Sometimes in the foreclosure process a person finds that there is no way for the lender to modify the mortgage. The mortgage company cannot reduce the monthly mortgage payment low enough. The person facing foreclosure still cannot even make the new lower payment.
The person then has two choices, either sell their home or let the foreclosure go through and turn their home over to the mortgage company. Turning their home over to the mortgage company is the less desirable choice. So they decide they will try to sell their home.
They contact a realtor and place it on the market. It is priced reasonably but a long time passes before an offer comes in. The offer they get is very low. In fact, the offer is less than the balance on their mortgage.
This is known as a Short Sale. The home may be sold for less than the mortgage company is owed on it.
What happens when an offer like this is made?
The person cannot accept the offer on their own. Since the mortgage company will get less than what they are owed on the mortgage, they have to either approve or reject the offer.
Most mortgage companies have a loss mitigation department which handles all mortgages in foreclosure. The sales contract has to be sent to them. They will review it and determine whether or not they will accept it.
What will this loss mitigation department look at?
Most have fixed guidelines they follow. They want to make sure that through this Short Sale they will recover most of the money that they are owed on the home. Typically they will look at what they stand to lose if they acquire the home through foreclosure and have to sell it on their own. If they lose less money on a Short Sale than by selling it on their own, they will approve the Short Sale
In making their decision the loss mitigation department looks at how much equity is in the home. They also look at what the current value of the home is. They also look to see if they are any second mortgages or liens on the property. If there are, the holders of the second mortgages or liens may have to approve of the Short Sale.
Frequently it takes a long time before the mortgage company makes its decision on a Short Sale. Buyers are not aware of this. Unfortunately most mortgage companies do not regularly keep the parties informed on a Short Sale.
Weeks and even months can go by without the mortgage company communicating to anyone. This is frustrating to buyers. Some decide that the home isn’t worth it. They back out of the contract when they can legally.
With the rising number of foreclosures mortgage companies are willing to approve more Short Sales now. However, there are still many instances where they are rejected. If the Short Sale is rejected, the home has to be listed for sale again. The person facing foreclosure is now further behind.
If the mortgage company approves the Short Sale, the sale goes forward. The proceeds from the sale are sent to the mortgage company. Normally the mortgage company forgives the balance that was due on the mortgage.
Because Short sales need the approval of the mortgage company and because the process can be complex, the person facing foreclosure should not handle this on their own. They should seek the assistance of a lawyer or an expert in Short Sales.
Waiting for approval on a Short Sale does not stop the foreclosure process. In some instances, the short sale is not approved and the closing does not occur in time in time to save the person from foreclosure. This just makes a horrible situation worse. This is another reason a person facing foreclosure should not handle a Short Sale on their own.
In the past any person who stopped the foreclosure through a Short Sale had to declare the amount of money that the mortgage company forgave as income on their tax return. They were liable for tax on it. In 2007 congress passed a law amending the tax code. President Bush signed this into law. This amendment stipulates that from January 1, 2007 through December 31, 2009 no person who paid a mortgage company less than they owed on a mortgage will have to pay tax on any part of the debt that the mortgage company cancelled.
With any Short Sale, the person’s credit is affected. Their credit scores drop. The Short Sale appears on their record for seven years. They typically will not be able to get a mortgage to purchase another home for several years.