A short sale , is defined as an ‘agreement’ to allow a home to be sold for less than the amount that is owned. This can basically be a compromise for all parties.
For a lender, it can help avoid the hassle and expense of seizing and auctioning off real estate in delinquency. For the owner, it can save some of the pain and major credit challenges associated with bankruptcy and/or foreclosure.
It is important to note that short sales occur at the sole discretion of the existing lender or servicing company. Any potential would be buyer needs to understand this. While a seller and buyer may come to some type of agreement on their own, the lender will have the ultimate say in granting final approval of this legally-binding arrangement.
Lenders are not looking to bail our borrowers who simply overindulged themselves during the recent boom. A lender will only consider a short sale if the borrower has clearly suffered a serious financial hardship that is causing a potential default on the mortgage.
Written declaration and supporting documentation demonstrating financial hardship, and the inability to make payments will almost definitely be required in order for a short sale to even be considered. This may include tax returns, pay stubs, and liquid assets statements. In addition, a borrower must be at least 91 days delinquent before a lender will even discuss a short sale. Also, a lender’s hands may be tied depending on how the borrower’s loan was sold into the open market.
In addition, in the event a short sale is affected, the lender will most likely issue a 1099 to the seller for the difference between what is owed and the final amount the lender collects after the costs of the sale. This means that the ‘deficiency’ can be considered as taxable income to the borrower. (It is also common for some lenders to attempt to get the existing homeowner to sign a note for the remaining amount.)
Should there be any liens against the property, then the lien holders will have to be involved in the process as well, not just the first lien holder.
With multiple parties involved, it is difficult to please all sides all of the time. Thus, there is no guarantee of success.
Communication and patience are essential components of the process.