Minnesota Foreclosure Basics
Part 3: Short Sales
Before we discuss short sales, a word of caution: Foreclosure prevention scams are common today. If you are a borrower facing foreclosure, be sure that you fully understand the short sale process before pursuing this course of action. If you are a foreclosure buyer, become knowledgeable about the process and its risks before entering into a short sale purchase contract.
A short-payoff sale (short sale) occurs when the mortgage lien holder(s) agree to release their collateral interest in a property for less than the principle balance owed. Essentially, the lender agrees to sell for less than is owed on the property.
This means that the borrower receives nothing from the sale. But if the borrower has no equity in a home, or owns property in a declining market, this approach may make sense. He/she does walk away from the transaction with bruised rather than severely damaged credit. This can be significant, because full foreclosure can affect a borrower’s credit for up to 10 years.
Lenders may agree to short sales for several reasons. First, it is expensive and time-consuming to foreclose on a property: Lenders may pay attorney fees, filing fees, sales fees, court costs, insurance, taxes and upkeep when foreclosing. Second, an REO property (see Part 2) is a liability on a lender’s books. Commercial lenders make money by lending capital; they can lose money by having expensive nonperforming assets idling in their portfolios.
If you are a borrower in pre-foreclosure, and have significant equity in your home, it may make more sense to put your property on the market at a reasonable price than to short sell your home. Contact an experienced Realtor to get a net sheet showing what you would receive from a sale, and explore other available options, before agreeing to a short sale.
Buying a short sale property involves creating a purchase agreement and negotiating the purchase price and terms directly with the borrower. The borrower then submits the offer, along with letters documenting financial hardship, to the lender(s).
The lender(s) review the borrower’s situation carefully. They want to know why the default occurred. Did the borrower experience a serious illness, layoff, or death in the family? They may want to look at pay stubs, bank statements, tax returns, and other financial data. If the borrower is unable or unwilling to provide documentation, the short sale can be delayed or denied.
Short sales are generally not approved for housing investors, borrowers with significant financial assets, or people quickly buying and selling homes for financial gain.
The lender(s) approve or deny the agreement. They can also ask for changes to the purchase agreement.
The approval for a short sale can take months (expect a very lengthy approval process if there are senior and junior mortgage lien holders), or it may be disapproved altogether.
Remember that the decision-making process will probably be multi-layered, with numerous people providing input inside the lending institution. It may be necessary to consult one or more junior lenders who stand to recoup only a portion of their investment. Insurers could be involved, especially if the borrower paid private mortgage insurance (PMI). If the original mortgage was sold on the secondary market to Fannie Mae, Freddie Mac, or the like, they will be involved. Don’t be frustrated if the approval takes a long while, this is the norm.
And to repeat, there is no guarantee that lender(s) will approve the transaction.
One condition for a short sale is that the borrower can’t receive any of the proceeds of the sale. If the lender is losing money, they will not let the borrower benefit from the sale.
If the lender approves the short sale, there may be tax consequences. Consult your tax advisor. The difference between the amount owed and the amount the lender collects may be considered taxable income. The lender may even try to collect the remaining amount due from the borrower.
For more detailed information see parts 1 or 2. You may also contact the Real Estate Foreclosure Specialist, Fritz Von Yeast, at 612-965-2212, for further assistance.
Part 1 – Preforeclosures
Part 2 – Foreclosure process in detail
This information is provided for general educational purposes only. It is not legal advice. If you have legal or financial questions concerning foreclosure, contact your attorney or tax advisor. The author does not warrant the information's accuracy or completeness, and strongly advises the reader to gain competent professional guidance before making any real property buying or selling decisions.
Copyright 2008 by Fritz Von Yeast. All rights reserved.