With the recent decline in home values many homeowners find the market value of their home is less than what they owe on their mortgage. If a homeowner can still make the mortgage payments, there is no need to panic. Home values have historically risen over several years time, so at some point there should be positive equity in the home again. Just keep on making payments.
However, when a borrower must sell a property, but the proceeds of the sale will not be enough to pay off the mortgage, he may ask the lender to accept less than full payment to settle the loan. The borrower is short of enough money to pay the full balance, hence the term “short sale” or “short pay”.
A lender may find that accepting a short pay is their best option. They may realistically have two choices: accept the proceeds of a short sale or foreclose on the property. Either way, the home will be expected to sell for a similar price. Since foreclosing on a property is an expensive process for a lender, that is generally less desirable.
The processes of getting lender approval and then selling a home as a short sale are time-consuming, more complicated than a standard sale and often very stressful.
The owner must first convince the bank that he or she will not be able to continue making payments. The homeowner must submit a hardship letter describing all income and financial assets. Generally, an offer from a buyer must first be accepted by the homeowner before the lender agrees to a selling price. The lender will review the offer and evaluate the home’s market value. Even though the purchase transaction happens between the buyer and the seller, the lender essentially calls the shots. If they are not happy with the price or other details of an offer, they can simply refuse to accept the short pay.
Lender approval of the submission can take weeks or months. Banks are often overloaded with short sale submissions, and it may be difficult to communicate with their negotiators. Some lenders have made efforts to expedite the process, but even the best situations require patience.
There are other possible negative factors a homeowner should consider. The lender may require the homeowner to chip in money from other assets to add to the proceeds of the sale. Also, lenders sometimes require the homeowner to agree to repay some of the lender’s loss in the form of a loan. There may be a significant negative impact on the homeowner’s credit scores. There may also be significant tax implications, as the amount of debt that is “forgiven” might be considered income. A licensed financial advisor and CPA should be consulted regarding these matters.
Short sales are not for everybody, either buyers or sellers. If you’re in a situation where buying or selling a short pay seems like a good move, be sure to get the assistance of a real estate professional very early in the game.