What is a Short Sale?Â
If you borrowed money to buy your house, now you owe more on that loan than what your house would sell for on the market today, and your circumstances have changed and you can't make payments anymore, then a short sale may be a way out. A short sale is like asking your bank (the lender) to agree to let you sell your house for that lower price, even though it won't pay off your entire mortgage. They essentially agree to "take a loss" on the remaining amount.
Why Should You (the Homeowner) Consider a Short Sale?
Potentially Less Damage to Your Credit: While a short sale will still negatively impact your credit score, it's generally considered less damaging than a full foreclosure. This could make it easier to rent or get a new loan in the future compared to the longer-lasting impact of a foreclosure.
Avoiding Further Financial Burden: By selling, you can stop the increasing debt from missed mortgage payments, late fees, and the potential for a deficiency judgment after a foreclosure (more on that later).
More Control Over the Process: In a short sale, you are the one selling the house, working with a real estate agent. In a foreclosure, the bank takes control and sells the property.
Possibility of Relocation Assistance: In some cases, your lender might offer a small amount of money to help with your moving expenses as an incentive to complete a short sale.
Shorter Waiting Period for a New Mortgage: After a short sale, you might be eligible to apply for a new mortgage sooner than after a foreclosure (potentially as little as two years versus a longer waiting period for foreclosure).
Emotional Benefit: Taking proactive steps to sell your home can provide a sense of closure and allow you to move forward.
Why Might a Bank Consider a Short Sale for You?
Avoiding Foreclosure Costs: Foreclosure is an expensive and time-consuming legal process for banks. They have to pay for legal fees, court costs, property maintenance, and eventually selling the foreclosed home (often at a discount).
Recovering More Money: In many cases, a bank can recover more of the outstanding loan balance through a short sale than they would by going through the entire foreclosure process and then selling the property themselves (as a "bank-owned" or REO property).
Reducing Losses: Banks want to minimize their losses. Accepting a short sale, even at a loss, can sometimes be a better financial decision than the unpredictable costs and potential lower returns of foreclosure.
Public Relations: Banks often prefer to work with homeowners to find solutions rather than going through the negative publicity associated with foreclosures.
What Steps Will You Need to Take for a Short Sale in Colorado?
Acknowledge Your Situation and Seek Help Early: Contact a real estate agent experienced in short sales in Colorado as soon as possible.
Gather Financial Documentation: Your lender will require a comprehensive financial package to assess your hardship. This typically includes:
A hardship letter explaining why you can no longer afford your mortgage (job loss, medical expenses, divorce, etc.).
Financial statements: Pay stubs, bank statements, tax returns.
List of debts and expenses.
List Your Home with a Qualified Agent: Choose an agent who understands the short sale process in Colorado and can market your property effectively to attract buyers.
Obtain a Purchase Offer: Once you receive an offer, your agent will help you present it to your lender.
Lender Evaluation: The lender will review the offer and your financial information. They will likely order their own valuation of your property (a Broker Price Opinion or BPO) to determine if the offer is reasonable.
Negotiation with the Lender: This is where your agent's expertise is crucial. The lender may counter the offer or have specific requirements. Negotiation can take time (potentially 3-6 months or even longer).
Short Sale Approval: If the lender agrees to the offer, they will issue an approval letter outlining the terms.
Closing: The closing process is similar to a traditional sale, but with the lender's final approval being a key factor.
Potential Difficulties Involved in a Short Sale in Colorado:
Lengthy Process: Short sales can take a significant amount of time (3-6 months or more) due to the lender's review and negotiation process. This can be stressful when facing an impending foreclosure sale date.
Lender Approval is Not Guaranteed: The lender has the final say and may reject the short sale offer for various reasons (e.g., they believe the offer is too low, or they don't feel you've demonstrated sufficient hardship).
Deficiency Judgment: In Colorado, unlike some other states, lenders can potentially pursue a deficiency judgment against you after a short sale. This means they could sue you for the remaining amount you still owe on the mortgage after the sale. It's crucial to try and negotiate a waiver of the deficiency judgment with the lender as part of the short sale approval. This is a very important point to discuss with your agent and potentially a legal professional.
Credit Impact: While less severe than foreclosure, a short sale will still negatively affect your credit score.
Emotional Toll: The uncertainty and extended timeline of a short sale can be emotionally draining.
Buyer Issues: Short sales can sometimes fall through due to buyer financing problems or impatience with the longer approval process.
Communication Challenges: Dealing with the lender can sometimes be frustrating due to bureaucracy and communication delays.