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Short Sale Education
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Your short sale eligibility is based on a number of determining factors including, but not limited to your reason for having to sell, your financial situation, and your specific lender’s requirements. Your eligibility for potential short sale approval will be analyzed during your consultation.
In most cases, the answer is yes. Whether it is your primary residence, a second home, or an investment property, a short sale can be approvable depending on your specific lender requirements and short sale guidelines.
Not only are most lenders agreeing to a reasonable short sale offerings, they are encouraging their defaulting buyers to consider and/or pursue a short sale. They agree to the short sale so they do not have to foreclose on the property. There is much higher costs to a lender to go through the foreclosure process, acquire and maintain the property, and then resell it for a statistically 20% to 40% lower price than the typical short sale approvable offer.
Your lender will typically pay all reasonable real estate commissions, title services and settlement fees, attorney negotiation fees, as well as real estate taxes due at the time of closing. A seller commonly has only the cost of minor recording fees, water bills, or other small costs necessary to clear the title. It is also common for a seller to have zero expenses in a short sale closing.
A real estate broker or agent can communicate with your lender regarding the value of the property and the buyer’s offer. They cannot, however, within the scope of their real estate license, provide advice regarding which course of action is best for you. There are many decisions you may need to make throughout the process in which you will want and/or need legal counsel. For your legal protection, it is imperative that you have an attorney review documentation you provide to the lender as well as interpret any legal documents the lender requires you to sign including, but not limited to, the Arm’s Length Affidavit and the Short Sale Approval Letter. It is possible in some short sales that, even after lender approval, it may not be in the seller’s best interests to close on the transaction. You want someone advocating for only you. Your attorney represents only your best interests in the transaction. Most real estate professionals understand their limitations in advice they can or cannot provide and recommend their short sale sellers obtain good legal counsel and representation.
Maybe. Most first mortgage lenders will “waive the deficiency balance” as terms of the short sale approval. In those cases, the remainder of the debt is forgiven after successful closing of the short sale transaction. In some short sales, the lender will only waive the deficiency if the seller contributes some funds to the lender’s loss as part of the terms of the approval letter. In rare cases, the lender may approve the short sale for release of mortgage lien only and not release the seller from the debt. In those cases, because of Minnesota’s foreclosure statutes, the seller may choose not to close on the short sale and simply let the lender take the property back. This is another reason why legal representation and legal counsel is so important for short sale sellers.
It depends. Through both short sale or foreclosure, it is likely your lender will provide you with a 1099C that could be potentially taxable income. If a seller is insolvent at the time the debt is forgiven, they will not owe tax on the 1099 income. It is important that you consult your personal tax professional to see where and how any current tax laws apply to your specific situation.
If the bankruptcy is Chapter 7, the homeowner must wait until it is discharged before short sale offer can be considered by their lender. Despite the fact that a short sale should be negotiable during a Chapter 13 bankruptcy plan, in practice the lenders have exhibited a refusal to cooperate in those negotiations. After discharge of either, the short sale tends to be easier to get approved, due to the homeowner being released of the debt obligation through the bankruptcy.
The foreclosure status of the property may or may not affect your ability to be considered for short sale. The entire foreclosure process has many steps. When a homeowner has defaulted on their mortgage, a lender likely will eventually turn the loan over to an attorney for foreclosure proceedings at which time the foreclosing attorney will contact you informing you of your rights to bring the mortgage current. If you are unable to do so, the attorney will then schedule a sheriff sale. Minnesota has a six month redemption period in which you can redeem the property after the sheriff sale has occurred. Most lenders (servicers and/or investors) will consider a short sale offer during the redemption period. If approved, the short sale must close prior to the expiration date of the redemption period. Some lenders (servicers or investors) are not willing to consider a short sale during the redemption period. It is vitally important that the homeowner call their lender on their first mortgage to see if short sale can be considered in the redemption period if property is in foreclosure.
In some cases, a lender will postpone the sheriff sale so the short sale process can continue. However, if they are not willing to do so, a homeowner has the right to postpone the sheriff sale themselves. If the property is homesteaded, you can postpone the sheriff sale for five months by filing certain documents with the county offices and foreclosing attorney. This must be done at least fifteen days prior to the date sheriff sale is scheduled. By postponing the sheriff sale yourself for five months, the redemption period is decreased from six months to five weeks. That postponement can make the difference of getting the short sale approved or not. For instructions and forms to postpone your sheriff sale, (click here).
A short sale may be your best option for curing your current mortgage problems. However, the alternatives available to you depend on your most important needs and goals as well as your financial situation. Alternatives to short sale are limited if you are in serious default and have an inability to bring the mortgage current. A loan modification reducing your monthly payment may allow you to stay in your home. In some loan modifications, missed payments are added to the principal balance. If you are in serious default and have an inability to make up the missed payments, then the only option to short sale is likely losing the property to foreclosure or pursuing a “deed in lieu of foreclosure” with your lender. Other alternatives available are to stay in the home if you are able to become current and stay current on mortgage payments, rent the property in hopes the rents obtained will cover the mortgage payment, or sell the property and bring enough cash to closing to cover the mortgage debt(s).
As everything else, benefits and consequences of either can be “case by case.” Each homeowner has to decide what is best for them specifically. Commonly homeowners choose short sale over foreclosure for the following reasons: credit restoration timelines; an ability to come to a settlement with junior lien holders (ie: 2nd mortgages); no foreclosure on public record limiting credit availability or employment opportunities; avoiding the embarrassment of signs in the windows, public notifications of foreclosure, and sheriff’s sale of the property; the ethical decision to “do the right thing.” Today, many lenders are offering relocation assistance funds o $3,000 to $10,000 to sellers at the short sale closing. See the blog on this sight or details of those programs to see if you may be eligible.
Most short sale lenders require that all parties to the transaction (ie: sellers, buyers, and agents) sign an affidavit warranting that the transaction is “arm’s length.” The specific lender’s definition of “arm’s length” can vary lender to lender and is detailed in the affidavit. In most cases, the lender’s definition of an “arm’s length” transaction is that the buyer and seller do not have any familial or previous business relationship. They also usually require that the seller cannot remain in the property, not as a tenant, nor future owner. In other words, a friend could not buy your home on a short sale and then either rent it back to you or sell it back to you. The affidavit commonly requires that the buyer’s agent also has no familial or prior business relationship with the seller.
As with most short sale related questions, the answer is “it depends.” Some mortgage investors such as HUD (FHA or VA loans) require that the homeowner has a financial hardship and is in default before they will approve a short sale to close. Some investors, such as Fannie Mae and Freddie Mac have requirements that the seller is either already in default or that the seller’s financial situation proves that default is “imminent.” Most people without financial hardship cannot prove that default is imminent and cannot be considered for short sale unless they are in default on their mortgage payments. Default requirements are case by case based on your specific mortgage investor guidelines and requirements.
According to Minnesota statute, if a lender forecloses via advertisement, they give up the right to pursue the homeowner for the outstanding debt. However, it is only the foreclosing mortgage that has given up that right. Any mortgages that did not foreclose, lose their mortgage lien rights at the end of the redemption period, but still have their collection rights under the promissory note that was signed at the time the mortgage was acquired. Therefore, the homeowner is still responsible for the full balance to any mortgages that did not foreclose. Even if you have two mortgages with the same lender, you would still owe the full balance on any that did not foreclose. A short sale provides you with the opportunity to negotiate a settlement with any junior mortgages. Those settlements can be as generous as full waiver of deficiency balance at no out of pocket expense to the short sale seller. Some require some payment from the seller for release of the balance of the debt. And, in some cases, a junior mortgage will simply release the lien in the context of the short sale and work out a settlement with the homeowner after the short sale closes. In many cases, an approved short sale can help the homeowner avoid bankruptcy that may have been their only remedy to that debt without the short sale.
A hardship defined by most lenders is the term for a financial situation that the seller has found themselves in that either forces the sale of the “underwater” property or has caused the seller to be unable to continue to make the mortgage payments. Lender’s list of acceptable hardship reasons include, but are not limited to: job loss, income loss, excessive credit card debt, medical bills, divorce, job transfer, death of a wage earner, mortgage payments increasing due to adjustable rates, etc.
1. Call 763-450-1639 to schedule your no charge attorney consultation to find out if the short sale is your best option. Complete the Pre-Consultation Questionnaire (click here) and email to email@example.com or fax to 763-447-6458.
2. Choose a great real estate agent. Selecting someone with experience and education in short sales is very important. Short sales are marketed differently, and when done properly, can move quickly.
3. Complete your short sale package and provide to the law firm at time of listing.
4. Submit the deal to the bank. We will handle this part. Once you sign a purchase agreement, we will submit the offer along with all supporting documents to your lender(s) for short sale approval and negotiate the short sale to the best possible outcome for you.
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Markve & Zweifel lawyers and attorneys practice in the area of short sale negotiation for the Minneapolis, St. Paul, Maple Grove areas including Bloomington, Brooklyn Park, Anoka, Brainerd, Fridley, Eagan, Shakopee and surrounding areas in Minnesota. This includes short sales in Wisconsin from Hudson to Milwaukee overseen by our attorney licensed in Wisconsin.
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