Homeowners struggling with mortgage payments may consider a short sale to avoid foreclosure and lessen the damage to their credit. As noted by Bankrate.com, a lender must, however, agree to and approve a short sale transaction.
Because a bank receives less than the amount a borrower owes on a mortgage, a short sale approval may require several items of supporting documentation. A lender may, for example, request information detailing a borrower’s financial hardship, current income and any existing third-party liens against the property.
When lenders may approve a short sale
Borrowers who foresee a long-term reduction of income may stand a chance of a lender approving a short sale. Medical records demonstrating a serious illness or permanent disability may provide evidence that a homeowner can no longer earn sufficient income to continue making mortgage payments.
A professional appraisal may show that a property has substantially lost its value. Comparative prices from recent home sales in the neighborhood may convince lenders that a short sale would recover their money in significantly less time than a court procedure. Lenders may prefer a quick transaction if it appears foreclosure will not recover the hoped-for amount of money owed.
When lenders may not approve a short sale
An unprecedented number of all-cash buyers have created a surge in Florida’s home equity values. As reported by Millionacres.com, approximately 63% of borrowers experienced an increase in their home’s equity value between 2020 and 2021. If a lender has reason to believe foreclosure may lead to a higher sale price, a borrower may find it difficult to receive a short sale transaction approval.
Homeowners experiencing financial hardships may benefit from a short sale that avoids foreclosure and also helps limit the damage to their credit. If a lender agrees, a short sale transaction may enable a borrower to “walk away” from an underwater property.
Homeowners should beware however, of possible detriments to short sales. One, if the lender forgives the balance of the debt owed, the homeowner will likely receive a 1099-C showing the forgiven debt as income on which the homeowner will have to pay taxes. Two, many lenders do not forgive the balance due on the loan. They allow the sale to go through and then turn around and sue the homeowner for the balance due. All that glitters is not necessarily gold.