Short Sale - Frequently Asked Questions
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If you have further questions about Short Sales or Foreclosures, or would like more information about our services, you may email or call us and we will be happy to assist you.
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What is a Short Sale?
A short sale is the sale of a home in which the seller's mortgage lender agrees to accept a payoff of less than the balance due on the loan(s).
One of the benefits of a short sale to the homeowner is that the lender pays the sales costs, including real estate commissions, escrow, title, and other closing expenses.
When the property closes escrow, you are relieved of your debt, avoid foreclosure, and prevent a foreclosure from appearing on your credit history.
Is a Short Sale Right for Me?
For various reasons, some borrowers may not be able to fulfill their mortgage obligations. These reasons commonly include financial hardship due to increased mortgage payments, job loss, and other family emergencies.
If you are no longer in a position to make the mortgage payments, are facing foreclosure, and the current market value of the property - including escrow and closing costs - is less than the loan(s) on the property, you should consider a short sale.
A short sale saves you from having a foreclosure on your credit history and releases you from an obligation you can no longer afford. If you do not have the home equity or money in the bank to pay for closing costs and commissions, the lender will pay for these expenses.
A short sale also saves the lender the expense of foreclosure proceedings and from having another REO property on its books.
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How do I Qualify for a Short Sale?
These are several common factors a lender will consider when approving of a short sale. Ask yourself, do you:
- Owe more on your property than the current market value?
- Not have money to cover the difference of what you could sell
your property for and what you owe the bank?
- Not have the money to pay for real estate commissions, closing costs, late payments, etc?
- Have difficulty covering your monthly expenses?
If you answer yes to the above questions and can display a financial hardship, you will likely qualify for a short sale. Ultimately, the decision is up to your lender.
What Type of Hardship Will the Lender Accept?
Generally, as long as the hardship is real and the lender believes the loan is likely to become, or is currently delinquent, the Short Sale request will be approved by the lender’s loss mitigation department. A key to obtaining an approval is a strong letter explaining the hardship situation of the borrower.
Below is a list of "hardships" that are frequently accepted by lenders:
- Family illness or injury
- Job relocation
- Job loss or significant income loss
- Divorce or split of domestic partners
- Upward adjustment in mortgage payment or increase in living expenses
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If I do a Short Sale, How Much Will I have to Pay?
Nothing. In most cases you will pay none of the costs associated with selling your home if your lender approves the Short Sale.
Your lender will pay all real estate commissions, title and escrow, miscellaneous closing costs, and even most required repairs.
The reason lenders will do this is because they are trying to avoid the even larger loses and expenses associated with the foreclosure process.
If I do a Short Sale, Can I Stay in My Home?
Yes.
A Short Sale is a real estate sales transaction and you may stay in your home during the process, even if you are missing your mortgage payments.
How do I Get Started With a Short Sale?
It's easy. Call or email us, and we will be happy to answer any additional questions you have and get you started with the process.
There are no up-front fees to get you started.
What is the General Short Sale Process?
Here's How A Short Sale Works:
- First, you sign a listing agreement and all required documents that allow us to negotiate with your lender.
- Next, we list your home as a short sale and begin marketing the property.
- We help you gather financial information requested by the lender, assemble all the necessary forms, and begin the process.
- We submit the offer(s) on your property, financial information, and other documents to our lender contacts and begin negotiating the short sale of your property.
- We coordinate with the lender(s), escrow and title companies, attorneys, public trustees, etc. for the approval of your short sale.
- When the property closes escrow, you will be relieved of your debt and are free to move on with your life.
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Why Would a Lender Agree to Accept a Short Sale?
Lenders have ample incentive to negotiate a short sale with a distressed borrower. First of all, if the lender has to take back a property pursuant to a foreclosure sale, the lender would become responsible for a variety of costs, including property maintenance, utilities, and HOA fees. They also risk destruction of the property by vandalism.
Every month that goes by during the foreclosure process, the bank is losing money. Once the property has been foreclosed on, they must hire a local real estate broker and pay commissions to sell the property. Furthermore, lender-owned properties (REOs) may take a long time to sell, in part because so many REO properties are now for sale.
Add up all the months and expenses for the foreclosure process, and it is very expensive for the bank. This is why the lender has a good incentive to work with a short sale. They are less costly, and the bank can move the property off its books much sooner.
Another reason lenders are willing to negotiate a short sale is their Reserve Requirement. Delinquent and non-performing loans place another burden on mortgage lenders. For all delinquent and non-performing loans, lenders must set aside funds in reserve to deal with potential losses. These funds cannot be put to work generating new loan fees until the bad loans are resolved. A successful Short Sale allows the lender to put the money back to work.
Do Lenders Approve all Short Sales?
No. This is why it is critical to work with a company that has extensive experience and lender contacts to maximize your opportunity for getting a Short Sales approved. Key elements for our short sale success include:
- Established relationships with all major mortgage lenders
- A professional and complete Short Sale package submitted to the lender
- Experienced negotiating skills to deal successfully with the lenders Loss Mitigations Department
- Constant professional communications
- Continuous attention to your file, to move it forward to a successful close
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I am Current on my Mortgage. Will my Lender Consider a Short Sale?
Maybe. Some lenders will accept a Short Sale file for approval on loans that are not delinquent.
Other lenders will not accept the file until the loan is delinquent. This is because if you are current on your loan, they assume you are not in a genuine hardship situation and do not qualify for the "hardship" status necessary for short sale approval.
If you are current on your loan but wish to determine your short sale eligibility, we can assemble your Short Sale file and submit it for approval. This is the best way to determine if your lender will accept a file for approval on a loan that is current. We charge no upfront fees to help you submit your file.
I Have Two Loans. Can I Still do a Short Sale?
Yes. Many homeowners have two mortgages on their properties. This is common. We can work with both lenders, and sometimes the same lender holds both the 1st and 2nd mortgages.
We can usually get both lenders to cooperate because neither lender will benefit by having the property go through foreclosure.
My property Needs Work. Can I still do a Short Sale?
Absolutely. The lender knows the risk of loss goes up when they foreclose on a property that needs a lot of work, so they should be motivated to approve a short sale.
Lenders are in the loan business, not the fixer business. They would prefer to dispose of the property through a Short Sale, rather than foreclosing and becoming responsible for repairing it.
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Can I Deed my Property to Someone Else and Avoid Foreclosure?
Quitclaiming or deeding your property to someone without paying off and removing your name from the loan is almost always a bad idea. You waive all your rights to the property, but the lender still considers you completely responsible for payment on the loan. If loan payments do not get paid, or if the lender ultimately forecloses, this will show on your credit.
Do not deed your property to someone without first consulting with an attorney.
How Will a Short Sale Affect my Credit?
A lender may report a short sale loan as being “Satisfied” or settled for less than the full balance, such as “Settled,” or “Paid Settled.” This and any late payments would show up on your credit report as a negative mark.
However the lender enters the information, a short sale record will be far less damaging to your credit report than a foreclosure. A foreclosure will cause a credit hit of approximately 150 points more than a short sale, and is among the most damaging events your credit report can sustain.
By avoiding foreclosure, you will likely be able to resume normal borrowing (car loans, credit cards, consumer goods, etc.) relatively soon.
And very importantly, by saving your credit report the black mark of foreclosure, this will make a HUGE difference when you want to buy another home. The short sale minimizes the credit hit and makes it easier to buy your next home sooner and at better interest rates.
Are There any Tax Effects of a Short Sale?
Maybe. Generally speaking, any relief of indebtedness is taxed as ordinary income. There are however, some exceptions to this rule.
President Bush signed the Mortgage Forgiveness Debt Relief Act of 2007 on December 20, 2007. It provides relief to many people who have lost their home due to a short sale or foreclosure that relieves the borrower of the obligation to pay some portion of their debt.
The bill amends the Internal Revenue Code to exclude from gross income amounts attributable to a discharge, prior to January1, 2010, of indebtedness incurred to acquire a principal residence. Details of the Act include:
- Applies to mortgage debt forgiven between January 1, 2007, and January 1, 2010
- Applies to the mortgage used to buy the home
- Applies when the home loses value or the owner’s financial condition qualifies
- The home must be the principal residence, not a second home or rental property
There are also other exceptions that may benefit a taxpayer involved in a short sale. Sellers who are insolvent at the time of the cancellation of debt may not have to pay taxes on the forgiven amount. Insolvency would occur when a borrower’s liabilities exceed assets. The seller would have to show this insolvency to the IRS when filing a tax return.
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Is the Seller in a Short Sale responsible for any Deficiency Judgments?
A deficiency judgment is a judgment obtained by the lender in court against the borrower (Seller) for the difference between the unpaid balance of the secured debt and the amount produced by sale in a judicial foreclosure.
California has “anti-deficiency statutes” that protect certain borrowers from deficiency judgments. A California lender typically would opt for a trustee’s sale foreclosure, which is quicker and less expensive than a judicial foreclosure. No deficiency judgment is allowed following a trustee's sale.
** We are not CPAs, tax experts or Attorneys. This is for informational purposes only. A short sale may have credit, legal or tax consequences, and may result in taxable income to the seller. A seller is advised to seek advice from an attorney, CPA or other expert prior to proceeding with a short sale.
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