The definition of the short sale process is when the lender of a property allows the property to be sold for less than the amount due on the mortgage loan. A foreclosure can stay on your credit report for up to 10 years and can take an emotional and financial toll on you and your family. Reporting of a short sale to credit reporting agencies varies but in many cases it allows the seller to avoid the credit report damage associated with a foreclosure.
There are pitfalls to the short sale process and should be considered. Lenders can often pursue a borrower for the deficiency balance (the difference between the amount owed and the amount paid). Additionally, the I.R.S. may consider any debt forgiveness as taxable income, thus resulting in a tax liability.
Recently, the federal government passed the tax relief bill HR 3648. Known as the Mortgage Forgiveness Debt Relief Act of 2007, the law allows in certain circumstances that a homeowner does not have to pay federal income tax on debt forgiven on a loan secured by a qualified principal residence via a short sale, foreclosure, deed in lieu, loan workout or short refinance where the loan amount was reduced and forgiven in order for the homeowner to keep the property.
The Short Sale Process (overview)
1) The lender is contacted to discuss the possibility of a short sale and to determine the lender’s process for completing the sale.
2) The seller issues a letter authorizing the release of personal information about the loan and the property to the buyer or escrow agency.
3) The lender will review a settlement statement, which will indicate the proposed selling price, remaining loan balances and itemize all expenses, including real estate commissions and other fees and expenses associated with the closing.
4) The seller will complete a "hardship letter," which will detail and explain all financial difficulties. Lenders will usually want to validate the seller’s financial situation by looking at bank statements, investment accounts, along with examining pay stubs and other financial records.
5) The lender will then look to the broker to provide a price opinion by examining the condition of the house and the market value of comparable properties.
6) The lender will then want to scrutinize the purchase agreement to determine if all amounts are reasonable and the real estate commission is acceptable.
Because of the documentation required, the short sale process can be lengthy. But if done correctly, it can work well for all parties involved. The lender avoids the uncertainty of the foreclosure process, the seller avoids a foreclosure on his or her credit report (along with potential bankruptcy), and the buyer hopefully got a good deal on a property.
Considering the complexity of the short sale process, you must be educated. If you are considering a short sale, make sure that you discuss your situation with a competent lawyer and accountant. The more educated you are on the process, the easier the transaction will be, and the better the impression you will make on the lender.