Short Sale and your Options
What is a short sale?
A short sale is a sales transaction in which the seller's mortgage lender agrees to accept a payoff of less than the balance due on the loan
In a declining housing market, the value of a home sometimes falls below what is owed on it. When you can no longer pay the amount owed, you have several options.
1. You can try to hand over your deed to your first mortgage holder. They might not accept it, since they'd still be on the hook for legal fees, taxes as well as your second mortgage.
2. You may just let the house fall into foreclosure. But that should only be a last resort because it hurts your credit rating. And it may not solve your financial problems since you may be held liable for any difference between what you owe and what the house brings at auction.
3. Another alternative is a short sale -- that is, a sale in which the proceeds fall short of what you owe. It can be a win-win situation for you, the lenders and the buyer of your house. But since you're asking lenders to accept less money than you promised to pay them, there's no guarantee that they'll go along with such a sale. And preparing for it will take considerable work on your part.
First, you must prove that you really can't pay your loans -- and that the reason is new, not something that you concealed from your lenders when you originally applied for the loan.
You or your agent also must figure out all the costs of selling the property. That includes the balance of both loans, accrued interest up until the day of closing, closing costs and fees, and unpaid property taxes.
You then must present the facts to your first mortgage holder, which has the top lien position and gets paid first. If your plan will bring them more money than they'd get if the house were sold at auction, they'll most likely go along with it -- and sometimes pick up some of your costs as well, like real-estate commissions and associated closing costs. However, it may be difficult to get your second mortgage holder to sign off on the deal because if they do, they might not be repaid what they’re owed. But they may be willing to go along with a short sale if the first mortgage holder offers to pay them some money, especially if the amount you owe on your second mortgage is small.
As you can see, setting up a short sale is complicated. It would be worthwhile to consult local professionals with experience in the process, including an attorney, a tax advisor and a real-estate agent.
Sonali Shastri at Remax Accord can help with questions regarding Real Estate. Sonali can be reached at 925.699.9099.