Times can be rough, and some homeowners in Rhode Island & Massachusetts may realize they can no longer afford to keep up with their mortgage payments. They are proactive, though, and do not wait for the bank to foreclose on them. Instead, they initiate a short sale –– a process that requires an application and approval by the lender. A short sale, in this scenario, can benefit both the home seller and the purchaser. It can also be good for the lender because they save by not having to deal with a foreclosure.
At Law Office of Senerchia & Sheehan, our real estate lawyer based in Rhode Island & Massachusetts knows how short sales work and will help you determine whether a short sale is your best option. Contact us at 401-615-3880 to schedule a free initial consultation and to learn more about short sales and the benefits it might bring to your situation.
What is a Short Sale?
A short sale occurs when a property is sold for a price less than the current owner owes on their mortgage. The lender must review the terms and approve the sale before it can proceed.
For example, a person may own a home with a mortgage with a balance of $250,000. They have a purchaser willing to buy the property for $175,000, which is $75,000 less than what is owed to the lender. If the lender agrees to accept the $175,000, then the property can be sold.
However, in most states, the lender has two options:
- The lender can forgive the remaining balance; or
- The lender can pursue a deficiency judgment against the seller for the balance.
Because of the two lender options, it is critical to speak to a real estate attorney who knows the law. At Law Office of Senerchia & Sheehan, we will explain short sale laws in Rhode Island & Massachusetts, help you understand your responsibilities, and provide guidance throughout this complex process. You will particularly need to know if a deficiency judgment will possibly be filed against you –– because that can make a big difference whether you opt for a short sale or not.
Short Sale Process in Rhode Island & Massachusetts
The short sale process can be intimidating, but if done correctly, it can be a great benefit to the seller and the purchaser. Here's an overview of the process, which is fairly straightforward and similar in any jurisdiction.
- Assess your financial situation. Can you truly not afford mortgage payments? Is this inability to pay temporary or long-term at least for the foreseeable future?
- Request a short sale from the lender. Your lender must approve the short sale. It's a good idea not to request a short sale until you are in default – if you are still making payments, then the lender may assume you really can but do not want to pay.
- Prepare and locate a short-sale buyer. If you get the approval, you can begin the process of a short sale by gathering all the documents and information you need and by starting to inquire into potential buyers.
- Set the price of the short sale. An attorney can help make sure you get the price right by setting it as close to the market value as possible but low enough to be attractive.
- Submit your short sale proposal. Once you have prepared the proposal and located a buyer, you can submit the proposal to the lenders. During the approval process, the lender may check your financial circumstances to verify you are in dire straits.
Pros and Cons of a Short Sale in Rhode Island & Massachusetts
There are advantages and disadvantages for both the buyer and seller. Knowing these can help you weigh the pros and cons against your economic situation.
Pros and Cons of Selling Your Home in a Short Sale
The Good News
- Credit Score. People who consider a short sale usually do so because they are in a poor financial situation, and a short sale reflects better than a foreclosure on a credit report.
- Control. A short sale also gives the seller more control over the process than they would have in a foreclosure. Foreclosures are lengthy processes and the seller has little control over the steps it takes and the length of time to complete a foreclosure.
- Privacy. Short sales are also less public than foreclosures, saving many home sellers the embarrassment of having their financial woes become public knowledge.
- Peace of mind. You avoid the emotional trauma of a foreclosure and can typically remain in your home until you find a buyer.
- Cost-savings. There are usually no fees and commissions associated with a short sale like when you sell your home under normal circumstances.
The Bad News
- Lender approval. You must get your lender's approval of the short sale; without it, you may have to endure a foreclosure.
- Deficiency judgment. The lender may seek a deficiency judgment for the amount left owing under the terms of the mortgage.
- Tax potential. Even if the lender does not seek a deficiency judgment, there is the possibility that the forgiven debt could be considered a part of the seller's taxable income.
- Time-consuming. A short sale may take time and require significant paperwork.
- Credit damage. Your credit score will still suffer some even if it is not as significant as the impact would be under a foreclosure.
Pros and Cons of Buying a Home Through a Short Sale
The Good News
- Better price. Many short-sale homes are offered below market value to move them quickly. If the buyer is willing to put in a little elbow grease, they can score a nice home with instant equity.
- Less risk. The current owner of the home must participate in the short sale process, so less risk exists than the risks present in foreclosures where, for example, former homeowners refuse to leave.
- Less competition. The complexity of short sales and the uncertainty of the approval make these types of home purchases less attractive for some, and as such, that means less competition. In the real estate market today, that can be a good thing.
The Bad News
- Sold as is. In many cases, short-sale homes are sold “as is.” If the home is purchased as is, there is a chance the home is purchased with a hidden defect not to be discovered until after the property is purchased. Such a discovery could cost an unsuspecting purchaser a significant amount of money.
- FHA loan risk. If you intend to use an FHA loan to purchase a short-sale home, but the home is poorly maintained and requires repairs, this may put your FHA loan at risk. FHA loans have certain livability standard requirements, and the buyer must ensure they comply with these requirements.
- Lender involvement. Though it can be a positive thing to have the current homeowner involved in the process, it can become an issue when the lender (and possibly the seller) gets involved and counters a potential buyer's offer or asks for concessions.
- Time-consuming. Short sales can take a significant amount of time as the lender and the seller must agree to many different terms. Short sales can be difficult to find, and many real estate agents are not well-versed in how they operate.
Short Sale Document Checklist
When a person seeks to sell their home through a short sale, the bank will require certain information. While the particular documentation may vary, some of the commonly required documents are:
- Hardship Letter. A letter from the seller to the lender that explains why they are no longer able to pay their mortgage payments.
- Proof of Hardship. If the seller claims a particular reason why they cannot make their payments, such as a recent illness, proof of that illness may be requested by the lender.
- Financial Documentation. Proof that the seller does not have the income or other funds to pay the mortgage payments. This may include recent bank statements, payroll stubs, W-2s for the prior two years, and recent tax returns.
- Market analysis. A comparative market analysis of recent sales of comparable properties in the area.
- Authorization Letter. A letter to your bank authorizing the bank to speak with your representative or attorney.
If the seller has already lined up a qualified purchaser, they may need to provide other information to the lender, including a purchase agreement that states the terms of the potential sale to the purchaser and a preliminary net sheet that reflects all costs associated with the sale of the home.
Contact a Short Sales Attorney in Rhode Island & Massachusetts Today
There are a number of circumstances that can lead to financial hardship. Fortunately, you have options if you are a homeowner who can no longer afford the mortgage. Before thinking of a short sale, however, you should consider speaking to our real estate attorney in Rhode Island & Massachusetts first. You may have other viable options, even ones that can help you save your home.
For instance, we can help negotiate a loan modification or arrange a revised payment plan in cases where it makes sense. Contact us today by either using our online form or calling us at 401-615-3880 to schedule a free initial consultation and to learn more about all your legal options.