A Short Sale occurs when a homeowner wants or needs to sell his home, but can not sell it for enough money to pay off his mortgage.  His mortgage lender must agree to take less than the full amount owed to release the lien on the home.  The reason why a home may not be worth what is owed on it is usually because of the decline in market values over the past five years.  This is especially true for homes purchased at the height of the market (from approximately 2002 to 2006), and for homes that have a primary mortgage and an equity loan.  

Once the home is listed with a Realtor for sale, the homeowner contacts their lender to let them know that they are selling their home and will need to do a Short Sale.  The lender will usually send a packet of required documents  to the seller for completion.  In addition, the lender will want to see checking and savings account statements, two years tax forms with W-2's recent pay stubs, a financial worksheet detailing income and debt and a hardship letter explaining why the seller needs to do a Short Sale.  Most lenders are open and agreeable to Short Sales if there is a reasonable need on the part of the seller to sell, and if the home is sold for market value.  

When an offer is received, the process can take 3-5 months, due to the tens of thousands of Short Sales currently in the banking system.  Therefore, the term "Short" Sale does not mean "Quick" Sale, instead it refers to the "shorting" of the mortgage payoff to the lender.  After the bank is satisfied with the paper  work submitted, the file is sent to a Negotiator.  The Negotiator has certain guidelines he must work within.  The bank will absorb most of the traditional "seller" costs of the home sale, i.e.:  Realtor commission, state and county transfer tax and title insurance.  The seller does not have expenses to pay at the sale, and seller is not allowed to receive any proceeds from the sale.  Some lenders will require a seller to participate, by bringing a lump sum to closing or by signing a promissory note to make scheduled payments.

The Foreclosure Process begins when a borrower defaults on his first monthly payment.  Due to the enormous amount of foreclosures in today's housing market, it can be a few months after the first missed payment before the bank or lending institution reacts to the default with a "warning" letter.  Typically though , after two or three missed payments, the borrower will get a letter informing them that they must immediately catch up all missed payments, including penalties and interest.  If that does not happen, the next letter will be a notice of a Sheriff's Sale, or a Sheriff's Auction on the property, usually scheduled about a month later. 

The Sheriff's Sale is published in the Notices section of a local newspaper, and a Notice will be posted on the front door of the property, but no one comes to the house the day of the Sale.  That day someone, or some lending institution will usually "buy" the property.  The foreclosure process in most other states is now complete, and the owner must vacate the property.  We have a different law in our state, though.  At the Sheriff's Sale, title is not transferred to the new owner just yet.  Michigan is a Redemption State.  That means that after the Sheriff's Sale or Auction has taken place, the owner still has the right to remain in the property (without making payments), redeem the property by "buying it back" for the amount of the Sheriff's Sale, OR try to sell it in a Short Sale with approval from his lender.  The redemption period is 6 months, unless the property has 3 or more acres, and then it is 1 year. 

If the owner has listed the home for a Short Sale, even if there is an offer on the property pending bank approval, the Foreclosure Process goes on.   If the bank has not approved the Short Sale prior to the end of the redemption period, the home will go into foreclosure, regardless of the fact that there is an offer on it.  Once in foreclosure, the home now belongs to the buyer at the Sheriff's Sale, and the title will transfer.  

Sellers who find themselves struggling to make their payments have quite a bit of time to successfully complete a Short Sale, if they contact a Realtor and get their home listed quickly. Waiting until 3 or 4 mortgage payments have been missed could ultimately mean foreclosure instead of successful Short Sale.  Why would an owner want to consider a Short Sale, rather than just let the bank have the house in a Foreclosure?  There are many reasons to opt for a Short Sale over a Foreclosure.  Doing a Short Sale will not negatively impact the credit score of the owner AS MUCH AS a Foreclosure.  In a Short Sale, the seller does not pay Real Estate Commission, Transfer Taxes or Title Insurance; the bank pays all of that.  In many cases, the Realtor can negotiate with the sellers' bank so that they will forgive the entire deficiency (the amount between what the bank nets from the Short Sale and what the seller actually still owes on  his mortgage).  In some situations, the seller may be required to agree to pay a portion of what is still owed to release the debt.  Overall, achieving a total release of the debt is the goal in a Short Sale, because in a Foreclosure none of the debt is forgiven!

Why should an owner worry about the fact that none of the debt is forgiven in a Foreclosure, after all, the bank has the house back and can just sell it?  Again, Michigan law differs from other states in this regard.  Michigan is a recourse state.  When closing on the purchase of a home, a buyer not only signs the Mortgage (an agreement to pay back the money borrowed, and a lien on the property), but he also signs a personal Note, which is an agreement to pa back the money borrowed, and is attached to him as a a person.  This gives the lending institution the right to claim future properties and belongings of the borrower, as well as garnish future wages earned.  In other words, that borrower in default, will be looking over his shoulder for many years to come.  Does doing a Short Sale guarantee a total release of any deficiency debt obligation?  No, but our Real Estate industry has made tremendous progress in the past couple of years with the lenders, and most are now cooperating to reach a full release settlement.  Does giving back the keys or the deed, prevent the bank from pursuing borrowers for the money they owe?  No, they still retain the right to legally pursue the borrower for years into the future.  

To learn more about the possibility of a Short Sale on your home, feel free to contact Linda Fennell, Realtor.  Linda has been successfully completing Short Sales for six years, and is ready to assist you.