What is a short sale?
A short sale is a sale prior to foreclosure where the lender or lenders agree to accept less than the total amount owed on a piece of real estate in order to facilitate the sale of that property and transfer clear title to the new buyer. This is generally accomplished when the owners of the property are behind on their monthly mortgage payment and a foreclosure of the property is looming.
Who qualifies for a Short Sale?
Generally a Short Sale is granted by the lender to homeowners who have experienced a financial hardship that prevents them from continuing to pay on the mortgage. Rather than foreclose on the home, which is a huge expense to the lender and very devastating to the homeowner’s credit, a Short Sale may be done instead of foreclosure. The property value on the open market today must also be less than what the owners owe their mortgage lenders.
Why would a lender accept less than what is owed?
If a bank forecloses on a home they must repossess it. Once the foreclosure process is completed and all the fees are paid, the lender then has to sell the property. The bank is now responsible for the repair costs, marketing costs, Realtor commissions, appraiser costs, title fees, escrow fees, property taxes as well as having their money tied up in a non-productive asset. A short sale often costs less than the cost to foreclose on the home. Therefore a properly submitted and documented short sale often can often be very appealing to a lender. Having a Realtor that is experienced in Short Sales is highly recommended.
What is the seller’s advantage for doing a Short Sale?
Well, one of the best reasons to do a Short Sale is to try to avoid a lender from pursuing a deficiency judgment against the homeowner. The next reason is preserving the homeowner’s credit. Both a foreclosure and a short sale will negatively impact a homeowner’s credit, however, a foreclosure is much worse. Foreclosures will remain as a public record on a person’s credit history for 7 years or more. This will hurt the person’s ability to get a new home loan and will put him or her in a high risk category causing much higher interest rates. It could also impact career choices as many employers now check a person’s credit report as part of the hiring process. Also, homeowners who are police officers; security officers, military, and/or CIA could possibly be terminated from their position or lose their security clearance if they have a foreclosure on their credit score.
Are there tax ramifications?
Presently through December 31, 2012, if you owned and occupied your home as your principal residence for two years or more, then you may be exempt from recognizing as income the difference between what the bank accepts to clear your mortgage/deed of trust and what is actually owed to the bank. If you have not owned and occupied such dwelling for two years, you might be liable for reporting such “forgiveness of debt” as income. You should consult with your attorney or tax advisors for specific advice for your situation.
Are there liability ramifications?
If your home is sold in a “short sale” (the lender takes less than the lender is owed) the lender may require a “Reaffirmation” of the debt. Thereafter, the lender, or someone they sell or assign their rights to, may demand from you what the lender lost. Other lenders may still sue you under their promissory notes. Accordingly, signing any reaffirmation agreement may not be in your best interest and you should seek legal counsel prior to signing such agreement for specific advice for your situation.
Are there credit ramifications?
It is virtually certain that any foreclosure or short sale will seriously damage your credit rating or credit scores and impair your ability to obtain future credit, mortgages or loans. Credit scores are also used in other industries and can influence, for example, insurance premiums, security clearances, apartment rentals, and job screening. Paying your loan timely and staying current will likely positively affect your future credit.
What typically happens is the loan will show up as “paid” on their credit report; however there will be a notation that says “settled for less than originally owed” or something along these lines. It is more favorable for a homeowner to short sell than to have a foreclosure on their credit report.
Would it be easier to let my home foreclose?
On one hand, yes it is easier because the seller really doesn’t need to communicate as often with the lender. However, there are some potentially damaging consequences. In some states, a lender may seek a deficiency judgment following a foreclosure to try to get back the money you still owed on the home. The lender may then try to place liens on other properties, garnish your wages, or even repossess vehicles to recoup their losses. This is why a Short Sale may be a better option for a distressed homeowner in that a deficiency judgment and the negative consequences might be avoided. For more detailed information, seek advice from your CPA or legal counsel
Will filing for Bankruptcy affect a short sale?
Yes, if you have put the home under bankruptcy protection then the home cannot be sold as a short sale until the home is released or discharged from the bankruptcy. Negotiating a short sale payoff is considered a collection activity. Collection activities are prohibited in bankruptcy.
Will I receive any money at the closing of my home?
Generally no, however a program Home Affordable Foreclosure Alternatives Program (HAFA) may allow the homeowner to receive 3,000.00 to be used for relocation expenses. As of 2009, the Treasury Department introduced HAFA program to provide a viable option to homeowners who are unable to keep their homes through the existing Home Affordable Modification Program (HAMP).
Will banks allow a short sale when the owner has equity in the property?
If a property has what the lender would consider a substantial amount of equity, chances are they would consider allowing the property to foreclose and then reselling it closer to the retail value.
What documents do I have to include in a short sale package?
Documents depend on the lender. Each lender has different requirements. It is typical to require hardship letter, purchase and sales contract, ECOR, settlement statement (HUD 1), net sheet, pay stubs, bank statements, personal financial sheet (monthly budget), amongst other things. A Realtor who specializes in short sales will be able to assist you with this question.
Do all mortgage companies send someone out for an appraisal or BPO on a possible short sale?
All lenders order a BPO or full appraisal of the property before making their decision to accept or reject the short sale offer. This is there only way of assessing the value of the property.