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What is a Short Sale?

A short sale is where a homeowner sells their home for less money than they owe on the property. A “short sale” is an option for a homeowner to avoid foreclosure when they can no longer afford the mortgage on the home.

The owner of the home negotiates a discounted payoff with their mortgage company without having to come up with cash to cover the shortfall. At the conclusion of a short sale, the mortgage and any liens on the property are deemed satisfied and any foreclosure process stops. 

In order for a lender to agree to a short sale, most require the borrower to list and actively market the home at its fair value. The sale must be an arm's length market transaction with all proceeds (after selling costs) applied to the discounted mortgage payoff.

Short Sales Requires Time, Cooperation

Short sales can sometimes be complex transactions involving careful coordination and close cooperation among a number of parties — servicers, appraisers, borrowers, purchasers, real estate brokers, title agencies and often mortgage insurance companies and junior lien holders. A short sale usually provides a better outcome for borrowers, investors and communities.

However, due to the complexity of and time required for completion of these transactions, servicers historically have often opted to pursue foreclosure instead, even where a short sale would have provided a substantially better outcome for borrowers, investors and communities.  During the financial and housing market crisis, though, lenders and servicers are more agreeable to reasonable short sales. 

Do I Qualify for a Short Sale?

In order to sell a home in a short sale, the borrower generally must be able to show they are unable to pay their mortgage and currently are experiencing a financial hardship. An involuntary loss of income, a divorce which leaves one spouse in the home and unable to assume the mortgage payments, and injury or illness that results in the borrower being unable to keep up with payments are commonly given reasons for a financial hardship permitting a short sale.

Some lenders require that the borrower first attempt to do a loan modification before the lender will proceed with a short sale. Also, your lender will require you to submit various forms and other documentation to determine whether you and your property qualify for a short sale.

You may also qualify for a short sale under the Home Affordable Foreclosure Alternatives (HAFA) Program, sponsored by the U.S. government as part of the Making Home Affordable Program. Under HAFA, homeowners and lenders are given a financial incentive by the government to complete short sales of delinquent properties.

The program is specifically intended to help homeowners who do not qualify for a trial mortgage modification under the Making Home Affordable Program, did not successfully complete a trial loan modification period, or missed at least two payments in a row during the trial modification period.

It also may be available to homeowners who simply request a short sale under the program. You may even qualify to receive up to $3,000 to help out with relocation costs after you sell your house in a short sale under HAFA.

Contact your lender to find out if you qualify for a short sale under HAFA.

How long do I have to try to sell my house as a 'short sale'?

It depends on your lender's requirements and whether you qualify for any special government sponsored programs helping homeowners avoid foreclosure.   For instance, under the Foreclosure Atlernative Program (part of the Making Home Affordable Program), borrowers should have at least 90 days to market and sell the property, with possibly more time based on local market conditions. The property must be listed with a licensed realtor experienced in selling properties in the neighborhood. Marketing of the property may run concurrently with the foreclosure process, however no foreclosure sale can take place during the marketing period specified in the Short Sale Agreement as long as the borrower is acting in good faith to sell the property. There will be a maximum marketing period of 1 year for the property, provided any longer period not otherwise delay foreclosure sale, to ensure diligence by servicers and borrowers in moving as quickly as possible to complete the short sale.

Can any property be sold as a 'short sale'?

Ttypically, if there are any junior liens, mortgages or other debts against the property, those must be cleared first before the property  can be sold as a short sale. The servicer can proceed with a short sale there is a reasonable belief that all liens on the property can be cleared.

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