The ins and outs of buying or selling a short sale in Utah are challenging, even for most real estate agents. Here are the answers to buyer’s and seller’s most common questions about short sales.
What Is A Short Sale?
A Utah short sale happens when a homeowner experiencing difficult financial times request their mortgage lender to accept a purchase offer for less than what the borrower (homeowner) owes on the property. The bank agrees to accept the offer, forgiving the difference between the sale price and the remaining mortgage balance.
The difference between what is owed and the price the bank agrees to is the amount the seller is short.
For example, if the seller purchased a Salt Lake City home at the height of the real estate bull market in 2021 for $600,000 and wants to sell the home for $500,000 in 2023's declining real estate market, the $100,000 difference is the amount the seller is short.
This process allows the homeowner to avoid foreclosure and the lender to recover some of their funds.
How Short Sales Affect Sellers
Limited Ability To Negotiate
Short sales have significant drawbacks for sellers. Although the seller is involved in selling the property, they cannot negotiate the final sale price of the home. The lender will be the only decision maker about the price they will accept.
Additionally, after making mortgage payments for the entire time they occupied the property, the seller will receive none of the proceeds from the sale.
Negatively Affects Credit Score
A short sale will negatively impact the seller's credit score.
While short sales tend to be less harmful to credit scores than foreclosures, they can still result in lower FICO scores, especially for sellers with higher credit scores.
Prevent Purchasing Another Home
After a short sale, most sellers will need to plan on renting since it will likely be years before they can qualify for a new mortgage. Two to seven years is a typical time frame to qualify to buy a home after a short sale.
Liability For Unpaid Debt
Just because the lender accepted a price below what was owed on the property doesn't mean the seller is forgiven. The lender may sue the seller to recoup the debt after the short sale, known as a deficiency judgment.
Utah Code § 78B-2-313 requires filing a deficiency action within three months following a short sale.
Short Sale Package
Below are the typical documents sellers must prepare to submit to their lenders. First, make sure your package is complete. Please do your best to provide your lender with everything they need to expedite the process. Unfortunately, an incomplete packet will only frustrate the lender and delay your situation.
- Executed Listing Agreement
The bank will require details such as the property's listing date, brokerage information, commission amount, and listing term. Lower agent commissions mean the bank nets more money.
In addition, working with an experienced Utah discount real estate broker makes a low sale price easier for the lender to stomach.
- Fully Executed Purchase Contract
Sloppy contracts will not be accepted. Ensuring the purchase contract has all the necessary signatures before submitting it to the lender is crucial to avoid delays.
The contract should include the following: Full property address, all initials from both parties, dates and signatures from all parties involved.
- Seller's Hardship Letter
The hardship letter is a crucial part of the package. It explains how the homeowner landed in their current financial situation, their steps to create a solution, and why a short sale is the best option.
For example, a borrower who can afford their mortgage payment if they reduce spending in other areas is not likely to have a compelling letter. In contrast, a borrower who has lost their job is dealing with a significant illness, and exhausts their savings will have a better chance of getting their request approved. Include bank statements, medical bills, pay stubs, a termination notice from your former job, or a divorce decree.
Provide the bank with all documentation necessary to illustrate your unfortunate financial situation. You'll need to show the bank why a short sale is the best option for you and them.
It must contain the loan number and be signed and dated.
- Authorization Letter:
The seller's authorization letter lets the bank communicate directly with the listing agent.
- Bank Statements
Your lender will want detailed explanations for deposits you can't explain, significant cash withdrawals, or significant cash deposits in your bank account.
Typically, banks require the seller provides them with the last two months of bank statements.
- Tax Returns and Wage Documentation
The lender will want to review federal tax returns for the past two years. If the seller has not filed tax returns in the past two years, a letter of explanation and extensions are necessary.
In addition, W-2s for the past two years, the last two pay stubs, and other documents supporting wages may be required.
- Proof Of Assets
When dealing with lenders, it is best to be upfront and transparent about your financial status and assets. Lenders will request documentation for any assets that you may have.
- Comparative Market Analysis (CMA)
Real estate markets are unpredictable, and property values may sometimes decrease. A CMA provides the lender evidence that the seller's home will not fetch a price equal to or above what they owe.
- Similar homes currently active on the market,
- pending sales,
- sold within the past six months.
The market analysis can help your lender understand the current local market conditions and make a more informed decision about your house.
Aaron Peters is the creator of DiscountAgent.com. Aaron has sold over $150,000,000 in Utah real estate and has over 110 five-star Google reviews.
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The Short Sale Approval Letter
The bank issues a short sale approval letter to the homeowner outlining exactly what they expect to receive from the sale.
- The acceptable sales price
- Maximum allowable commissions
- Maximum closing costs
- Minimum net proceeds
- Closing date
Tax Consequences of A short sale
If a borrower's debt is forgiven, they must report it as income on tax Form 1040 and could be taxed at the same rate as other forms of income.
In addition, the lender must provide a 1099-C tax form to the seller reporting the debt forgiveness.
Short Sale Vs. Foreclosure
In a foreclosure, the lender possesses and sells the defaulted property to recoup the mortgage balance.
The borrower still possesses the home in a short sale, but the bank determines the acceptable sale price. The lender would prefer to short-sell the home, then take possession of the property and manage the foreclosure sale.
How Long Do I Need To Wait To Buy A Home After Foreclosure?
How Long Do I Need To Wait To Buy A Home After A Short Sale?
- If the buyer has a 20% down payment, they'll need to wait two years to qualify for another mortgage.
- If the buyer has a 10% down payment, they'll need to wait four years to qualify for another mortgage.
- If the buyer has less than10% down payment, their wait time to qualify for another mortgage is seven years.
Does A Foreclosure Affect My Credit?
Any late payments, especially a foreclosure, will hurt your credit. A foreclosure will remain on your credit report with all three credit bureaus (Equifax, Experian, and TransUnion) for seven years.
Does A Short Sale Affect My Credit?
Just because homeowners sell their home through a short sale doesn't mean they missed any mortgage payments. Many short sales do not have any delinquent mortgage payments. However, the seller's credit will be impacted by their failure to "not pay as agreed," which will be reported on all three credit bureaus (Equifax, Experian, and TransUnion).
Tips For Buying A Short Sale
- Inspection & Repairs
Every home in Utah is sold in "as-is" condition, but you should always have an inspection. Believe it or not, we always recommend meth and radon testing in Utah. Unfortunately, more than one in ten Utah Homes test positive for methamphetamine.
In addition, major repairs that you find must be disclosed to any future buyers, so defects discovered during the inspection could give you more bargaining power with the lender.
For example, if you demonstrate that the home requires meth decontamination, the lender may become more negotiable on price.
- Submit Your Best Offer
Make an offer that matches or comes close to market value. The lender is attempting to recover as much of the remaining mortgage balance as possible, so lowball offers will likely be rejected or wholly ignored.
Ask your discount real estate agent to prepare a comparative market analysis (CMA) to determine a realistic offer. Agents have access to all the current active and sold listings through multiple listing service (MLS) website to support your offer price.
- Pay closing costs
If you love the home, put yourself in the best position possible to receive an acceptance from the lender. Remember, this is not an emotional decision for the lender. They are staring at spreadsheets and numbers, trying to minimize their losses and protect their best interest.
Be prepared to pay the buyer's closing cost.
If there are multiple offers which is often the situation with a short sale offering to pay the seller's closing cost might be the deciding factor between your offer and another offer.
The lender's decision will be based on who nets them the most money.
- Hire An Agent
Short sales are complex transactions, and with lenders making all the decisions, it's essential to have representation.
An experienced short-sale agent will be the difference between getting and not getting the home.
Lenders do not want to work directly with an inexperienced buyer. They know the likelihood of a solo buyer successfully navigating the short sale process is nearly zero.
It would be wise to contact a discount Realtor. You receive guidance through the short sale process, which the lender likes, at lower commissions which the lender loves.
- Be Patient
Short-sale homes may not be your best option if you have a strict move-in deadline.
It is common for offers to take three months or more before a buyer receives a response.
The process will take longer if there are multiple lien holders.
This post was all about providing the most helpful guide on purchasing or selling a short sale in Utah.
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My name is Aaron Peters. I'm a full-time discount real estate agent in Utah and the creator of DiscountAgent.com. Thank you for taking time out of your busy day to read this blog post. I'm always open to suggestions from readers.
Toeby(a.k.a Toesy) was born with only three toes on his front left paw. Luckily for him, his only job requirement as my assistant is to nap and remind me that life isn't about sitting at my desk staring at a computer all day. Who's a good boy?
Contact me at 801.243.8900 If you own a company and would like to participate in an interview that is helpful to DiscountAgent.com readers.
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