A short sale occurs when the proceeds of a real estate
sale fall short of the balance owed on the property. In a short
sale, the bank or mortgage lender agrees to discount a loan
balance due to an economic or financial hardship on the part of
the mortgagor. This negotiation is all done through
communication with a bank's Loss mitigation department. The home
owner/debtor sells the mortgaged property for less than the
outstanding balance of the loan, and turns over the proceeds of
the sale to the lender, sometimes (but not always) in full
satisfaction of the debt. In such instances, the lender would
have the right to approve or disapprove of a proposed sale. Most
Short Sales leave a deficiency balance for which the Mortgagor /
Borrower is still liable. In 99% of all cases it is not a
settlement-in-full. A deficiency balance will remain while the
mortgage broker, real estate agent / broker, loan officers,
title and closing agents still remain getting their profit. And
no regulatory agency governs this hybrid transaction.
Extenuating circumstances influence whether or not banks will
discount a loan balance. These circumstances are usually related
to the current real estate market climate and the individual
borrower's financial situation.
A short sale typically is executed to prevent a home
foreclosure. Often a bank will choose to allow a short sale if
they believe that it will result in a smaller financial loss
than foreclosing. For the home owner, the advantages include
avoidance of having a foreclosure on their credit history and
the partial control of the monetary deficiency. Additionally, a
short sale is typically faster and less expensive than a
foreclosure. In short, a short sale is nothing more than
negotiating with lien holders a payoff for less than what they
are owed, or rather a sale of a debt, generally on a piece of
real estate, short of the full debt amount. It does not
extinguish the remaining balance unless settlement is clearly
indicated on the acceptance of offer.
Negotiations
Lenders have a department (typically called "loss
mitigation") that processes potential short sale transactions.
Typically, lenders do not accept short sale offers or requests
for short sales until a Notice of Default has been issued or
recorded with the locality where the property is located.
Lenders have a varying tolerance for short sales and
mitigated losses. The majority of lenders have a pre-determined
criteria for such transactions. Other distressed lenders may
allow any reasonable offer subject to a loss mitigator's
approval. Multiple levels of approvals and conditions are very
common with short sales. Junior liens - such as second
mortgages, HELOC lenders, and HOA (special assessment liens) -
may need to approve the short sale. Frequent objectors to short
sales include tax lien holders (income, estate or corporate
franchise tax - as opposed to real property taxes, which have
priority even when unrecorded) and mechanic's lien holders. It
is possible for junior lien holders to prevent the short sale.
If the lender required mortgage insurance on the loan, the
insurer will likely also be party to negotiations as they may be
asked to pay out a claim to offset the lender's loss in the
short sale.
Credit reporting
A short sale does adversely affect a person's credit report,
though the negative impact is typically less than a foreclosure.
Short sales are a type of settlement. Like all entries, except
for bankruptcy, short sales remain on a credit report for seven
years. Depending upon other credit information, it is typically
possible to obtain another mortgage, 1-3 years after a short
sale.
While it is frequent if not common for a lender to forgive
the balance of the loan in question, it is unlikely that a lien
holder that is not a mortgage, will forgive any of their
balance. Further, it is common for a lender to omit updating
mortgage balances to reflect a zero balance after a short sale.
However, willfully misrepresenting information on a credit
report can constitute libel in some jurisdictions, and lenders
may be sued in civil court for engaging in this behavior.
"This is for informational purposes only, and not intended to
give legal advice. It is always recommended to consult a Real
Estate Attorney for additional information."
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