A Short Sale Primer

t seems that just about everyone knows someone who has experienced foreclosure or a short sale. While the meaning of foreclosure is generally understood, the concept of a short sale remains unclear for some people.

Since the real estate market bust, it is all too common that the value of a home is far less than the total mortgage balance due. In other words, many people have what is referred to as an “upside down” or “under water” mortgage because they owe much more than the new market value of their property. Lots of people in this situation can’t keep up with monthly mortgage payments.

What exactly is a short sale? It’s an agreement with your mortgage company to accept the market price to pay off the balance of your mortgage. The market price can be 50 percent less than your current mortgage balance, or even lower than that.

Think of a round-faced kid with freckles and a cute smile who can barely reach a store counter. This child has his heart set on a piece of candy and proudly approaches the counter with a quarter. The clerk says, “The candy you want costs 50 cents.” The child, no longer smiling, says, “My Dad only gave me this quarter.” The cashier accepts the quarter and gives the boy his candy.

The store clerk made some money even though the child was “short” 25 cents. A short sale is similar, but mortgage companies don’t approve them because they feel sorry for homeowners. When they agree to a short sale, more than likely it’s because it is in their best interest. Mortgage companies are not in the business of losing money.

Mortgage companies view short sales as a foreclosure alternative. In order to be approved for a short sale, homeowners must prove a legitimate hardship, such as unemployment, divorce, illness or some other situation that has negatively impacted their financial landscape.

Why would a mortgage lender agree to accept less than what you owe? A mortgage company spends approximately $30,000 in attorneys’ fees, court costs, taxes and property preservation fees when foreclosing on a home. After the foreclosure is complete, the home will be worth market value, not what you owe them. It costs the mortgage company less money, staff time and effort to allow you to sell the property for current market value, instead of paying the fees involved in foreclosure, and still only get the same amount of money for the property.

Short sales also protect neighborhoods from blight, reduce crime and stabilize property values because the home is not sitting vacant and vulnerable to vandalism.

Homes offered for short sell take an average of 90 to 120 days to close. Buyers and sellers must be patient with the process. Most of that time is spent waiting for the bank to respond to the offer and confirm the market value. This window of time can be shortened if the homeowner uses an experienced real estate agent, realtor or broker.

Another key to reducing the timeframe is to call your mortgage company directly and confirm the documentation and criteria required for short sale approval. One Detroit couple submitted all their paperwork and had the mortgage company agree with their assertion that their monthly income was less than their monthly expenses-in essence, confirming that they could not afford the mortgage. But their short sale was denied because they continued to find a way to pay the mortgage each month, building up more debt in the process. They were told that the mortgage company would not even consider a short sale unless they failed to pay their mortgage for at least three months in a row.

When you call your mortgage company, you might initially be connected to someone in the collections department, but calmly ask to speak with the short sale department. You can also ask your real estate advisor to facilitate a conference call with you and the mortgage company. If they are familiar with the process, they might know what questions to ask that you wouldn’t think of.

By selling your home as a short sale instead of going into foreclosure, you will avoid a foreclosure on your credit report. A short sale negatively impacts a credit report for three years, while a foreclosure negatively impacts a credit report for seven years. In many cases, banks will waive the difference between what you owe and the current price of the home, which may have plummeted in this economic environment. Walking away should be your last option because your mortgage company could possibly sue you later.

Feel free to send your real estate questions to jayesimpson@realtor.com.

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