During the past few years, foreclosures have become much more common throughout the United States, including Fairfield County. During this period, the term “short sale” has been used more and more often. Short sales are extremely important because, when done properly, they have the potential of allowing a property owner to avoid bankruptcy and foreclosure, even if the property owner owes more to the lender than the property is worth. The purpose of this page is to provide some basic information about short sales. For specific information about your situation, please contact our office to set up a consultation.
WHAT IS A SHORT SALE?
A short sale is the sale of real estate where the lender agrees to accept less than the amount owed on the mortgage as part of an agreed upon sale, instead of completing a foreclosure action of the property. For example, if an owner owes $400,000.00 to the lender but can only sell the house for $380,000.00, a short sale would allow the owner to sell the property, pay all of his/her closing costs and obtain a release of mortgage from the lender.
WHEN WILL A LENDER APPROVE A SHORT SALE?
Although every lender has its own rules, a lender will generally approve a short sale request, if all of the following conditions are met:
- The price requested by the owner for the short sale must be fair and represent the true market value of the property. The lender will verify the market value by obtaining its own appraisal of the property, often referred to as a broker price opinion (BPO). In other words, although lenders do not want to foreclose a homeowner’s property, they also will not take much less than the property is worth.
- The owner must not have the financial means to pay the balance of the mortgage. The mere fact that a property owner is behind in mortgage payments and that the property value is worth less than the mortgage owed, is not sufficient for a lender to agree to a short sale. The lender will need proof that the owner does not have the financial ability to pay the shortfall. If an owner has the means to pay the shortfall, the short sale will not be approved. A hardship letter and financial statement, as well as supporting financial information such as tax returns, pay stubs, W-2’s and bank statements will all be required.
- Fully executed contract of sale showing a ready, willing and able buyer. The lender will generally not approve a short sale request unless the owner already has a buyer ready to purchase. The lender will also require a copy of the listing agreement with the real estate agent.
- In most circumstances, none of the proceeds from the sale can go to the seller. If the owner wants to be able to sell the house without paying the lender in full, then the lender will usually not allow the buyer to receive any proceeds at closing. One exception to this general rule is if the owner can get approved under the government’s HAFA program which often allows an owner to receive up to $10,000 at closing.
- Proposed HUD Settlement Statement. The lender will want to see exactly how much it will net from the proposed short sale before it agrees to the short sale request. Your attorney will prepare a preliminary HUD closing statement and include it in the package being sent to the lender. The lender will want to see that all of the closing costs are reasonable and that nobody is getting any funds that could be going toward the mortgage.
WHAT ARE THE BENEFITS OF A SHORT SALE?
If approved by the lender in a timely manner, the following are some of the benefits of a properly performed short sale in Connecticut:
- Avoid foreclosure. The negative effect on one’s credit, auction signs, deficiency judgments and other negative consequences of foreclosure may be avoided by the successful negotiation of a short sale.
- Avoid bankruptcy. Even when a homeowner is behind in mortgage payments and owes the lender more than the house is worth, a successful short sale could allow a homeowner to avoid filing for bankruptcy.
- Eliminate the balance of any mortgage and home equity loan owed to the lender. Such forgiveness is not necessarily the case in a foreclosure.
- If the property is being sold or the owner is insolvent, the forgiveness of debt is not usually considered a taxable event for the homeowner. However, a homeowner should always consider all tax implications before agreeing to a short sale.
WILL A SHORT SALE APPLICATION PREVENT OR STOP A FORECLOSURE ACTION?
Unfortunately, merely submitting a request for short sale approval will not stop a lender from starting or continuing with a foreclosure action. Therefore, if a foreclosure action has already been started, the homeowner should obtain legal representation while the short sale request is pending because the lender could obtain a judgment of foreclosure before it approves or denies the short sale request. Lenders take anywhere from three weeks to three months to make a decision on a short sale. This process is unfair to the homeowner because in Connecticut, the lender’s attorney can obtain a judgment of foreclosure in less than two months. Therefore, it is important to work with an attorney in connection with a short sale, especially if a foreclosure action has already been commenced.
DOES A HOMEOWNER REALLY NEED AN ATTORNEY TO ASSIST WITH A SHORT SALE?
We believe that using an attorney with experience in the short sale process is important. If you are behind in your mortgage payments and in danger of losing your home, you need to get advice from the right people. Many people say to contact your lender as soon as you fall behind in your mortgage payments. Theoretically, that is good advice. However, anyone who has tried contacting the lender to work out a payment plan or to request a short sale, knows that this is not always practical. In addition, there are many scam artists, investors and other unscrupulous individuals trying to make money from people who are in danger of losing their homes in a foreclosure. Consider using a local lawyer you trust, instead of phony counselors and short sale “specialists” who will not always be able to properly protect your interests. If an investor or lender tells you not to hire your own attorney, think twice about working with that person.
HOW CAN THE LAW OFFICES OF SETH J. ARNOWITZ, LLC HELP?
The Law Offices of Seth J. Arnowitz, LLC provides legal representation to individuals at risk of losing their homes in foreclosure. Attorney Seth J. Arnowitz has over twenty-five years of experience practicing law in Fairfield County, Connecticut. We can help you decide which foreclosure alternatives may be available to you, including loan modification, deed-in-lieu or short sale. If you choose to go forward with a short sale, Attorney Arnowitz and his firm will help perform the following services for individuals seeking assistance with a short sale:
- Help you understand whether a short sale is realistic and advisable under your individual circumstances;
- Assist you and your real estate agent to understand the foreclosure process and the deadlines you will face with your lender during the short sale process;
- Represent you in the foreclosure litigation. If you have already been served with a foreclosure complaint, you may still have time to sell your property through the short sale process. If you ignore the papers, you could lose your home to your lender and still owe the lender additional money after the foreclosure action is complete. Contacting our office about the possibility of a short sale is one of many possible options. If you choose to have our firm represent you in connection with a short sale and a foreclosure action, we may be able to appear on your behalf in court and possibly prevent a judgment of foreclosure from entering against you.
- Negotiate on your behalf with all parties involved in the transaction including your lender, your lender’s attorney, and your buyer’s real estate attorney;
- Prepare a contract of sale for a potential buyer to sign that can be used in connection with the short sale application;
- Prepare a short sale package for the lender’s approval including a hardship letter, financial statement and preliminary HUD settlement statement;
- Prepare all closing documents on your behalf; and
- Complete the closing on your behalf, disburse all funds and obtain a release of the mortgage from the lender.
For more information about short sales, our fees or to schedule an initial consultation, please contact Seth J. Arnowitz by phone at 203-348-7722 or e-mail at email@example.com.