BringMeTheNews Minnesota

Can a short sale work for preventing foreclosure?

You may have heard of a "short sale" as an alternative to foreclosure or as an option to get out of a mortgage. 

While short selling might be a viable option, it can also be a complicated process for both a home owner and a creditor.

Here is some very detailed information on the short sale process and when short selling is an option for property.  

A potential short sale may occur when the current market value of the property is not sufficient to pay all debts and obligations secured by any liens on the property. The sale requires the seller to enter into short sale agreements with each creditor who has a lien against the subject property and the same should include a release of the creditor’s liens for a payment of less then the amount they are owed.

The seller should explain their hardship before listing a property by submitting a hardship letter to the lender. The hardship letter may include job loss verification, medical statements, disability documents or any other information relating to the hardship.

The seller may be required to supply requested documentation to the lender’s loss mitigation department which includes financial documents pertaining the seller and the property, accepted offers to purchase, a listing contract, an appraisal or market analysts, or a statement of need or hardship.The broker may assist the seller by providing a market analysis to the lender pertaining to the property.

A contingency pertaining to short sales must be included within any offer accepted on a property in which the same applies. Lender approval must be included as part of the contingency which must be given in regard to the transaction. A seller may still be liable for any unpaid portion of debt against the property even though the lienholder releases the lien.

The amount which is forgiven by a lender in a short sale may be taxed as income. The lender must submit Form 1099C to the Internal Revenue Service. The form must state the amount of forgiven debt.

The seller should then submit a letter to the lender authorizing the listing agent to deal directly with the lender if the seller so desires. The seller and/or the listing agent should contact the Loan Mitigation Department of the lender. The lender will send the file to a negotiator at the mortgage company/bank after satisfying the requests from the Loan Mitigation Department, including the purchase agreement and all other related documentation.

The seller and seller’s creditor(s) must finalize a short sale agreement pertaining to the subject property. The lender has the ability to approve, condition, reverse or reject the short sale. The seller shall promptly notify the buyer if the short sale agreement cannot be finalized. The buyer may then, at the buyer’s option, declare the purchase agreement cancelled as there has been a default pertaining to the short sale contingency. The buyer and seller shall immediately sign a cancellation of the purchase agreement directing release of the earnest money to the buyer.

Short sales can be a complicated process, but also a way to help out a homeowner.  For more information on short selling, contact the Minnesota Realtors Association.