Be specific to all the costs. Your lender could say he did not authorize one or more expenses.

7. Request from the lender the actual and future outstanding balance. The burden and obligation for accuracy rests with the lender. Review carefully that there are no charges which have been added. If you missed some payments, though you will be asseessed late fees and penalties. You could try to negotiate through your attorney these additional penalties and fees.

8. Make your financial situation clear to the lender and the more documentation you can provide the Lender, the faster the decision will be. Keep in mind, you are one of many facing these sad times.

9. The earlier you start the process, the better chance you have of getting it approved.  But the approval of the lender does not stop the process.

10. The contract you receive on the house must be subject to the approval of the lender. You will send an accurate accounting of all expenses which you will have to pay at settlement, and a final number that the lender will receive when settlement takes place. Have your attorney prepare a HUD-1 form. The lender now will review the expenses and may reject certain expenses. The lender may not allow buyers' closing costs being out of the sale, for example.

11. You want to go into the closing knowing exactly all the terms and conditions of the sale and whether or not you will need to come to the table with money at closing.

12. You are in financial trouble. The short sale process may work, but it is complicated and time consuming and very uncertain. Starting before a default on the loan will reduce the impact. However there is an impact to you financially well after the closing. Your future ability to borrow will be affected long after the closing.

I hope by passing on this information that all buyers and sellers understand that steps and patience necessary. I've had quite a few properties on the market that have successfully closed because of the TEAM EFFORT, in negotiations with the Bank. I've taken extensive training to help you as much as I can, and please don't be affended if I also refer you to a good tax accountant or an attorney, that's my job and obligation to you.CDPE, a designation meaning I have taken the course and applied it to my business in these hard times.