Do I qualify for a short sale?
Your lender or service company is the decisionmaker in evaluating your hardship situation. They will decide on whether or not your short sale will be approved.
To qualify for a short sale, a borrower must demonstrate the following:
- Financial hardship – what is your situation and how did you fall behind?
- Monthly income shortfall – your income will not allow you to meet all of your monthly bills.
- Insolvency – the bank will not want to see a lot of liquid assets that can pay down the loan.
Secondly, a homeowner needs to understand that there are tax and legal considerations when short selling their home.
If you’re considering short selling your home, you must be able to answer “yes” to all four requirements:
- The mortgage is in default (or will go into default). Generally lenders will not even entertain a short sale unless the loan is in default. However, recognizing that some homeowners’ financial situations can suddenly change, banks prefer to head off a potential foreclosure, where possible.
- The home is underwater and cannot sell in today’s market to cover all the debts owed. Comparable sales of home in the neighborhood need to support that the value of the home is less than the unpaid balance of the debt owed.
- The homeowner has no liquid assets. The lender will require the homeowner to submit tax returns, which show assets. If the lender determines the seller has liquid assets (stocks, bonds, IRA, or cash in a savings account), the lender may either deny the short sale or may require the seller come to the closing table with cash to minimize the shortfall the lender is willing to accept.
- The homeowner has fallen on hard times. The homeowner must have a legitimate reason for falling behind on mortgage payments. Examples include:
- job loss
- death in the family
- sudden illness
If the homeowner doesn’t like the house anymore, or its not large enough, are not valid hardships.
A successful short sale is dependent on a buyer agreeing to purchase the property. If there is no offer on the property, the short sale will not take place. Even if there is a purchase offer, the lender must “approve” the short sale offer price. If the lender rejects the short sale offer price, the short sale will not go through. A lot of short sales fail due to lost paperwork and lack of follow up on the part of the agent and lender. Hiring an agent that knows how to get short sales approved is key in getting a short done successfully.
Even after a short sale gets approved, the homeowner does not get off scott-free. There are legal and tax ramifications which must be considered such as the lender pursuing a deficiency judgment or the IRS taxing the homeowner on phantom income created by forgiven debt.
If you have any questions regarding this process, please contact us right away.