Real Estate Terminology 101: What Is A Short Sale?
A short sale is a process wherein a financially distressed homeowner sells the house for a price lower than what is still owed on the mortgage.
Key facts about a short sale:
- A short sale must be approved by the lender. They would normally require documentation that will support the need for this course of action.
- All the money made from the sale will go to the lender. The latter has two choices: forgive the difference owed or get a deficiency judgment. This is a court ruling against a borrower in default on a loan.
- In Florida, banks or lenders can get a deficiency judgment but the law sets some limitations if the property is residential. Borrowers can be obliged to sign a promissory note for the deficiency. If the lender forgives the amount, the homeowner may have to pay taxes on the owed balance.
- Short sales can be tedious. It requires a lot of paperwork, and processing takes time. But unlike a foreclosure, it is not as damaging to the homeowner’s credit rating. It will, however, still be a negative mark on the credit score.
- As part of the approval request process, the homeowner will need to submit a hardship letter as well as tax returns and payroll stubs. A completed financial statement and a preliminary closing statement will also be required.
- Once they acknowledge receipt of documents from the borrower, a negotiator will be assigned.
- A broker will generate a broker price option (BPO) upon order by the lender. This is an “educated opinion” on the value of the home.
- The file will be sent for review. The bank can request an “arm’s-length” affidavit. This is a document signed by both parties stating that they do not know each other and that there is no pre-existing relationship between the two. The intent behind this agreement is to prevent mortgage fraud.
- An approval letter will be issued if the short sale is approved.
What Is Mortgage Forbearance? And How Is It Different?
Mortgage forbearance is another option for struggling homeowners. This is a type of agreement wherein the lender allows the borrower aka the homeowner to suspend payments for a set period.
This is a short-term solution to a financial problem. Mortgage forbearance is not for homeowners who see themselves unable to settle their dues in the near future. Otherwise, it will create bigger issues and more liabilities.
An important aspect of this agreement is that the lender commits to not foreclose the property. On top of the regular mortgage payments, the homeowner may have to pay taxes and interest at the end of the grace period.
In consideration of the ongoing COVID-19 crisis, the Federal National Mortgage Association (FNMA aka Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) announced special considerations for affected borrowers and homeowners.
Mortgage forbearance was among these provisions. Reduction or suspension of payments for up to 12 months will now be considered. Late fees or penalties have also been suspended. And lenders are required to suspend reports of borrowers’ late payments to credit bureaus if the borrower is in a forbearance plan.
After the grace period, Fannie Mae “mandated” lenders to work with borrowers on a permanent plan to reduce or maintain monthly payments. Freddie Mac offered loan modification options so borrowers can pay the same pre-pandemic rate or benefit from a payment relief.
Are You Having Financial Troubles And Struggling With Paying Your Mortgage?
If you are experiencing financial challenges and having a hard time making mortgage payments, a short sale could be the solution that you’re looking for.
At The Corcoran Connection, we understand that you may be overwhelmed financially and are now unsure of your next move. If you’re having trouble settling your monthly mortgage payments and possibly facing foreclosure, we can help.