Short Sales Vs. Foreclosure

Sometimes the value of a home is worth a lot less than the market value of the home. During the real estate bust of the past few years, home values have dropped greatly - some homes are worth 10%, 20%, sometimes 50% less than what they were purchased for. Sometimes homeowners have refinanced so many times that they owe more than the home is worth, and they feel trapped in their homes!

How Does A Short Sale Work?

In negotiating short sale, the homeowner finds a buyer for the home, and the mortgage company agrees to accept the proceeds from the sale to pay off the mortgage in full, even though the sale price is less than the mortgage itself. For instance, if a homeowner owes $200,000 on the mortgage, but finds a buyer who offers $150,000, the homeowner's mortgage company might agree to a short sale - the mortgage company would agree to accept $150,000 to pay the mortgage off.

Why Do A Short Sale?

Short sales are often done to prevent foreclosure, and a short sale is an economic calculation made by the mortgage company - the mortgage company will approve a short sale if it thinks it will lose less money through the short sale process as opposed to filing a foreclosure lawsuit. A short sale is when the lender will accept less than the full amount due on a mortgage when a property is sold. Usually, the lender will accept the short sale to avoid the time and expense of a foreclosure.

Negotiating Short Sale Cheaper Than Foreclosure

Why would a mortgage company accept less than the full amount of the mortgage? Because it's better and cheaper than foreclosure. When a homeowner defaults on his or her mortgage, fees add up quickly. Not only are there back payments, but also late fees, property inspection fees, attorney fees, etc. Mortgage companies begin foreclosure proceedings and file a foreclosure lawsuit to try to collect the monies owed. However, a mortgage company can lose up to 70% of the mortgage amount because of the time, costs, expenses and delays associated with foreclosure, such as attorney fees, court costs, lost interest, eviction costs, property maintenance costs, and selling costs. Also, foreclosure can be a slow process taking months or even years!

Short Sale Or Foreclosure: Short Sale Might Be In Homeowner's Best Interest

Short sales can also be in the best interest of the homeowner, too. Homeowners will not have to endure the time and stress of a foreclosure and their credit may not be as adversely affected as it would with a foreclosure. Short sales are faster, easier and less embarrassing than foreclosure.

Contact Your Mortgage Company For Negotiating Short Sale

Homeowners should contact their mortgage company when they know can no longer afford their mortgage. Most mortgage companies do not want to foreclose on a home - they lose too much money. Mortgage companies have loss mitigation departments that work with homeowners behind on payments to resolve the situation. If you cannot resolve the default with your mortgage company, ask to talk to the department that deals with short sales to find out about your options.

Often the mortgage company will require the homeowner to submit a lot of information in order to consider the short sale. The information required may include:

• Income documentation such as W-2s and pay check stubs to verify the borrowers' income.
• Bank statements to verify the borrowers' assets
• Hardship letter - this letter will describe for the lender the reasons the borrowers are in the financial position they are in and will ask the lender to accept the short sale. Borrowers should make this letter sound as sad as possible and back up the story with any documentation you may have such as medical bills, etc.
• Fair market value for the property - depending on the lender they may require an appraisal or may accept an opinion from a local Realtor know as a Comparative Market Analysis (CMA).
• Preliminary proceeds sheet from the sale of the property. This will show the proceeds of the sale of the property after the mortgage is paid off and all other closing costs and fees are paid. This will be negative in the case of the short sale and this negative amount is the amount of the shortage.
• Listing agreement and purchase agreement when they are available.

Mortgage Company Approval Needed For Short Sale

The mortgage company reviews all this information and decides whether or not to approve the short sale. If they do not approve the short sale, the mortgage company will proceed with the foreclosure. If they do agree to the short sale, you will sell your home and the lender will take the loss.

Protect Yourself

So, is the homeowner off the hook? Not necessarily - the mortgage company may still try to collect the shortage, or require the homeowner to sign a new promissory note, or even file a collection lawsuit. There may also be tax implications with the IRS. When considering a short sale, it is important to understand the facts and speak to an experienced short sale mortgage foreclosure attorney, like the team at the Byrne Law Group - call for a free consultation today at 813-413-6565 and learn about your options.