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Andrews, Bongar, Starkey & Clagett: Waldorf, Maryland Attorneys

Short Sales to Avoid Foreclosure – A Resource Guide

This article explains the basics of selling your home to avoid foreclosure. In particular, it focuses on short sales, the most common method. However, please realize this is a general guide for consumers. We cannot provide all of the details of the process for every situation. Everyone's case is different, and everyone has unique facts and circumstances that will affect how or whether a lender will allow a short sale.

In order to truly understand the details of short sales, and all your other options for avoiding a foreclosure, you should consult with an attorney. We offer a free consultation for anyone who is having trouble paying their mortgage or other debts, and needs to know their options. Just contact our office and schedule an appointment. Since it is free, you have nothing to lose. Know your options and be informed.

Often bankruptcy is not your only option. Perhaps a bankruptcy is all that can be done, but you can avoid filing a bankruptcy if your situation allows you to take advantage of other options. In a consultation we will discuss all of your options, including, but not limited to, bankruptcy. If bankruptcy is not right for you, we will be more than happy to tell you so and not charge you. Please contact our office today for an appointment.

This article is adapted from a consumer resource guide by the Maryland Association of REALTORS®. If you want to sell any kind of real estate, it is our strong legal advice that you hire an experienced real estate professional to do so. Real estate sales are WAY too complicated to handle on your own. Too many things can go wrong, and you may wind up in a huge mess if you try to sell real estate on your own. You could wind up paying a lot of money to a lawyer trying to save money on a realtor.

Carefully Look Over Your Options: In reality, you have several options to sell your home and avoid foreclosure. A short sale is merely the most common option, due to the drop in home values we experienced in this area over the past several years. This article will cover all the available options, but new programs are cropping up all the time. To get the most current answer, contact us for a free consultation.

In choosing which of these options is the lesser of the evils you need to investigate all of your options. Therefore you need a team of consultants. You need a real estate agent, a tax adviser and a lawyer.

For the Short Sale, you need a good real estate agent with experience in short sales. You also need a tax adviser. If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable. The last thing you want to do is sell your house and think your troubles are over only to find out at tax time that you've gone from having a mortgage problem to having a tax problem. Therefore, you need to look at the possible tax consequences of a short sale. You may be able to exclude this forgiven debt under the Mortgage Debt Forgiveness Act of 2007, or by use of the Insolvency Exception, but you want to know this before you decide to complete the short sale.

Finally, you also need to consult with a bankruptcy lawyer. One of the main reasons for doing a short sale is to avoid bankruptcy. However in some cases the bankruptcy is the better option. You simply have to know those options before you take action.

By the time you are looking at this article you probably know what it's like to deal with a mortgage company. First you need to get a human on the phone, than you need to get someone on the phone who can make a decision, than you need to get them to make a decision.

On top of that, the whole mortgage system, with the bundling of mortgages into securities made the whole system so complicated that it is hard to predict what decision would make sense for the mortgage company. If the Mortgage Company is managing the mortgage as one of a thousand mortgages that have been bundled into a mortgage back security that is owned by thousands of investors, the bank may be more worried that if they cut of deal with you, one of the investors may come back and sue them than if they may lose more money by doing a foreclosure than letting you do a short sale. Add to this a second mortgage and private mortgage insurance and the negotiations become really complicated.

Because of all of this the Short sale process will be long and frustrating, and you may have to make difficult last minute decisions. Therefore you need to know all your options now, so if something unexpectedly comes up at the settlement table you know what to do.

Here are the four primary options you have for selling your home to avoid a foreclosure:

Option 1 – Regular Sale: If you find that you can no longer afford to keep your home, but your debt is worth less than the value of the home, the lender will usually agree to give you a specific amount of time to find a purchaser and pay off the total amount owed. Of course, you need equity in your home to make this happen. If you are "upside down" in your debt to equity ratio, this option may be impossible.

Frankly, the lender would love to give you this opportunity. But the reality is that home values have fallen so much in recent years that few people having trouble paying their mortgage actually have enough equity in their home to be able to sell it and pay off the debt. If they did, they would probably just refinance.

Some people with equity may be unable to pay the debts and unable to refinance. If you have the equity, a regular sale is the best option. If you don't know what your house is worth, then ask a realtor to help you. We would be happy to refer to a good and honest realtor who can help you figure that out. Just contact us.

If you do get a reprieve from foreclosure to sell your property, you must act quickly. You will only get a certain amount of time to make the sale. You will be expected to obtain the services of a real estate professional who can aggressively market the property. If you do not, the lender will think you are just stalling instead of really trying to sell your house. They will not likely allow that.

If you need to think about selling your house, you should get a good realtor, and also consult with an attorney. Both are needed before you go down the road towards selling your house.

Option 2 – Short Sale: This is also called a Pre-Foreclosure Sale. This is the type of sale you will have to do if you are upside down on your house. If the property's sales value is not enough to pay the loan in full, the lender may allow you to sell it for less than the total debt, and they may agree to accept the amount of the sale as full payment of your debt.

The lender must approve a short sale in advance. They must agree to accept less than the full amount owed. You cannot force them to agree to a short sale. This requires a negotiated agreement with the lender to accept your short sale and avoid a foreclosure on your home.

Our attorneys are experienced in negotiating with the lender for a short sale. If you hire an attorney to do it, they know you are serious. They know that your fall back option if they do not agree to the short sale is bankruptcy. That is because we have bankruptcy attorneys and a full bankruptcy department, and we have been filing bankruptcies for many years now. If you hire us to negotiate for your short sale, the lender will know you mean business. Remember, we offer a free consultation so you can know all of your options before you make a final decision.

A short sale is an "arrangement" between the current owner of a home and the current mortgage lender holding the mortgage to accept an offer for less than the total amount owed to pay off the home loan (including other transaction-related expenses such as closing costs, property taxes, transfer tax, and/or commission fees). This option can also include a period of time of forbearance (see our companion article "Foreclosures – a consumer's guide") to allow your real estate agent to market the property and find a qualified buyer.

The lender will analyze the facts of your particular situation, and determine if the seller is eligible to sell the home at less than the outstanding debt. If they agree, the lender accepts that shortfall as their loss. They usually require that you prove you have suffered a hardship of some sort that prevents you from paying off the loan.

Simply owing more than the home is worth is not a considered a hardship. Hardships include divorce, unexpected hospitalization and medical expenses, job loss, death of a family member or similar catastrophic situation. Additionally, a budget must show that the seller's expenses exceed their income/assets, they are behind on their payments, and there is no way to repay the lender.

A short sale may be an excellent option if you cannot keep your home and want to avoid a bankruptcy. Often, mortgage debt is the one thing that ruins a person's finances, and if they could just get rid of that excess debt they would be able to afford their other bills.

But anyone who is thinking a short sale is right for them must be aware that the ultimate decision on approval of a short sale is going to be made on the best interests of the lender. It is not easy to get the mortgage lender to agree to a short sale. Think about it. You are asking them to take a guaranteed loss on the property. You have to provide the lender with very good reasons for taking the deal, such as avoiding the costs of foreclosure or avoiding forcing you into a bankruptcy. In some situations, it may be better for the lender if you file for bankruptcy. If the bankruptcy court forces you to file a Chapter 13 instead of a Chapter 7, the lender will sometimes get more favorable repayment terms by forcing you to file bankruptcy. It really depends on the details of your specific situation.

On the short sale (or deed in lieu option, see below) the bank may agree to forgive all or some the balance left after the sale. The bank's goal would be to get all the money from the sale and have you bring the balance to the settlement table in cash. Your goal is to get them to forgive the balance.

If you are considering whether or not a short sale is right for you, you should consult with an attorney to go over the details of doing one, and investigate all of your options. We offer a free consultation for anyone having trouble paying their mortgage who may want to investigate short sales, mortgage modifications, bankruptcy, etc.

The buyer of a property in a short sale should be aware of several key issues. The contract is usually contingent upon the agreement of the seller's mortgage lender to accept the net proceeds of the sale as full payment for the underlying debt. This is often a long process, which can delay an anticipated settlement date, and buyers and agents should be prepared for this possibility.

Ideally, the lender pre-approved the short sale prior to advertising on a Multiple Listing Service, but the fact that the property is a short sale should be disclosed in the comments section of the listing. The sales contract should also include a third party addendum, outlining that the contract is contingent upon the agreement of the seller's mortgagee to accept the net proceeds of the sale as full payment of the underlying outstanding debt.

As always, if you are considering a short sale, or any real estate transaction, whether you are a seller or a buyer, it is important to seek competent legal and financial professional advice. Get a consultation with an attorney, and be sure you deal with a real estate professional with experience on short sale transactions. We will be happy to recommend some good realtors with experience in short sales if a short sale is right for you.

Option 3 – Mortgage Assumption: A qualified buyer may be allowed to assume your mortgage, even if your original loan documents state that it is non-assumable. As with a short sale, the lender must approve this arrangement. You cannot force them to take a new loan with a new person. Their willingness to enter into this arrangement is contingent on the new buyer's credit, income, and a lot of other factors.

Option 4 – Deed-in-lieu: The lender can also agree to voluntarily accept your house "in lieu of" (which just means "instead of") going through the foreclosure process. In this option, the lender agrees to allow you to voluntarily "give back" your property and forgive the debt.

Although this option sounds like the easiest way out for you, generally, you must attempt to sell the home for its fair market value for at least 90 days before the lender will consider this option. Also, this option may not be available if you have other liens such as judgments of other creditors, second mortgages, and IRS or State Tax liens.

Ultimately the lender does not want to own your home. It wants money. Mortgage lenders are in the business of owning loans and future payment streams – not marketing real estate. So don't be surprised if they turn you down when you suggest this option.

Conclusion: Selling your home to avoid foreclosure may be a good idea, but it is not an easy thing to do. It is a complicated process, involving complicated negotiations. We hope you found this article helpful in explaining the major aspects of a short sale. If you think a short sale, assumption, or deed in lieu may be right for you, call us for a free consultation today.

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