Over time we have collected the questions most frequently asked by clients who were considering the short sale of their property.
FAQs for Sellers
Seller
A Short Sale allows homeowners to sell their home for less money than they actually owe on the mortgage(s). Documentation is provided to the lender(s) convincing them to reduce the mortgage balance to allow the sale. If the sale is approved, the mortgages lender(s) will actually take a loss on the mortgage. If a bank approves the discount of a mortgage, the home is sold for a price lower than the total debt on the property without the seller having to come up with cash to cover the shortfall. The mortgage is satisfied and any foreclosure process stops.
When faced with a hardship which makes it unlikely you will be able to meet your mortgage obligation, your lender would prefer to settle the matter with you as opposed to taking the property through foreclosure. Mortgage lenders are increasingly willing to work with borrowers faced with a hardship to accept a discounted payoff on a mortgage.
Important factors to consider:
a) Property in foreclosure or default
b) Personal hardship
c) Little or no equity in the property
d) At least 60 days until eviction date
e) The value of the home is less than the loan amount.
With a Short Sale, sellers avoid having to go through a lengthy foreclosure process and prevent the impact of a foreclosure on their credit score.
A foreclosure may reduce credit score between 200-300 points and stays on your report for around 7 years. Home loans and car loans will become nearly impossible during that time and/or future interest rates will be extremely high.
A short sale may impact a credit score as little as 50 points and several 'strikes' for the months of missed payments. Once the property is sold and the debt is considered satisfied, you may begin rebuilding your credit immediately. You may be eligible for another loan in as little as two years, and in the meantime, may still satisfy a credit check.
When agreeing to allow a Short Sale, not all lenders will completely relieve the seller of the balance of the loan. In some cases the lien holder requests the homeowner sign a promissory note to pay back some or all of the difference. In this case the homeowner may refuse the agreement and allow the foreclosure to proceed, which typically nets a second lien holder nothing.
Depending on the structure of the loan the lien holder could still pursue a judgment to pay off the difference even after a home is foreclosed and/or sold at auction.
There is no guarantee all the lien holders will accept the Short Sale. It is important to have an experienced negotiator working for you.
Also, the Short Sale of a non-primary residence may require payment of income taxes on the forgiven amount. When the lender decides to forgive all or a portion of a borrower's debt, the forgiven amount is considered income to the borrower and is liable to be taxed (see www.irs.gov). A consultation with a tax advisor is necessary to ensure that a borrower qualifies.
Ask a tax professional about your liabilities in a Short Sale.
To some extent, this depends upon the lender. As long as the hardship is real and the lender believes the loan is likely to become delinquent as a result, chances are the lender will process a Short Sale request.
The hardship letter sets the tone for the entire file, and a strong, well-worded letter is crucial. Below you will find a list of “hardships” that are common and frequently accepted by mortgage lenders.
• Family illness or injury
• Illness or injury in the extended family – particularly if it forces relocation
• Job relocation when the property is equity deficient
• Job loss or significant income loss
• Divorce or split of domestic partners
• Adjustment in mortgage payment or unforeseen increase in living expenses
This list is not all-inclusive; there are many other hardships a lender will consider. Please call Residential Law Group of Suzanne Watts, LLC to discuss if you qualify for a hardship.
Short Sale in one of several options:
a. Cure your mortgage default (bring your payments current);
b. Attempt a loan modification which adjusts the terms of your existing loan;
c. Refinance your mortgage with another lender;
d. Try to sell your home through normal channels/bring cash to the closing;
e. Attempt to get your lender to accept a deed in lieu of a foreclosure; and/or
f. File for bankruptcy.
Contact Residential Law Group and in a simple one-hour consultation will help you determine if a Short Sale is truly your best option.
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. Residential Law Group will compile your Short Sale Packet together in several days 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.
Short Sales can still generally be accomplished with these types of mortgages, although each one has different criteria.
A Short Sale may take 90 to 120 days or longer to complete. The process is complicated and takes a lot of time. To exercise the Short Sale option, you must act quickly. For more information see our Short Sale Timeline.
The estimated value of a property as determined by a real estate broker or other qualified individual or firm. A Broker Price Opinion (BPO) is based on the characteristics of the property being considered for a Short Sale. Some of the factors a broker will consider when pricing a property include: the value of similar surrounding properties, sales trends in the neighborhood, an estimate of any of the costs associated with getting the property ready for sale and/or the cost of any needed repairs. It is important to note that a BPO is not the same as an appraisal. The bank will use the BPO to determine the price it will accept on the Short Sale of a property.
When a Short Sale's debt is forgiven, the tax liability does not apply if that debt was used to purchase or improve a primary residence. This means that homeowners who negotiate with the lender to lower their original mortgage (used to buy their home) will not have to pay taxes on this forgiven debt.
The same applies for borrowers who took out a loan or refinanced in order to improve the house.
But when a loan is taken out to purchase a second house, consolidate debt, pay college tuition, or for any other purpose besides buying or improving the primary residence, the IRS may step in. The IRS treats any of this forgiven debt as money given to the homeowners, which they then used to pay down their loan. Thus, the borrowers are forced to pay taxes as if they received the money from the bank as regular income.
Homeowners, however, can avoid paying the tax if they can prove they were insolvent at the time of the Short Sale. Each Short Sale will bring different tax factors into the situation and it is imperative you speak with a tax advisor.
