A short sale is a device used by lenders and borrowers to avoid a foreclosure action. The mortgage is in default for a while, and the bank realizes that the borrower cannot pay. The borrower finds a purchaser, but either the market value has gone down, or for whatever reason, the borrower finds a new buyer who wishes to pay less than the mortgage due.
The bank will require documentation, including an income and expense statement from the borrower, a hardship letter, the contract of sale, and a proposed HUD-1 Settlement Statement showing all expenses of sale. Each bank has their own requirements, and it usually takes approximately three weeks to review the package when received. You may feel that you are in limbo, but eventually you should have a person assigned to the case who will negotiate with you.
If the amount offered is approved, the closing can take place, and the borrower provides a letter from the bank to the title company showing approval of the short sale. The borrower should also make sure that he is released from personal liability on the note for the shortfall.
One consideration in a short sale is whether there will be income tax due on the forgiven amount, and a tax advisor must be consulted before the short sale to resolve this issue.
Another option to avoid a foreclosure is called a Deed in Lieu of Foreclosure, whre a deed is given directly to the lender. However, you need to make sure that you will not be held liable for the shortfall after the bank sells the property. Also, you need to check with a tax advisor as to any tax ramifications.
See post regarding Chapter 13 filing as a possible remedy. A qualified bankruptcy attorney should be consulted to protect your rights.
Cynthia M. Burke, http://www.nyrealtylaw.com
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