A short-sale transaction is the process of selling your home for its current market value and negotiating to settle the outstanding mortgage debt with your lender for less than you actually owe. Ideally, if everyone involved does his/her job properly, you would be able to sell your home for its current market value, have the lender pay for all of the costs involved in doing so, and also get released from the remaining mortgage debt owed. Unfortunately this is a lot easier said than done. This article will illustrate the different errors and intricacies that often occur during the short-sale process and will explain why having an attorney on your side can have an enormous impact on your financial well-being, your levels of stress, and your future.
Parties Involved in a Short-Sale
First, let’s list the parties involved in a short sale:
- Buyer’s Realtor
- Buyer’s Lender
- Your Realtor
- Your Lender
- Your Lender’s Attorney
- Title Company or Closing Agent
- Clerk of Court
- Judge (If foreclosure action is instituted.)
- Borrower/Seller (You)
Why a Realtor is Necessary
The first step in a short-sale is putting your home on the market. As a general rule, you must hire a licensed realtor to list your home on the Multiple Listing Service (MLS). If you try to "sell by owner" your lender will likely deny the short-sale. It is extremely important that you choose a realtor experienced with short-sales in Florida, as the transaction is much more complicated than the usual procedure for buying/selling property. In addition, you should consider having an attorney carefully review all documents prior to executing a contract for sale or submitting an application to the lender. A tiny mistake could cost you a lot of money and a lot of time and could result in loss of the buyer, or even worse, an outright denial by the lender.
Short-Sale Usually Requires a Default on Mortgage Payments
Another common rule involved, which seems counter-intuitive, is that a lender usually requires default by the borrower, often for as long as 90 days, in order to even consider a short-sale offer. This brings us to one of the most popular questions asked in our practice:
Why does the bank require me to be delinquent on my mortgage to approve a loan modification, short sale or deed-in-lieu of foreclosure?
To understand this seemingly unusual requirement you must first place yourselves in the bank’s investors’ shoes. Why should the lender approve a short-sale or another workout if you can afford your home? From the lender’s standpoint, if you are paying the mortgage, you can afford the home. On the other hand, if the borrower is not making payments and can explain a valid hardship resulting in the default, the lender will then consider a workout to protect its own interests and cut its losses. Keep in mind that the lender may require a contribution from the borrower towards the purchase price in a short-sale, which is usually due at closing.
Mistakes During Offer Negotiation Can be Costly
Next, you must receive a reasonable offer to purchase your home. Once the offer is made it must submitted to your lender for consideration. This is where the process gets tricky and where realtors, owners and buyers make costly mistakes: paperwork gets misplaced or lost, important clauses in the contracts and/or applications are left blank, offers get submitted to the wrong department, or even worse, a release of the remaining mortgage debt is not requested nor granted, which makes the seller liable for any difference. Unfortunately, realtors or non-attorney "short-sale negotiators" often make mistakes that can be financially devastating to the borrower/seller or fatal to the transaction. An attorney can review all necessary documents and handle all negotiations between the parties, thereby greatly reducing the odds an error will occur.
If there is a second mortgage or home equity line on the home as well, the transaction becomes even more difficult as the second lien must be released in order for a short-sale to work. The second lien usually must be settled by the borrower, either by payment in full or with a negotiated amount. An attorney can aid you in lowering the amount required to be paid for release of the lien, or negotiate a payoff to the second loan into the original offer/price.