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Information for Buyers & Sellers "What is a short sale?" is a commonly asked question amongst homeowners struggling to pay their mortgage payment. Word has gotten out that short sales can help borrowers avoid foreclosure. While this is true, the process is complex and requires authorization from the originating mortgage lender.
Foreclosure
A mortgage short sale, also known as a pre-foreclosure sell, takes place when a homeowner needs to get rid of his home because he is facing imminent foreclosure. If the foreclosure goes through, the homeowner will have a ruined credit rating and no home. By going through a short sale, the home owner can minimize the losses. Some homeowners in this situation will seek out potential buyers, while others are open to offers when they are approached by interested real estate investors. You can find potential mortgage short-sale candidates through the public records by watching for foreclosure notifications.
When property is listed through a realtor, banks generally grant a grace period of a few months to locate a buyer. If the property is not sold within the specified timeframe, the lender will commence with foreclosure action.
Approval of Lending Company
Even though the buyer and seller enter this agreement, the lending company must approve the final deal. Generally, the buyer will handle the contact. A letter outlining the settlement offer is faxed or mailed to the lender, preferably to the head of the loss mitigation department. The bank's representatives will review the offer and determine whether or not the amount offered to pay the mortgage balance is sufficient. The likelihood of success will be influenced by the real estate market, the value of the property and the mortgage balance. Be prepared not to receive an immediate response. Lending companies are notoriously slow in responding to these offers and sometimes will take up to five weeks before giving an answer. If the lending company does agree, be sure they will not be going after the homeowner for the difference between the settlement accepted and the mortgage balance. This should be part of the final purchasing agreement.
Two Important Points
If you are the seller of the property, consult a tax attorney prior to entering the agreement. You may have to pay taxes on the amount of the mortgage that was forgiven because of the short sale. In some financial situations, that will not be the case. However, you want to know this information before deciding on a course of action. If you are the buyer of the property, you should investigate the property's title before finalizing any agreements. Many homes have multiple liens against them because of second and third mortgages. Paying off the primary mortgage on the property will not remove any of these additional liens.
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