A short sale occurs when a home is sold but the amount of the sale is not enough to cover what is owed on the seller’s mortgage loan, as well as closing costs, taxes and the commission owed to the real estate agent. In a short sale, the seller is not willing to make up the difference. Oftentimes, a short sale is happening because the owners are behind on their mortgage payments and are heading down the trail to foreclosure. Other reasons for a short sale could be because the home was bought at the peak of the market and has decreased in value, the homeowners used a large amount of their home equity toward a refinance, the owners are being relocated or they are getting a divorce. If you are interested in purchasing a short sale, you will need to ask the seller how much is still owed on their debt. Then you can figure out the additional costs associated with the short sale. Many lenders will have their own forms to help calculate these costs. The lender and the title company will have exact figures that will be due at closing. You will also be able to find out if there are any other inspections that should be completed. When a seller decides that a short sale might be the best option, he or she will need to get the lender’s approval. Included in the approval request submission is the borrower’s W-2 forms from any employers, or if he or she is unemployed, a letter outlining the unemployment. It will also include bank statements, two years of tax returns and any other financial documents that show the amount of income and debt obligations. It is also a good idea to include a “hardship letter,” which explains the reasons why you are not able to pay the full amount of the loan. What kind of impact does a short sale have on credit reports? It is not unheard of for the lender to ask the seller to sign a promissory note. It can be for all or part of the difference between the short sale amount and the amount still owed on the debt. Overall, short sales show as negative activity on credit reports and can therefore lower credit scores tremendously. When looking to purchase a short sale property, it is important that you understand exactly what you are getting into and know that the process is a long one. Have your real estate agent walk you through each step of the short sale process. How a Short Sale WorksIn a real world, short-sale scenario, a home seller puts his or her property on the market, while formally designating the home for-sale as a potential “short sale/subject lender” deal to any potential buyers. Once a buyer agrees to make a short sale offer, the homeowner contacts his or her bank, and completes an application asking for short sale status on the home. There is no guarantee the bank will green light the application, but a short sale does eliminate many hassles associated with the mortgage loan, such as closing the books on the homeowner loan, and the bank or lender gets a portion of their loan repaid. Home sellers involved in short sales can expect to file several firms and documents to their mortgage lender. Those include a hardship letter stating why you can’t fully repay your mortgage loan, along with the filing of records like pay stubs and tax returns that back your case as being unable to repay the home loan. The bank will then review your application, send out an appraiser to estimate the full value of the property against the short sale offer, and then either approve or reject the short sale request. Benefits of a Short Sale to a Home SellerIf the property seller is presented with a short sale opportunity, it’s a good idea to thoroughly vet all the options on the table, and calculate the risks and opportunities and look at other relative personal financial options, before making a decision. Nobody is saying a short sale is a perfect solution to a home seller who has suffered a financial setback and owns a home with where the mortgage exceeds the property’s value – but it might be the best option. Benefits of a short saleCredit score advantages Emotional advantagesIn many instances, a home mortgage is the biggest financial event of a person’s life at least before retirement. The seller avoids a “worst case scenario” of foreclosure and can honestly say they sold their home and moved on with their life. • Lender interference: Lenders may also get directly involved in the home price negotiations, often asking for a higher sales price than the home seller (including the insistence that the buyer make all or most of the closing fees), in order to recoup more money on the home loan. Subject to the Mortgage Lender’s ApprovalIn a typical property sale, the only one who has to approve the sale is the person who owns the property. In a short sale, this is not the case. The current owner is not the only one who must accept the offer. Since the owner is trying to get their mortgage lender to accept less than they are owed for the property, the lender must approve the sale. Lenders are not necessarily too eager to take a loss on their loan. This process is further complicated if there are multiple liens on the property, meaning you would have to get multiple lenders to agree to the short sale. Property ‘As Is’Sellers attempting to negotiate a short sale are usually experiencing some sort of financial hardship. Therefore, they may not have the money to do upkeep on their property. This inability to keep up with maintenance may be obvious, or it may lie deeper in structural, electrical or plumbing issues. When you buy a short sale, you are usually buying the property ‘as is.’ The bank is already losing money on the property, so they will not usually make concessions for these maintenance issues. It is therefore extremely important to get a home inspection so you can uncover any major issues the property may have. Is the Seller Approved?Just because someone advertises a property as a short sale does not mean they have been approved for one. They may think they qualify for a short sale, but unless they are actually approved by the bank or mortgage lender, this classification means nothing. Before getting involved in a short sale, you should always verify that the seller has been approved by their lender for one. If they have not, you could be wasting your time or could become involved in a process that will draw on for months or even a year. Pros and Cons of Buying a Short SaleAny buyer considering participating in a short sale should be aware of these issues: Free Initial Consultation with LawyerIt’s not a matter of if, it’s a matter of when. Legal problems come to everyone. Whether it’s your son who gets in a car wreck, your uncle who loses his job and needs to file for bankruptcy, your sister’s brother who’s getting divorced, or a grandparent that passes away without a will -all of us have legal issues and questions that arise. So when you have a law question, call Ascent Law for your free consultation (801) 676-5506. 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