Many Home buyers are mystified by this term – "A Short Sale is really a long sale," they say. Many do not know how it works or understand what it means to purchase a “short sale” home. The following will explain the process.
When a homeowner gets into financial trouble and can't pay their mortgage any longer, this leads to a “default”. As a result, one of two things may happen:
1. The bank “trustee” initiates foreclosure proceeding or;
2. The homeowner puts the house in the market for sale as a “Short Sale”.
If the homeowner chooses to sell the house and they owe more than the selling value of the house, then the mortgage pay off will be short and will be labeled "SHORT SALE."
How is this done?
1. The homeowner must first put the house on the market to determine how much the house would sell for.
2. When an offer comes in, the homeowner's agent submits the offer to the mortgage company that holds the note along with all the supporting documents required by the lender, for a short sale approval.
3. Once the mortgagee (bank) receives the offer along with the short sale request, they will review all the documents and conducts a market review (BPO) or appraisal of the property to see the "Fair Market Value" of the house.
4. Approval depends on the reason for default, and how much money the bank (mortgagee ) will be losing.
For example:
The house was bought for $270,000 two years ago through a VA Loan program ( no down payment ) and therefore the balance remains $270k. Markets the house for $200k, but receives an offer for $190k. Calculating the cost to sell, ( agents commissions, termite inspections, lawyers fees, etc ) approximately $12,500. Then 190,000 less $12,500 resulting the final pay off to the bank of $177,500.00.
Now assuming the homeowner was not able to pay the mortgage for five months, with a 6% interest rate and a 30 year term, his payment would be 1,620.00 x 5 months, leaving an unpaid balance of $8,100. This amount will be added to how much the homeowner currently owes the mortgage company. Thus $270,000 + $8,100 = $278,100
For the purpose of our discussion we'll say the homeowner owed including late charges, and penalties $280,000 total.
The homeowner submits the offer of $190,000 minus the cost to sell of 12,500 = $177,500 to be applied to the balance owed ( pay off balance ). This is where the transaction gets complicated and the long wait for approval begins.
With this example, the homeowner is asking the mortgage company to absorb the loss of $100,600; ($278,100 - $177,500 = $100.600) This is not a small change for the bank to simply "forgive"; the bank reviews every application thoroughly and the review process are causing the "hang up" in approval or denial of the Short Sale application.
If the holder of the loan is Bank of America, good luck, Bank of America by my experience and according to other Real Estate professionals, takes three to six months to even look at any short sale application, and often times denies short sale request.
I have seen other cases where the defaulting homeowner were asked to sign a promissory note, promising to pay half of the short fall in small increments for number of years (around 15 years or so) with no interest.
So, here's the bottom line. If you are looking for a terrific deal and can stand to wait four to six months for the closing, then go for a short sale. But if you do not like taking a chance of not receiving an approval after waiting for several months, a great option is to buy a foreclosed property. Watch for our next topic: "How to Buy a Foreclosed Home, and Why."
