Monday, August 6, 2012

Short Sales in a Nut Shell

            A short sale occurs when a lender is willing to take less money to pay off the balance owed on a mortgage loan so that the sale of real property can move forward to closing.

Q:       Why are short sales becoming more frequent in Ohio real estate sales?
A:        Sellers often find themselves “under water” when they owe more on their mortgage loans than their property is worth. For example, a seller may owe the bank $150, 000 on property that is worth only $100,000. In such a case, the seller may have to ask the lender (a bank or mortgage loan company) to agree to a short sale.

Q:       Why would the lender agree to being paid less money than what it is owed?
A:        Lenders know that many customers are “under water,” and may decide that it is better to receive less money in a controlled short sale than to risk a default on the loan or foreclosure.

Q:       Will a lender agree to a short sale in all situations?
A:        No. Most lenders will not consider a short sale unless a customer has routinely been late in making payments or has missed several payments, causing the loan to be in default. Many times, a lender will not agree to a short sale unless the property is already in foreclosure.

Q:       How should I ask my lender for a short sale?
A:        You can contact your lender directly, but most sellers work with a real estate agent or a real estate attorney who has experience in working with lenders in short sale situations.

Q:       How does the short sale work?
A:        Several weeks before closing, the lender will ask to see a proposed closing statement that shows any anticipated seller costs, including a real estate commission, conveyance taxes, deed preparation fees, tax proration credits and other typical seller-paid closing costs. This proposed closing statement allows the lender to see how much money will be netted from the sale of the real estate. The lender will issue a “short sale payoff demand statement” that spells out the minimum amount the lender must be paid at closing. In such a case, the seller usually is not entitled to receive any money from the sale.

Q:       Are there disadvantages to me as the seller if my lender agrees to a short sale?
A:        Yes. The lender will issue a negative report to credit agencies, which will significantly lower your credit score. The lender may also require you to sign a “reaffirmation of debt agreement,” in which you agree to pay the lender some of the money still owed on the original debt. Finally, you could owe federal and state income tax on the amount of debt the lender has forgiven. Because of these possible tax implications, you should always consult a competent tax advisor before asking for a short sale. 

Q:       What if I have a second mortgage or home equity loan? Do these impact a short sale?
A:        Yes. If you have a second mortgage or home equity loan, the lender may end up getting paid nothing from the short sale. If any such lender does not agree to release the lien of its mortgage after closing, a short sale cannot proceed. Sometimes, the first mortgage lender will agree to share some of its net closing proceeds with other lenders, or you, the seller, may have to bring some money to closing in order to satisfy or partially payoff a second mortgage or home equity loan.

This “Law You Can Use” column was provided by the Ohio State Bar Association (OSBA). It was prepared by Charles A. Brigham, III, an attorney with the law firm of Brigham & Brigham Co. L.P.A. and an Ohio licensed title agent with Buckeye Land Title Company in Cincinnati, Ohio. Articles appearing in this column are intended to provide broad, general information about the law. Before applying this information to a specific legal problem, readers are urged to seek advice from an attorney. 

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