A short sale is when the lender accepts a payoff less than what is owed on the property. It avoids foreclosure and the worry that the lender will sue the borrower for a deficit judgement.
In our current market, not all homes are worth what is owed on them. We sometimes refer to these homes as being under water or with negative equity. While property typically appreciates in time, during the past several years we have seen properties devalue. In Oklahoma, we have been very fortunate that most of our values have remained flat or had a minor adjustment in value. This is frustrating and scary to the homeowner but if you’re able to make the current mortgage payment then I suggest that you continue to do so. The likelihood is that the economy will improve at some point and the value of these homes will increase.
The bigger problem occurs when life changes–people lose jobs, get divorced or have a serious medical condition –and you cannot continue to make your current mortgage payment. At that point the borrower has a few options: Contact their lender and try to work out a payment plan, do a deed in lieu, allow the house to go to foreclosure, or attempt to do a short sale.
In order to do a short sale, the lender is going to want to know why you can’t make the mortgage payment. They will want to see your bank statements for the past two months, pay stubs, and a hardship letter explaining why you cannot pay the mortgage. In addition, they are going to want to see your tax returns. They are verifying that you truly cannot make the payment.
Short sales do have a negative effect on your credit. The hope is the lender will forgive the deficit and mark the file paid. This does not always happen. I have had a file where the lender wanted the borrower to sign a promissory note for a small amount of money to be paid after the closing. This is a possibility. There could be tax liability issues. Most of the time though the lender accepts the short sale as payment in full and does not pursue the borrower for additional money.
In a future blog, I will discuss in more detail about short sales and what a buyer and seller should expect.
In the meantime, if you have questions about short sales, or other real estate questions, please feel free to contact me at 405-213-2992 or visit my website http://www.sandiwalker.com