A short sale occurs when a bank agrees to let a homeowner who owes more on a home than what it’s worth to sell that home without incurring the debt of the difference in the unsatisfied mortgage. While this may seem like a good deal for owners who are looking to get out from underneath devalued properties, they must realize that the sale will result in a negative credit rating. It also requires the owner to prove financial hardship in great detail. Further, other parties who may have an interest in the sale such as second or third mortgagors and other creditors may block it until their demands are met. For more on this continue reading the following article from JDSupra.
Short sales provide an opportunity for a distressed homeowner to avoid a lengthy foreclosure process. Generally, a short sale is possible if a homeowner owes more on a home than it is worth in today’s resale market, the original lender agrees to let the homeowner sell the property for what it is worth today, and the lender agrees to overlook the losses.
Be forewarned. Short sales damage the original homeowner’s credit rating. To qualify for a short sale, homeowners must show:
- Financial hardship or a reason why the mortgage cannot be paid
- Insolvency or an inability to pay bills on time
- Detailed financial records that demonstrate a monthly shortfall, meaning that the payment of all the bills plus the mortgage is beyond what the current household finances can sustain
In addition, there are hurdles to overcome before the completion of a short sale. Various creditors have a stake in the short sale:
- Second or third mortgage lenders may delay the finalization of a short sale by refusing to sign a settlement agreement, holding the buyer and seller of the property hostage to demands for a greater share of the settlement agreement.
- The electric company, water company and other utility providers have an interest in having their outstanding bills paid before continuing to provide service to the new buyer. Failure to make these payments may delay the completion of the short sale.
- The property may be subject to creditor and judgment liens, in which case, lawyers may have to deal with unpaid taxes, water bills, second mortgages, homeowners association dues and court judgments before the sale can be finalized.
This article was republished with permission from JDSupra.