Short Sale Explained

 

A short sale can be an excellent solution for homeowners who need to sell, and who owe more on their homes than they are worth. In the past, it was rare for a bank or lender to accept a short sale. Today, banks and lenders are more open to this option.

 

What is a Short Sale?

A basic definition is a term used to describe the sale of a home in which the homeowner owes the bank more than the home is worth.

But to be technical, here's a more official definition:

• A homeowner is 'short' when the amount owed on his/her property is higher than current market value.
• A short sale occurs when a negotiation is entered into with the homeowner's mortgage company (or companies) to accept less than the full balance of the loan at closing. A buyer closes on the property, and the property is then "sold short" of the total value of the mortgage.

Would I qualify for a Short Sale?

Yes. Contrary to popular belief, it is not difficult to qualify for a Short Sale. A good Short Sale candidate has no equity in their home. They are not able to sell their home and pay off all of the outstanding loans/debt that are secured against their property.

If you owe more against your home than it is currently worth and want or need to sell it but can't or won't bring cash to closing to make up the difference between what you owe and what your home is worth, then you are a prime candidate.

What are different Groups of People that would Qualify?

For homeowners to qualify for a short sale, they must fall into any or all of the following circumstances:

• You are behind on your mortgage payment and are unable to keep up with all of your monthly obligations. Some of the reasons for falling behind on your mortgage payment may include sudden change in monthly household income, loss of job, divorce, and more.
• You are NOT behind on your monthly mortgage payment but know that you will soon be unable to keep up with all of your monthly obligations and therefore in the near future will not be able to afford to keep your home.
• You are NOT behind on your monthly mortgage payment but need or want to move. Reasons could include a job transfer, a health reason, retirement, and more.
• You are NOT behind on your monthly mortgage payment and have come to the decision that staying in your home is not a good "business decision" or "financial decision."

If you have questions or feel you may qualify for a short sale, please contact us for a free consultation.

Understanding your options now could mean all the difference in the world.

Homeowner Impacts

The impact of a short sale will vary from situation to situation; however, below are some guidelines to address the most common items seen in short sale situations.

Are there Any Credit Consequences to a Short Sale?

This question is asked very frequently and has many different variables involved. The first thing to keep in mind is that the moment you go 30+ days behind on your mortgage payment, your bank has the right to report to all of the credit bureaus that you are 30 days behind on your payments. When a late payment is reported to the three major credit bureaus, it does have a direct affect on your credit. After going through a Short Sale or a Foreclosure, most people have multiple 30, 60, and 90+ day late payments reporting on their credit report.

When the actual Short Sale is completed, most banks will report to your credit report that your account was "paid in full for less than the full amount." Your credit report may also be marked as "settled." It is important to keep in mind that each lender has a different way of reporting that a Short Sale was done, but this is the most common language that is seen. If your home were to go to Foreclosure you would most often see the bank report "Foreclosure" on your credit report.

It is difficult to gauge how much of a credit scoring affect a Short Sale has vs. a Foreclosure. Credit experts will agree that neither a Short Sale nor a Foreclosure is favorable to your credit or credit score, however, the impact of a Foreclosure is much worse. We strongly advise you to work with a Credit and Credit Scoring Expert for more specifics on this topic, and ways in which to improve your credit after the Short Sale is complete.

Recently, many of our clients were able to Short Sale their homes without ever missing a payment, therefore, they do not have any late payments reporting to their credit. When there are no late payments on your mortgage, your credit score is generally not affected. It is possible to maintain a high credit score by completing a Short Sale without missing payments on your mortgage and other bills. Please be aware though, that your lender will still report that a Short Sale was done so while you may not see your credit score drop if you continue to make payments through the completion of the Short Sale, you'll still likely have your account marked as "paid in full for less than the full amount" and/or "settled."

 

Are there Any Tax Ramifications to a Short Sale? 

There may be tax ramifications to a Short Sale but this is a very "loaded" question. You may have heard, "Don't do a short sale because you will get a 1099 and have to pay taxes on the difference between what you owed on your home and what you sold it for or the amount the bank wrote off." This may be true, but this is not the whole story...

If you borrow money from a lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.

The thing that most people don't know or don't tell you is that with a Foreclosure, you will also get a 1099. In the case of a Foreclosure the 1099 is called a "1099-A." So what's the difference between a 1099-C and a 1099-A? The 'C' stands for "Cancellation of Debt" and the 'A' stands for "Acquisition or Abandonment of Secured Property". The differences are much more than you get the 'C' with a Short Sale and the 'A' with a Foreclosure. It is important to know that while there are many differences, the tax consequences for the 'C' and the 'A' are the same. You may not even be required to pay taxes on the 'income' as shown on the 1099-C, but don't just assume that you won't have to pay. While we are very good at successfully closing Short Sales, we are not tax experts.

 

Before making your final decision, first consult a CPA or Tax Preparer.

The Mortgage Debt Relief Act of 2007 provides relief to many, many homeowners. For more information on the Mortgage Debt Relief Act, how it works, who it applies to, and more, please read more directly from the IRS website by clicking here .

One more thing you should know is that in approximately 99% of the cases, the amount of the loss at Foreclosure is greater than that of a Short Sale. If you are going to receive a 1099 in either case, it is in your best interest to do a short sale instead of allowing your property to be sold for less at Foreclosure or as an REO (Real Estate Owned or Bank Owned Property). Now that you know this, don't allow rumors and incorrect information to influence an important decision in your life. Losing your home to Foreclosure is always the last resort and you should seriously look at all of your options before letting your home go to Foreclosure.

Can the Bank sue me or place a Judgment against me for the difference between what I Owe and what the Home Sells for?

This is a good question that is best answered by a qualified Real Estate Attorney.  Short sale is a good option to avoid foreclosure, however if you don�t know what you are getting into, you may end up owing a deficiency judgment unless it is otherwise stipulated in the short sale agreement.  For more specifics on this topic, please consult a qualified Real Estate Attorney.

It is also important to know that most Home Equity Lines of Credit (HELOC) are not just secured to your home, they are also personally "backed" by you. What this means is that even though your HELOC bank may agree to do a Short Sale or Foreclose on your home, they still may attempt to collect on your account - even after the Short Sale or Foreclosure is complete.

 

What else Homeowners should be Aware of...

• Banks will request information from the buyers of a short sale to ensure the buyer is not anyone the homeowner has a close personal or business relationship with, including family and friends.
• Mortgages in bankruptcy require special consideration.  

Frequently Asked Questions

It is understandable to have questions when coping with a new and challenging situation, especially when a home is at stake. The reality is that millions of homeowners across the country are finding out that they have more questions than answers. We hope that the following information will help you better understand the circumstances. If you have further questions not addressed below, or would like additional information resources, feel free to contact us. 

How do I select the right Agent to Successfully Manage and Negotiate my Short Sale? 

Before hiring just any 'Agent' to assist you in a Short Sale, make sure they are qualified and understand all the work that is required to see you through to the end. A properly trained Short Sale Agent knows how to qualify you for a Short Sale transaction and therefore has a very high success rate. Most Realtors®, Investors and Real Estate Agents do not understand how to qualify you and your lender for a Short Sale Transaction. This is one of the reasons they often have such low success rates when it comes to closing a Short Sale. Investors have around a 10% success rate. Most other Realtors® have between a 20-50% success rate.

 

Be smart and make sure that you ask many questions before trusting your future, your credit and your financial situation with just any Realtor®.

Do you Work with all Banks?

Yes, we attempt to work with all banks. Unlike some agents and investors, we do not "selectively choose" which banks we work with and which banks we won't.  Some banks are easier to work with than others.

How Long does it take to Complete a Short Sale?

This simple answer is that currently it takes approximately 5-7 months to complete a Short Sale from initial contact with you as the customer to closing. It is possible that legislation may mandate time restrictions in the future.

There are several stages that are involved with the Short Sale process...

1. The first stage requires working with you as the homeowner to get all of the required documentation that your bank will require us to send them - we refer to this as completing the Short Sale Package.
2. The second stage involves preparing the listing paperwork and scheduling an appointment with you to see your home and prepare your home to be listed for sale. This stage usually only takes a few days.
3. The third stage entails aggressively marketing your home for sale and producing a willing, ready, able, and committed buyer. This stage can take as little as a few days or as long as a few months.
4. The fourth stage is the actual presentation of the offer to your bank. This is where our expertise and experience in negotiating Short Sales takes place. The actual negotiation/approval process can vary from as little as 30 days to beyond 180 days. We exercise a great deal of persistence which entails many phone calls, emails and faxes.
5. The fifth and last stage to the Short Sale process is the period of time between Short Sale approval from the bank and the buyer closing on the home. We prepare all of the buyers that we work with to be ready to close as quickly as possible after the Short Sale approval. If you are still living in the home at time of Short Sale approval, it is imperative that you confirm the latest acceptable move-out date from Short Sale approval.

Are there any Fees Associated with doing a Short Sale?

Yes, there are two fees associated with doing a Short Sale. The great news is that we ask the bank pays for these fees...

1. Realtor® Commissions: A fee of 6% of the sales price of your home that is paid for by your bank/lender.
2. Short Sale Processing Fee: A fee we charge to your bank/lender for the processing of the short sale.

Why exactly would a Bank Agree to a Short Sale? 

It is much more cost effective for a bank to do a Short Sale rather than Foreclose on a home. Typically, banks are not interested in owning real estate. Banks make their money from receiving monthly mortgage payments. While banks will take a loss doing a Short Sale, they can often minimize their loss by as much as 10-40% over a Foreclosure.

Once I have Accepted an Offer on my House, What is the Process?

There are many things that go on behind the scenes once there is an offer accepted on a house being sold as a short sale. There are 5 Main Milestones which are noted below. Each Milestone has numerous tasks for each party involved (i.e. Homeowner, Listing Agent, and Bank Associate or Negotiator):

1. Initiate the Short Sale - your bank(s) are notified of your desire to short sale your house.
2. Submit Offer and Documents - The buyer's offer and the short sale package of information you have completed is submitted for their review.
3. Obtain Home Evaluation or Broker's Price Opinion (A.K.A. BPO) - your bank(s) request(s) an estimation of value from a 3rd party to determine Fair Market Value (this is like a mini-appraisal).
4. Analyze Offer and Decision - your bank(s) and the investor on your loan (for additional information see below in the section "Who will make the decision on approving my short sale") reviews all information to determine if they are going to accept, counter or reject the short sale request.
5. Closing � once your bank(s) and the investor on your loan approve the short sale, the buyer starts their due diligence period and proceeds with the loan process to purchase the house.

Who will Make the Decision on Approving my Short Sale? 

There are three entities that are usually involved in approving a short sale - it gets a little overwhelming for folks to understand but here is it broken down in its simplest form:

1. The Servicer - which is usually who you pay your mortgage to (i.e. Bank of America, Wells Fargo, Chase, etc.) they companies just offer their services of collecting the money on the loan for the investor and charge the investor a fee to do so. Once the Servicer takes their fee from the mortgage payment, the rest of the money is forwarded to the Investor for their return on your mortgage loan. In a short sale, the Servicer is the initial decision-maker in approving a file. Once they make a decision on it, they will forward it along to the other two entities - the Investor and the Mortgage Insurance Company (if there is one).
2. The Investor, having the "financial interest" in the loan, collects the money that is left over after the Servicer has collected their fees. The investor could be large entities located here in the US like Fannie Mae, Freddie Mac, and possibly some Servicers (but not too often). Most loans are owned by Fannie Mae and Freddie Mac. Other Investors may include entities overseas that invested in the US mortgage market. The Investor has the final decision on the short sale approval, term changes or may decline it because it does not meet their "guidelines."
3. The Mortgage Insurance Company - which has insured your mortgage loan in the case that you stop paying, will pay out a fee to the Investor in order to protect their investment. Not all loans have a Mortgage Insurance Company involved. If there is a Mortgage Insurance Company involved, they have to agree with the Investor on the terms of the short sale. Similar to the Investor, the Mortgage Insurance Company has the final decision on the short sale to approve, term changes or may decline it because it does not meet their "guidelines."

As you can see, it is much more complicated than just getting one person's approval and each entity is designed to provide a protective layer for all parties involved.

I'm behind on my Payments, How Long until the Bank Forecloses on my House?

Most notes (the "I Owe You" document that you signed with the bank when you first qualified for your loan) give the bank the right to file the "foreclosure notice" or the "notice of default" as soon as you are 30 days behind on your mortgage. While the bank has the right to file the "foreclosure notice" or set the trustee sale date (the date your home will be foreclosed on) as little as 30 days after you miss your mortgage payment, they often will not do so until you are 90 days or more behind on your payments. The bank has the sole discretion on when they want to file the sale date and all banks make this decision differently and within different time parameters. Recently many banks have elected to hold a foreclosure moratorium (suspension or freeze of filing foreclosure notices) therefore greatly affecting at what stage they file the "foreclosure notice."

When the official "foreclosure notice" is filed (whether it is filed after you miss  1 mortgage payment or 3 mortgage payments), there is a 91 day period of time between the filing and the actual "foreclosure sale" or "trustee sale."

It is important to know that if you are working on a Short Sale, it does not mean that the lender will put a "stop" on the foreclosure process. Most lenders will continue with foreclosure proceedings even if a Short Sale is being reviewed or worked on. It is not uncommon for foreclosure sale dates to be postponed/delayed while in the Short Sale process.

When Should We begin Working on the Short Sale Together?

Ideally it is best to begin working on your Short Sale as soon as possible.  If you recognize that you are unable to keep up with your payments and will be falling 30+ days behind please contact us immediately. The important thing for you to know and keep in mind is that the sooner we begin working with you on the short sale process, the more you increase your chance of a successful closing.

Contact us. 

 

We do not guarantee the accuracy of the above information and advise you to consult with an attorney and/or an accountant.