Increasingly, lenders are making loans in amounts that become too difficult for borrowers to repay. Some of these borrowers may not be able to fulfill their mortgage obligations. When a borrower is no longer in a position to make the mortgage payments, is facing foreclosure and the current market value of the property–including escrow costs–is less than the loan on the property, the borrower may consider a short sale. This could save the lender the expenses of foreclosure proceedings and from having another REO property on its books. From the borrower’s perspective, the short sale prevents having the foreclosure on the borrower’s credit history, and releases the borrower from an obligation that he or she can no longer afford.
In essence, a short sale is a sale transaction subject to a lender’s approval in which the lender consents to a sale of the security interest for less than what is owed on the note and accepts the proceeds in full satisfaction of the loan amount. A short sale requires much paperwork and preparation on behalf of the borrower. Typically, before applying for a short sale, the seller must have a ready buyer and all the paper work prepared to present to the lender. The buyer of the property must also be prepared for a protracted time period to conclude the purchase of the property.
What documentation will a lender typically require?
Lenders will typically require a distressed borrower to furnish a variety of documents, which could include the following:
· Written explanation (and proof) of the hardship the borrower is experiencing;
· Copy of the purchase contract signed by both the buyer and seller (borrower);
· Copy of the TDS;
· Proof of the buyer’s ability to purchase the property, i.e., a completed loan application, pre-approval by another lender, or evidence of cash on hand (bank statement);
· Copy of the certified escrow instructions;
· Preliminary title report;
· Estimated net/closing statement certified by an escrow officer acceptable to the lender;
· Completed and signed IRS Form 4506, “Request for Copy of Tax Form;”
· Completed and signed personal financial worksheet;
· Previous two years tax returns;
· Employment paycheck stubs for the past two months;
· Profit and loss statement (if the borrower is self-employed);
· Past three months bank statements.
What other options may the lender consider instead of foreclosure when the borrower is delinquent?
Depending on the situation, a lender may consider one of the following:
Loan Workout: Basically, a loan workout is any resolution of a problem loan between the lender and borrower that modifies the original loan agreement. Some of these options include forbearance (e.g. forgiving a portion of the debt or late charges); deferment; renegotiating interest rate, monthly payment amount, principal amount, maturity date; or the enforcement an acceleration clause in the loan.
Deed in Lieu of Foreclosure: After the borrower is in default, the borrower voluntarily delivers title to the lender for consideration and the lender accepts the conveyance of the property in full satisfaction of the mortgage debt. Using this method, the lender saves the costs of foreclosure and the borrower avoids having a notice of default on his/her records. (Hamud v. Hawthorne, 52 Cal.2d 78 (1959).)
Short Sale*: A short sale is a transaction in which a lender allows the real property securing the loan to be sold for less than the remaining mortgage amount due and accepts the proceeds as full payment of the loan. A lender may accept a short sale when the borrower is in severe financial straits and market conditions make a short sale the best choice to mitigate the lender’s damages. Like a deed in lieu of foreclosure, this saves the lender the costs of foreclosure and the borrower avoids having a foreclosure on his or her credit report.Short Payoff*: With a short payoff, the lender accepts less than the remaining mortgage amount as full payment of the loan. The property need not be sold.
*Note: Some lenders do not differentiate between a short sale and a short payoff.
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