SterlingResidential.com | Buying & Selling Residential Properties in Texas | Houses for Rent Houston Area | Humble Atascocita Kingwood & Spring Texas Realtors | Sterling Residential®, Realtors® | Real Estate Broker: Avoiding foreclosure through short sale takes planning & execution

Short sales make up a small percentage of current sales transactions, but that number is growing. Homeowners who are “upside down” (owing more on the home than its current value) and can no longer make the monthly payments are using “short sales” to avoid a threatened foreclosure. Short sales are often a complex and lengthy process approved by the mortgage holder or mortgage servicer in agreement with the homeowner. With the lender or “third party” approval, the home is sold “short” for less than the outstanding mortgage balance to a new buyer prior to foreclosure.

Generally, lenders won’t consider a short sale unless the homeowner is behind on their payments — there has to be a demonstrated inability to pay before the lender will consider an alternative to full loan repayment. If you’re behind on your monthly payments, you should contact the lender’s loss-mitigation specialist to determine their short sale requirements. Short sales are not without risks, and you should determine the tax consequences and potential liabilities prior to accepting the terms of a short sale by consulting with a professional tax adviser or real estate attorney. If there is more than one mortgage on your home, each lender will have to approve the short sale, complicating the process. Usually, the homeowner (borrower) will have to prove they are no longer able to pay by providing documentation of their financial hardship.

The hardship documentation is used to evaluate the homeowner’s ability to pay and determine the potential for a successful short sale. The homeowner must prove that they can no longer make the monthly payments with current income or available assets. To verify the homeowner’s claim, the lender will ask to see pay stubs, bank statements, monthly expenses, tax records, insurance information, selling costs, and any other outstanding expenses that must be settled when the property is sold (such as outstanding liens or assessments).

Additional information required by the lender may include a hardship letter explaining the homeowner’s financial situation. If the home is already listed for sale, the lender will want copies of the listing information and recent sales comparables for the home. If the home is already under a contract for sale, the lender will want copies of the purchase contract and any related addenda or amendments including information about the prospective buyer’s financing (including a pre-approval letter from their lender).

Once the information is submitted, the lender may take anywhere from 30 to 60 days to grant approval of the sale. With a growing number of mortgage defaults, lenders have been slow to respond to the additional demand for short sales by adding staff — that’s why only a small percentage of short sales eventually close. Many potential deals are lost because the process takes so long. That’s why homeowners are advised to work with a diligent broker willing to stay on top of the process.

With the growth in short sales, the Houston Association of Realtors (HAR) has instituted some additional buyer protections to promote adequate and timely disclosure of short sale facts. HAR includes requirements that short sales be disclosed properly within the MLS including the following language:

Additionally, TAR Form 1918 — the Short Sale Addendum — states that the purchase contract is subject to third party approval and provides the buyer with the right to terminate the purchase contract with written notice to the seller if the third party approval is not granted by the date specified within the addendum.

Be wary and cautious about working with companies or individuals promising to rescue you from foreclosure — the Federal Trade Commission is warning homeowners that foreclosure rescue scams are on the rise as con artists target troubled homeowners with promises to save their homes.

Short sales are not without risks for homeowners. You should consult with a real estate attorney, financial adviser, or housing counselor prior to accepting the terms of a short sale. Short sales are reported on your credit and will affect your ability to secure financing on your next home purchase. You could be subject to additional income taxes if your lender forgives the balance of debt not covered by the short sale or you may be subject to a deficiency judgment for any outstanding loan balance not covered by the short sale proceeds.