Short Sale: Working With Bank Loss Mitigation For A Successful Transaction

Short sale is a term used by lenders who accept a lesser amount than is due on the mortgage note. Lenders will sometimes offer a short sale agreement to borrowers who have defaulted on their mortgage and facing foreclosure. This type of real estate transaction is usually negotiated with the bank's loss mitigation department. When successful, the borrower is able to sell their home for an agreed amount and walk away without causing extensive damage to their credit.

Each lender varies in their short sale procedures. Therefore, the first step is to contact your lender's loss mitigation department and inquire if you are eligible. Once you become delinquent on your mortgage, you will be required to work with an assigned bank loss mitigator. This individual will work directly with you to resolve the issue. The bank mitigator may offer other options to help you get back on track. Typically, this includes a loan modification which either reduces or temporarily suspends mortgage payments.

Banks normally do not offer short sale agreements unless all other options have been exhausted. Additionally, the borrower must meet certain eligibility requirements to qualify for a short sale including:

1) The borrower is required to provide proof that their home is currently worth less than the unpaid balance. This is usually achieved by providing a list of comparable home sales in the area. These listings can be found at various real estate websites or by contacting a Realtor. Homes that have been sold within the past six months fall into the category of comparable sales.

2) The mortgage must be in default by two or more months or near default. Until recently, borrowers had to be to in default by three or more months to qualify for a short sale. Due to the massive explosion in foreclosures, some lenders are now allowing borrowers the option of a short sale if they are in financial distress and heading toward foreclosure.

3) The borrower must provide evidence they are in serious financial distress. This can be accomplished by submitting a short sale package, which includes a hardship letter. The hardship letter provides the borrower the opportunity to explain why they can no longer make their mortgage payments. Hardships might include extended unemployment, chronic or life-threatening health problems, bankruptcy, death and divorce.

4) The borrower must show proof they have no assets they can draw from to maintain mortgage payments.

If you feel a short sale agreement would be in your best interest, it's important to understand there are two types available. These include 'deficiency judgment' and 'payment in full without pursuit of deficiency judgment'.

Deficiency judgment requires the borrower to pay the difference between the short sale and original amount. For example, if your mortgage note balance is $200k and you sell the home for $170k, you would be responsible for paying the $30,000 difference. If you are unable to repay the $30,000, the bank will file a deficiency judgment against you which is reported to the three major credit bureaus. This judgment will stay on your credit report for 7-10 years, even if you pay the amount in full.

Additionally, the deficiency amount may be subject to income tax. Depending on the circumstances and how the short sale agreement is written, the deficiency could be considered as capital gains and subject to taxation.

In order to avoid a deficiency judgment and possible taxation, do everything in your power to negotiate 'payment in full without pursuit of deficiency judgment'. Also known as Deed in Lieu of Foreclosure, this short sale agreement allows borrowers to return the house to the lender and be free and clear of debt on the home.

If the bank loss mitigation department agrees to accept a short sale, experts recommend working with a professional Realtor or private real estate investor specializing in short sale transactions. An experienced agent can help expedite the transaction and protect the borrower's interests.

Although engaging in a short sale will not allow you to retain ownership of your home, they are a better option than allowing your home to fall into foreclosure. With a short sale, you can retain your integrity and avoid the agonizing heartache of the foreclosure process.

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