Illinois Short Sales During the Pandemic
With a tumultuous economy and lots of uncertainty on the horizon, it’s no surprise to find interest in short sales has increased, as Americans look to find financial relief from mortgage payments.
What is a Short Sale?
Essentially, a short sale in real estate is when a homeowner sells their property for less than what they still owe on their mortgage with the agreement of their lender(s).
All the money, less the approved costs of the sale from the home sale goes to the lender(s). In most cases, the lender will forgive the outstanding amount due after the Short Sale. Some, though rare, will require the seller to pay off some or all of the remaining balance due on the mortgage.
In several states, the difference between the sale price and the remaining amount on the mortgage must legally be forgiven (such as in Nevada and California who have unique laws in this area.) Illinois is a recourse state, and the Lender does not have to legally forgive remaining mortgage balances, though most often do.
In order to execute a short sale, the lender must sign off on the decision which typically includes documentation detailing why the short sale is taking place. Additionally, no short sale can be done without lender approval, since they stand to potentially lose a lot of money in the process.
The Difference Between a Short Sale and Foreclosure
The main difference between a short sale and a foreclosure is that a foreclosure is initiated by the lender upon the failure of the homeowner/borrower to make payments on the mortgage as they become due. A foreclosure in Illinois is a legal proceeding that results in a judgment being entered and the property being sold at a public sale. Once the sale is approved by the court a deed is provided to the successful bidder at the foreclosure sale, which can be the Lender or an investor who bids at the sale.
A Short Sale is a negotiation between the homeowner/borrower and a buyer with the consent of the lender, for the lender to accept less than the amount that is due to pay off the loan. Lenders are not required to accept Short Sales. The end result of a Short Sale is typically the forgiveness of the remaining balance due to the lender.
When Should a Seller Request and Negotiate a Short Sale in Illinois?
Typically, a homeowner will approach their lender for a short sale when they are behind on payments, with no realistic ability to catch up and there is insufficient equity in the property for them to sell it outright. It is often in both the lender and homeowner’s best interest to do the short sale, as it helps both to avoid the costly foreclosure process.
While usually seen as a last resort, short sales provide a way for Illinois homeowners to sell their property, with less damage to their credit scores.
The Pros and Cons of Illinois Short Sales in Real Estate
Though it tends to have a negative connotation, short sales are not always a bad thing and can have benefits for everyone involved. The lender avoids the losses and costs associated with foreclosure and the homeowner avoids a foreclosure being filed against them.
On the other hand, there is a reason that short sales tend to be most people’s last resort when looking to sell their home. The lender will issue a 1099 for the amount of the debt that is forgiven if the balance of the loan is forgiven or the homeowner may still have to pay off some or all of the remaining balance of the mortgage. There may still be a negative impact on your credit score. Short sales can be an exceptionally long and arduous process, filled with paperwork that requires a lot of attention and cooperation.
Short Selling During COVID
With COVID affecting the economy from every angle, it is no surprise that many homeowners find themselves distressed and looking for an out from mortgages they may not be able to pay or where there is no equity.
Distressed sales are reaching 2008’s ‘Great Recession’ numbers and climbing with so-called experts predicting a large number of distressed sales still to come into mid-2021. Like in 2008, this means it could take years for people to settle the outstanding balances on their mortgages, which could have a lasting impact on the economy.
To learn more about Illinois Short Sales, schedule an appointment with a real estate attorney at Lee Scott Perres, P.C.
