A short sale refers to an agreement between a homeowner and their lender to sell a home for less than is owed on the mortgage. In some circumstances, the lender may be willing to forgive the remaining debt on the home. A short sale can be a solution for the property owner who wants to shed his underwater mortgage. Still, a short sale is not for everyone as there are very real downsides to this alternative depending on your personal and financial situation.
The most common problem that a borrower might run into when trying to effect a short sale is that the lending institution may not consider the sale price to be high enough. It may therefore request the borrower to produce a certain cash amount at the time of closing. This amount is known as a "seller contribution."
For example, if the existing mortgage balance is $275,000. The lender may consider a buyer's short sale offer of $210,000 to be inadequate and require that the borrower produce $25,000 upon closing to reach a figure of $235,000.
A determining factor in whether or not you will be asked to provide a seller contribution is whether the lender believes you have sufficient liquid assets to do so. Accordingly, the bank will ask you to provide considerable documentation on your financial status. You should be prepared to furnish information about savings and investment accounts, as well as two years of your most recent tax returns, two months of recent bank statements, and two months of current paycheck stubs.
Another possible consideration in the lender's decision to require additional cash at closing is whether you are current in your mortgage payments. If you are current, the lender may decide that it can ask for a greater seller contribution.
Moreover, the lender may decide you are not in financial hardship and may leverage your concern about protecting your credit score to demand that you continue making monthly payments. Lenders perceiving your financial situation as being healthy will not likely approve a short sale of your property. Having either considerable assets, an adequate income, or reasonable means of paying the mortgage will likely cause most lender to reject the short sale, or ask for cash as your "seller contribution" at the time of closing.
Short sales may be more useful for clients who are experiencing financial hardship that can be documented to the lender. Homeowners who have experienced financial hardships, have few assets, and have either already defaulted on their loans or default appears to be imminent are more often awarded approval on short sales.
Most short sales require that provide your lender with a short sale application package. Similar to a loan modification application process, the short sale application will usually include a hardship letter stating the nature of your particular hardship, as well as providing personal and household financial statements, your cash flow, and a statement of your current assets and liabilities.
Genuine hardships generally can include unemployment, divorce, family illness, job transfer, physical disability, excess debt, military deployment, or additions to your family. If you cannot prove hardship, or if your mortgage is not in default, getting a lender to consider a short sale may be extremely difficult unless you are willing to bring "cash to closing."
If the bank approves a short sale offer, a final consideration is whether to your an attorney review the case to ensure no loopholes exist that would allow the lender to later pursue collection of the balance of the loan or seek a "deficiency judgment." This is critical as there are many homeowners have found themselves NOT actually released from the mortgage debt after the short sale was approved, since loopholes favoring the loan servicers remained in the paperwork.
If you are considering a short sale on your property, Illinois Foreclosure Lawyer Daniel S. Khwaja can help you review know your rights, create a strategy to help you protect your interests, and provide you with the information you need to decide whether a short sale is a viable option for you. Contact Illinois Foreclosure Attorney Daniel S. Khwaja today for a free, no obligation consultation about your situation. We are here to help.