The short sale is now a common feature in the real estate landscape. The borrower is unable to meet the mortgage payment, and at the same time the value of the home or property has declined. One option is to put the home on the market as a "short sale", find a ready and qualified buyer, and ask the bank to consent to a sale where it would obtain less than what is owed on the note in full satisfaction of the debt.

The borrower must be prepared for a large amount of paperwork to forward to the bank, and complete this approval, as well as face a long period of time, i.e., 90 days or more, for a completion of the approval and then the actual escrow and sale of the property. This includes providing a

• hardship letter,
• income and expense information,
• information on other properties owned,
• other assets,
• tax returns,
• bank statements, and
• copies of buyer's contract and qualifying information, among other things.

Banks have come under recent pressure from the Obama Administration to speed up their approval process, and larger institutions are, as of early 2010, taking steps to become far more helpful to sellers, buyers and their agents involved in the process.

The advantage to the lender to do a short sale is that it saves the bank the additional costs of foreclosure, often estimated to be about $50,000, including property maintenance, HOA fees, and utilities, and the advantage to the borrower is keeping a foreclosure from his credit record.

Issues to consider:

1. Effect on borrower's credit score. The short pay event is noted on the borrower's credit report, separate from other score "hits" as a result of late payment or nonpayment of the monthly mortgage.

2. Is the borrower's loan recourse (original purchase loan) or nonrecourse (re-finances are often nonrecourse)?  

3. Is the property the principal residence (or at least for 2 out of the last 5 years), or is it non-owner-occupied rental income?

3. Find out the tax effects for your federal and state income returns.

Currently, a buyer is generally able to recover sooner from a short pay than from a foreclosure and bankruptcy, depending on what type of home loan is applied for in the future. Currently, FHA loans may be obtained within 2 years after a short pay and 3 years after a foreclosure. Most lenders want to see 4 years since the discharge of a bankruptcy before giving a loan, and many conventional lenders are currently at 4 years for short pays or foreclosures.  Also FHA guidelines (which may be changing as 2010 progresses) look at the borrower's total risk profile, while conventional lenders follow stricter and very specific FICO score requirements.

Remember, it IS possible to successfully sell your property on a short sale basis as many banks have become much more efficient in their loss mitigation departments, as many more agents gain proficiency, certain consumer protection laws are now in place, and 3rd party professional negotiators are available to handle the entire process.

To discuss an overall plan to see if a short sale would work for you, please contact me. I can send you a complete package of the information required, as well as discuss more about the points of consideration above.

The seller is also advised to consult with a tax attorney or tax accountant, and perhaps consult with more than one; getting advice from an experienced specialist in foreclosure, short sales, and bankruptcy is extremely important.