As the economy and the housing market continue to remain uncertain, many California homeowners may increasingly find themselves unable to keep up with their mortgage payments. In many instances, the mortgage balances may be more than what the property is currently worth – this is what is meant when a mortgage is referred to as being “underwater†or “upside down†. Since there may not be sufficient equity in the home, the homeowner may believe they may have limited options. Many homeowners will opt to throw in the towel and accept that foreclosure is inevitable, not realizing that viable options still remain. One of these options is called a “short sale†.
Until recently, most people had never heard of a short sale. A short sale in real estate means that the lender has agreed to accept less than the total amount of what is due, in order to fully satisfy the debt. Often a lender will choose to agree to a short sale as they may believe that this could result in a smaller financial loss to them than a foreclosure. For the homeowner, a short sale can minimize the extensive damage and negative impact to credit that is part of the foreclosure process. Additionally, a short sale can relieve the homeowner of unpaid mortgage payments, unpaid property taxes, negative equity as well as the heavy financial and emotional burden these overwhelming expenses can place on the homeowner and his or her family.
When it comes to a short sale, time is of the essence and all lenders have differing requirements and requests for documentation. The lender, among other forms of documentation, may ask the homeowner for a preliminary net sheet, a comparative market analysis and other highly specific documentation, which a qualified real estate agent can help prepare. The lender may also ask a homeowner considering a short sale for proof of income and assets, copies of bank statements as well as a hardship letter. The hardship letter typically describes how a homeowner got into their present situation – through loss of a job, hospitalization, death of a spouse and any other tragedy that cripples the homeowner’s ability to pay their mortgage – and what they have done to get out of it, and why the situation will not change. These letters may be emotionally difficult to write because nobody wants to sit down and recount to themselves, much less anyone else, how their life and finances have changed dramatically since they bought their home and that it will not improve, but it is important to be truthful.
The lender will then review what has been submitted and may have additional questions or require additional information from the homeowner. Once the lender has fully reviewed the submitted documentation, if all goes well, the lender will approve the short sale. Every short sale situation is different and it is important to note that not all lenders may agree to a short sale, not all homeowners may qualify for a short sale, and that there may also be legal as well as tax consequences for a short sale transaction. Therefore it is always best for a homeowner who is considering a short sale to consult up front with the appropriate qualified professional who can help assess their situation and provide support, guidance and assistance.
A short sale is a highly complex transaction. In theory, any licensed real estate agent can assist a homeowner with a short sale. However, when the homeowner works with an agent who is experienced in short sales and understands the entire process, the negotiations with the lender will proceed more smoothly and thereby significantly increase the chances of success.
Viable options do in fact exist for homeowners who can no longer afford to keep mortgage payments current and unlike a foreclosure, a short sale does not result in the across-the-board destruction of a homeowner’s credit and personal dignity.
Michael Bates is a Los Angeles realtor who is highly experienced in all aspects of the short sale process. Michael can be reached at michael@batesestates.com or 310-245-4166.
