Generally, people do not pay cash upfront for their first real estate purchase. Instead, most homes are purchased using a mortgage. Mortgages charge fees and interest, which means they can drive up the price of the home purchase. Most people expect their home to appreciate in value over time to cover this extra cost. However when it does not, home buyers may find themselves considering a short sale. The idea of a short sale may be daunting, but with the help of a good real estate lawyer you can make sure the process works for you.
Why Consider a Short Sale?
Mortgages are contracts that are drawn-up by the lender outlining the terms of a loan used in the purchase of real-estate. Essentially the lender and borrower enter into an agreement in which the lender provides funding to the borrower to purchase property – the property purchased with the loan is then held as collateral by the mortgage agreement.
People do not enter into a mortgage agreement under the impression that their purchase will decrease in value. Unfortunately, the 2008 financial collapse resulted in property depreciation in real-estate markets across the nation. Nearly 300,000 families entered into foreclosure every quarter. In September 2010, the foreclosure crises peaked; nearly 120,000 properties entered into foreclosure. By 2010, the housing market had dipped so low that most of the properties under foreclosure were worth only a fraction of their original purchased price. As a result, hundreds of thousands of Americans found themselves facing foreclosure and the financial devastation that follows.
Although the economic crises has subsided, new families continue to face the fearful possibility of foreclosure every day. This is particularly true when borrowers are faced with unemployment, a death in the family, large medical expenses, or an uneven debt to income ratio. However, foreclosure is not the only option in these circumstances. Rather, foreclosure is an extreme option to choose for debt resolution and can be quite costly and drawn out for both the lender and the borrower. In order to avoid the devastation and frustration of foreclosure, lenders are often open to allowing a short sale to resolve a defaulted loan.
A short sale occurs when a property is sold for less than what is still owed on the loan. It releases lenders from the obligation of auctioning off real-estate as well as the costly measures associated with filing a lawsuit for the remainder of what is owed on the mortgage. While it seems odd that a lending company would accept less than what is owed on a mortgage loan, there are many reasons why it’s a good idea to consider moving forward with the short sale process if you find yourself facing default on your mortgage.
How Does a Short Sale Work?
Typically, a short sale follows a default on a mortgage when the borrower can no longer afford the monthly payments. A short sale is a transaction that results in a property being sold off for less than what is owed on a mortgage. In certain cases, lenders might agree to accept whatever proceeds they can make from a short sale and essentially forgive the remaining debt owed. However, this all depends on the lender and in some cases the borrower may be held accountable for the difference between the sale price and the loan. The contract for a short sale outlines how the mortgage property will be liquidated and often includes an addendum that is carried out by the mortgage lender, seller, and buyer.
In a short sale, the borrower would formally designate the property as for sale and classified as a potential “short sale/subject lender” deal when he or she puts the property for sale on the market. Once the borrower decides to move ahead with a short sale, the borrower/seller would contact their lender to complete an application for a short sale. While there is no guarantee that the lender will accept the application for a short sale to resolve the mortgage loan, it’s an important legal maneuver to help mitigate the financial damage of defaulting on your mortgage. If a lender chooses to accept the homeowner’s application, it will issue a short sale letter and the sale can proceed. A short sale letter outlines the approval of sale and the borrowers release from the mortgage loan for a lesser amount than what is due.
Mortgages are loans that carry substantial penalties for default. When a mortgage borrower defaults on a loan, the property is typically sold off in a public auction. To avoid the costs and challenges associated with the foreclosure and forced sale process, facing default often explore means other than foreclosure to settle their outstanding mortgages. Foreclosure is a challenging and stressful process for both the lender and the borrower. Forcing people out of their homes is no picnic, and the parties to a mortgage will often explore the option of a short sale in order for both borrowers and lenders to escape the frustration and aftermath of foreclosure.
Benefits of a Short Sale
There are many reasons someone facing default would consider a short sale. For example, in a short sale transaction, the sale of a property is performed by the borrower rather than the bank. Therefore, the borrower has more control over how much the property is sold for. This is a meaningful benefit over foreclosure, which requires a public auction and forced sale to the highest bidder. In Illinois, this process is regulated by the Illinois Mortgage Foreclosure Law.
Lenders and borrowers alike prefer short sales because these transactions allow them to avoid the lengthy and costly measures of proceeding with foreclosure. Borrowers benefit from short sales as well, as they are able to pay off their debt for less than what was owed and avoid the devastating effects to their credit that a foreclosure would inevitably cause. However, there are many potential legal pitfalls to selling your home in a short sale, so be sure to get advice from a good real estate attorney in your area. M&A Law Firm offers the best real estate law help in the Chicago area, so if you’re facing the potential consequences of default contact us today.