Real Estate Short Sale Process

A mortgage payment default may end up in a foreclosure or bankruptcy proceedings that can affect the credit report of the borrower/owner of the property. However, there are some options that can save the borrower from such situations and short sale is one among them. A real estate short sale can be initiated only if the property as well as the seller qualifies for this process. Another important factor is the consent of the lender. This article will provide you with a basic idea about real estate short sale process.

What is a Real Estate Short Sale?

As mentioned above, a real estate short sale is a process that can be initiated, only if certain conditions are met with. The following are some of the main terms and conditions associated with short sale process. The borrower must have made defaults in mortgage payments (at least for a month or 31 days). The current market value of the property must be less than the outstanding loan amount. The borrower should not have any other assets or other means to pay off the mortgage. He/she is facing real hardship in repaying the loan amount.

The application (from the borrower) for a short sale proceeding must be presented to the bank, before the bank initiates proceedings for foreclosure. Above all, the bank or the lending institution must agree for such short sale and this happens when the lender weighs the various aspects of short sale vs foreclosure, in that particular case. In other words, the lender must find a short sale profitable, as compared to the expenses that would be incurred with a foreclosure (like, attorney fees, eviction expenses, etc.). So, now, you know more about the basic requirements for a real estate short sale process.

So, when the borrower makes default in mortgage payments and does not have any means to pay the remaining loan amount, he/she can approach the lending institution and request for a short sale. A short sale is a sale of real estate by the owner, with the consent of the lender, so as to pay off the loan amount. But, in case of a short sale, the proceeds of the sale fall short of the remaining loan amount. It is like a kind of a settlement between the owner of the property and the lender. You may think that why would a lender agree for real estate short sales, if it can cause a loss for the lender. The answer is that, it is not necessary for the lender to agree for each and every application for short sale. If the short sale procedure is profitable, in comparison to other proceedings, like, foreclosure and bankruptcy, then only, the lender will agree for the former. If the proceedings of the short sale is slightly lesser than the loan amount, the lender may give consent for the same. If the loss is higher, this may not be possible. Then, what will happen to the remaining loan amount? That may be either written off or the borrower may be required to pay it off.

Real Estate Short Sale Process

The borrower has to file a request with the loss mitigation department of the lending institution. It is this department that is entrusted with the various procedures related to the accounts with payment defaults. The borrower must seek advice from a real estate attorney as well as an accountant, regarding the legal aspects as well as the tax implications of a short sale. The lending institution will collect information from the local real estate brokers, about the current value of the concerned property. If the rate of the property, as provided by these brokers, is very low, the lender may not go ahead with the application for the short sale. Otherwise too, the borrower has to negotiate with the bank regarding the short sale.

While, negotiating, you must try for "payment in full without pursuit of deficiency judgment." This means the remaining amount (difference between the loan amount and the proceeds of the short sale) will be written off by the lender. In other words, the borrower will not be required to pay the remaining amount. In case of "deficiency judgment," the borrower has to pay the same. The bank may also require documents regarding the assets of the borrower, his/her bank statements, hardship letter, etc., for approving the application for short sale in real estate. If the borrower has a buyer ready, then, short sale can be done at the earliest. Otherwise, the property will be listed through a realtor, so that prospective buyers go through these real estate short sale listings and the concerned property gets a buyer. The borrower has to find a buyer within the stipulated period, on failure of which, proceedings for foreclosure will be started.

The above said is only a brief overview about real estate short sale rules and proceedings. If anybody is interested in real estate short sale proceeding, seek advice from a real estate attorney and accountant, beforehand. You must also negotiate with the bank, so as to get a good deal. Make sure to understand about the consequences of the real estate short sale process on your credit history. While, buying a short sale can be profitable for the buyer, he must also seek expert opinion, beforehand.