Short Sale Pros & Cons

Short sales can help a homeowner out of a difficult situation, sparing him the stress and embarrassment of a long, drawn-out foreclosure process. However, there are drawbacks to the short sale process. Of course, you will lose your home – but that will still happen when the bank forecloses. You will also walk away without a penny of profit from the sale. And, your credit score will take a hit.

Typically, the perfect situation would be that you mysteriously make up for lost time with your home loan installments and keep your home. In any case, for an increasing number of Americans, that is not a reasonable plausibility, so it truly is to your advantage to play an active role. This is the thing that a short sale is about – confronting the issue, rather than just hiding from your moneylender and hoping the issue will go away or, more terrible, leaving the property.

Why Would a Lender Agree to a Short Sale?

Why might your moneylender let you walk away from the home and overlook the deficit on your credit? To spare time and cash. Foreclosures are costly and tedious for loan specialists. Once the lender understands that foreclosure is inescapable, a short sale might appear like the lesser of two evils. Also, short sales help the moneylender look great on paper – the property was never recorded as a real dispossession, which helps the lender’s numbers.

In a short sale, the lender is already concurring to take a discounted or lower payoff on the loan, should they concur to the short sale. The equity position, that is, the property owner, is in the first loss position (as he would be in the first gain position if the property had appreciated instead of losing value). Because of leverage, customarily the lender in a short sale takes a much more preponderant hit than the owner ever will.

This said, there is great liability for a dealer to attempt to cheat the bank by undercutting a home and taking any returns from the deal. A respectable real estate broker won’t partake in extortion with a customer as it at last is not in the seller’s best advantage.

As of late, many lenders have started collaborating with the Home Affordable Foreclosure Alternatives (HAFA) program. This government sponsored short sale program sets pre-approved short sale prices for any sale of properties and also approves three thousand dollars ($3, 000) in moving costs for the seller. Because this is authorized by the lender, it is permitted in a short sale.

Pros of Doing a Short Sale

  1. Avoid Foreclosure

A short sale allows the homeowner to avoid foreclosure, the legal process employed by lenders to enforce payment of a mortgage debt. The homeowner must move from home before the public foreclosure auction. A short sale allows the owner more time to sell the house and find a new spot to live.

The average legal cost to the homeowner going by way of a foreclosure is around $7, 500, according to the U. S. Congress Joint Economic Committee. Add in any additional costs that can accumulate during the sometimes lengthy foreclosure process, which could be just the tip of a hard financial iceberg. And if the homeowner struggles to afford payments, the foreclosure could eventually lead to a financial predicament where bankruptcy — having its significant credit implications for the borrower and costs with the lenders — may be the only option. Therefore, if a foreclosure is generally avoided, it’s in the best interest of everybody involved.

  1. It Can Safeguard Your Credit

From a lender’s view, it’s better to recuperate a portion of a mortgage loan than to soak up a total loss. Therefore, in lieu of a foreclosure, banks will often acknowledge a short sale. This allows the lender and homeowner to end up in a better position.

One concern for many homeowners, however, is whether the financial institution will sue for a deficiency judgment just after the short sale. In an attempt to recover the difference in the amount that was initially paid and the sum of the loan, the bank can file case against the homeowner. A deficiency judgment will appear on a homeowner’s credit report and have a damaging impact, just as a foreclosure would.

But rather than endure a pricey and time-consuming litigation process, a bank will cut its losses with homeowners who are unable to pay their mortgages as a result of proven hardship, such as the divorce or decrease in income. And the reduced cost owed will ease the burden on the homeowners and not irreparably damage their credit.

  1. It Can Offer the Seller Relief

Real estate sales generate a flutter of activity relating to the buyer and the seller, and they’re often stressful of course. But they don’t compare to the pressure that a homeowner is under a foreclosure. The major credit hit, the drawn-out legalities and the general stigma connected to foreclosure is usually quite unnerving.

Short sales are not exactly risk-free on the subject of the seller’s credit rating, and they will not completely diminish this financial implication when homeowners cannot pay for a house that they purchased. But the sale will open the entryway to solutions for homeowners which may allow them avoid legal action plus the lengthy, laborious foreclosure process.

Cons of Doing a Short Sale

  1. Financial implications

Lenders may consider getting a deficiency after a short sale in some states. The collateral amount sold is determined by the difference between the balance of the mortgage loan and the price of the property. The borrower may be liable for taxes by the IRS, on the amount forgiven by the lender.

  1. Selling Obligations

The homeowner must list the home available and find a buyer to accomplish a short purchase. Some lenders require a real estate agent be used for the sale. The short sale application involves the seller providing the lender with solid proof, such as the borrower’s pay stubs and proof of hardship. A seller who has a high-paying job or assets might have a harder time carrying out a short sale with a lender.

  1. Bank is in the Driver’s Seat

When you offer a house in the standard way, you give orders. You set the listing value, you negotiate offers, you accept or dismiss a deal. In a short sale, you are only one player- – and not an essential one at that. In a short sale, the dealer puts the house available to be purchased and signs the business contract, yet it is truly the moneylender that chooses whether or not a short sale can continue, sets the time span and negotiates the price.

Why Short Sales Take a Little Longer

The deadline for a short sale is dependent on a number of factors, such as banks and brokers involved. From closing the first offer, it can take a quick short sale only 60 days. However, a short sale with problems along the way, might take up to a year to complete. According to Amy Simmons of Keller Williams Realty in Jupiter, Florida, the average short sale requires three to nine months.

Why It Takes Longer Than a Normal Transaction

A short sale happens when a homeowner sells a house for less than the amount due on the mortgage loan. They sell the House short of the outstanding balance, hence the term. In many cases, short sale is a strategy for avoiding foreclosure.

But homeowners cannot do this only on their accord. They need the lender’s permission, since the lender will likely be taking a loss in the deal. This is the reasons why a short sale takes longer than the regular transaction, generally speaking. In a conventional sale, the seller/homeowner doesn’t need the lender’s permission since they will pay off of the balance in full.

Short sales are usually more complicated for the reason that multiple approvals is usually required. There might be more than one lender involved. There may also be a private mortgage insurance protection (PMI) company that has a stake in the deal, and therefore some influence on the approval process.

Here is a closer look at the factors that slow down the short sale process:

  1. Responsiveness of the vendor

One of the biggest causes of delay in the short sale is the seller himself. Their mortgage lender asks for documentation during the short sale process, and many times the lender will ask for updates on paperwork that has already been lodged. Many vendors have been slow to produce paperwork because they are disorganized, emotionally upset, or confused about the purpose of the paperwork. The ideal short sale seller immediately responds to requests for paperwork without questioning why the lender wants it.

  1. Internal policies of the lender

Each lender has its own timetable for a short sale. Many borrowers try a loan modification first, and many lenders will not consider a short sale while a loan modification is being considered. Most of the time, the lender’s personnel is overwhelmed and that delays the process.

  1. Involvement of alternative lien-holders

If there are actually multiple lienholders, that might lengthen the short sale negotiation because everyone has to approve the sale. In most situations, each lienholder may seek to limit what other lienholders receive, which could complicate the negotiation.

  1. Involvement of a home loan insurer

If a loan insurer is needed, then they are required to agree on the amount of loss that the lender will take. That injects an additional decision maker into the process. The mortgage insurers sometimes have certain rules about what they would approve, and the lender may have to abide by those guidelines.

  1. Involvement of a Government Service Entity (GSE)

If Fannie Mae, Freddie Mac, the Veterans Administration (VA), the U. S. Department of Agriculture (USDA), or maybe the Federal Housing Administration are involved, then they too have to approve the short sale. That injects yet another decision maker into the process, and each unit has its own system.

The sort of short sale program. There are government short sale programs, similar to the Home Affordable Foreclosure Alternatives (HAFA). There are bank programs, similar to the conventional short sale and the cooperative short sale. Every program has rules on timing. One system might require that the property not have an offer on it yet, while another lender’s program might just consider a short sale if there is a marked contract with a purchaser.

  1. Involvement of a third party negotiator for the lender

Some lenders, particularly the Bank of America, prefer to use third party vendors to help negotiate with the seller. These third-party companies work for the bank and may have their own procedures in addition to the rules of the lender.

  1. Involvement of an authorized vendor or attorney negotiating for your seller

A third bash vendor or attorney working for the seller could possibly have their own suggestions. They may only advance the short sale if most paperwork is received from the seller upfront.

  1. The ability of your listing agent to help procure a buyer

Even if this short sale agreement process is switching along quickly, it is essential to get a ready, willing, and able buyer. Without a buyer, there is no closing. Some properties, such as houses in need of repair, may only entice a certain segment of the buyer pool. If a lender pre-approves this short sale at a certain price, but buyers believe that price to be too big, then there will probably be extreme difficulty in locating a buyer.

  1. Expiration of the appraisal or Broker’s Price Opinion (BPO)

Even if there exists a buyer and the process is going along quickly, a lender might possibly slowdown the negotiation because the valuation of your property is very old. Some lenders could possibly only consider some sort of appraisal if it occurred in less than three months, while others may well only approve a short sale if the particular appraisal is just less than 6 months old. Also, it may take days or weeks for the appraiser or BPO adviser to submit his or her report.

How To Speed Up the Short Sale Process

Hiring an agent who has closed many short sale deals will serve as leverage since experienced agents know how certain banks work, what could be expected and how to best work through the complex process. But even the most experienced short sale agent can at times come across brick walls or challenges they simply cannot overcome.

The long and short of it is that the sale of a home in a short sale can save your credit if you know how the process works, so make sure the professionals you work with have a lot of experience.

Sample Hardship Letter for a Mortgage Loan Modification

Are you behind on your mortgage? If you do not think you’ll be able to get under the current terms of your mortgage, but you are willing and able to be make payments, you might want to consider applying for a loan modification from your lender. If so, you need to write and submit a hardship letter with information about the circumstances that led to the current financial situation combined with a request to consider other loan terms.

Through a mortgage hardship letter, debtors inform creditors that they’re unable to make their mortgage payments. This letter describes the occasion or motive for their incapability, examples of which include being recalled to active navy duty, dying of a co-borrower, divorce, assets damage, activity loss or illness. In the letter, the borrower can also request a loan modification, payment abatement period or some other kind of relief.

By and large, it takes after the arrangement of an essential business letter: introduction, descriptive paragraphs plus a conclusion. The distinction is that, in the conclusion, the borrower makes a solicitation. It is written, marked and dated by the borrower, and should not be emailed. It is sent to the bank or home loan moneylender and turns out to be a piece of the borrower’s record upon receipt. Ideally, to guarantee that the letter is appropriately reviewed, it ought to be sent to a particular loan administrator and not to the general attention of the bank. It should also be dispatched to the existing loan management office and not a bank branch or other place.

Common hardships that financial institutions usually find acceptable:

  1. Loss of employment
  2. Lower Income
  3. Death or Illness (of the homeowner or family member)
  4. Divorce or Separation
  5. Flexible Rate Reset-Payment Shock

Everyone experiences issues in life, and they usually are not your fault. For example, no individual homeowner may very well be blamed for the particular nationwide banking crisis, recession, or housing bubble that this country experienced. These issues have far-reaching consequences and have placed many homeowners in a difficult position.

If you’ve been laid off from your job caused by forces beyond your current control, that is not your fault. Many hard-working, loyal employees lost their jobs at companies they worked in for years due to reasons unrelated to their job performance.

Property holders have missed work on the grounds that they were lamenting the passing of a relative, or they were getting treatment for a physical or emotional sickness. Notwithstanding the money related expenses of managing these occasions, the time far from work means lost wage. Cash is lost going and coming, and it’s no big surprise that individuals encountering these hardships can fall behind on their home loan. The uplifting news is that your home loan bank can take the issues you’ve had into thought while assessing you for a loan modification.

The reason for your hardship is not the bank’s essential concern. What’s imperative to the bank is that the hardship is over, or will be over when they change your loan. They need to see that the issues that made you cause harm have been determined, that you’re in a position to get back on track, and that you merit better terms.

It is worth noting that the hardship letter is just one of the required items in your loan modification application, and you may be refused for many reasons. The best letter in the world does not guarantee success, but it is a necessary piece of the puzzle, and can help the bank to see you as a real person rather than an anonymous name that owes them money.

If you would like to write your hardship letter yourself, it’s important to avoid common mistakes it is important to common mistakes, like writing too much, or failing to comprehend the bank’s point of view.
Whether you need to write your hardship letter on your own or not, still consider consulting with an experienced attorney to assist you through the loan modification application process. Although getting a loan modification approval is never a guarantee, you can increase your odds by working with a lawyer that understands the process and has a proven track record. Utilizing the services of a foreclosure defense law firm will allow you to present your best self to the bank, and frees you to recover from your hardship and work on improving your situation.

Remember, a real, legitimate, and genuine articulation demonstrating your purpose behind the asked for loan modification, deed in lieu, or a short sale is the best. Property holders can likewise check their qualification for the HAFA Short Sale including the $3,000 Seller Relocation Assistance before writing the Hardship Letter. Utilize the free Sample Hardship Letter guide to offer you some assistance with overcoming writers’ block and compose a successful Hardship Letter however never manufacture a Hardship Letter that is not totally reflective of your individual circumstance or duplicate somebody else’s Hardship Letter.

While there isn’t guarantee that your request will be granted, lenders are often willing to do business with borrowers who are proactive in seeking modifications as opposed to allowing outstanding financial loans to fall additionally behind and shift toward foreclosure. You may uncover (as do many) that this banker is willing to do business with you to maintain your home.

Disclaimer: Readers with credit, legal and tax questions are advised to seek the advice of an attorney or tax advisor. The above information should not be construed as legal or tax advice.

Download a free loan modification hardship letter guide here at:  You may need to fill in your name, email and state before you download

PS: You can download and upload to your site, citing reference, whatever works…


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