Short Sale FAQ

What is a short sale?

A short sale refers to the sale of real property for an amount that’s less than what is owed on it. In this scenario, the bank agree to accept less than the full balance due on the debt and usually forgives all or a large portion of the difference.

Why do banks consider short sales?

To mitigate their losses, banks often accept a settlement of less than what is owed on the property to avoid the costly process of getting the property back through foreclosure.

Why not just let my bank foreclose?

Foreclosure is an expensive legal process for the bank, and it does NOT remove your obligation to repay the remaining balance due. The bank has to first give the property to a real estate agent to sell, often for much less than market value, and then pay out commissions and all customary closing costs. It makes more sense for the bank to accept it back at just a little below fair market value without the foreclosure costs.

When should I consider a short sale?

Consider a short sale as soon as you feel the pinch. If finances are tight, you’re experiencing a hardship, and you don’t see a light at end of the tunnel, you need to look at your options. If you purchased your property within the last 5 years and are upside-down (the amount you owe is more than the value of your home), then you need to give a short sale serious consideration.

What qualifies as a hardship?

There are many situations that lenders take into consideration during the loan workout process, such as prolonged illness, medical bills, job changes, loss of income, a sharp increase in your adjustable rate mortgage, military duty, death of your spouse or co-borrower, incarceration, divorce, excessive property damage, and natural disasters. You’ll need to write a hardship letter (click here for a sample) to your lender that is honest, sincere, and brief.

Can FHA, Conventional or VA loans receive a short sale?

Yes!

How long does a short sale take?

It can take up to 90 days from the time of the offer to get an approval from the banks. Depending on the bank, some short sales can take a little as 30 days.

Who benefits from the short sale?

Short sales are a win for everyone involved. You get the financial relief you need while avoiding foreclosure, mortgagors and lenders get the majority of their money back, and the realtor receives commission from the sale as part of the total amount of the debt forgiven by the bank.

What if I owe exactly what my home is worth?

Short sales have been touted as being available only for folks who are in or close to foreclosure, but short sales work even if you’re not behind. If you have never missed a mortgage payment, but have a negative equity position, you may still qualify for a short sale.

Why would my property have negative equity?

Here are a few common reasons:

  • You bought at the height of the market, which has now declined.
  • You paid more than the property was worth.
  • Your neighborhood has become less desirable for any number of reasons, so property values have declined.
  • You purchased the home with little or no money down, you want to sell within a few years of purchase, but the property value has not increased yet. Therefore, costs associated with selling the property may create a balance due at closing.
  • You refinanced the home with a high appraisal value and now have little or no equity.
  • You bought in a brand new subdivision or a recently developed area that either has not yet fully developed or has not yet changed appreciated in value.
  • The market is soft (aka “a buyer’s market) because there are either too many new homes and/or too many existing homes available for sale.

What if my home is already in foreclosure?

If you act quickly, your foreclosure sale can be suspended during the short sale process.

How much will a short sale cost me?

We strive to complete the entire short sale process without having the seller bring any money to closing. Since 2007, some lenders changed their policies and there are certain expenses that the lender might not pay, such as Home Owners Association dues, certain escrow fees, and some minor closing costs. It is a good idea to set aside $500 – $1000 for these incidental expenses. Although this may sound high, it is usually less than one month’s mortgage payment. We work to get the lender to forgive your unpaid taxes and unpaid mortgage payments, as well as pay all of the realtor fees and customary seller closing costs associated with the sale.

How do I know if I qualify for a short sale?

Fill out this quick questionnaire and we will respond to you by the next business day to discuss your qualifications further.

What possible tax issues might I have with a short sale?

You should consult with a CPA or tax expert as to the tax consequences of a short sale. You can learn the basics by visiting the IRS website. When you owe someone money and that person forgives the debt, the IRS looks at the forgiven amount as income to you. The Mortgage Forgiveness Debt Relief Act of 2007 does provide that shortfalls in owner-occupied primary residences will NOT generate tax liability for sales in 2007, 2008 and 2009.

Will my lender send me a 1099 tax form on the debt forgiven?

In our experience the majority of lenders do not pursue filing a 1099, but they do have the right to report the amount they have forgiven in a short sale transaction to the IRS. If they do report it, your tax obligation will be far less than the debt forgiven. For example, for one client who had $30,000 forgiven, their additional taxes were just $1,300 for that year. Foreclosure would also have a much more devastating effect on you than paying the taxes on a short sale.

What tax issues arise if I have to short sale my rental property?

You need to be extremely careful in the short sale situation on a rental property, as it requires delicate handling for many reasons, such as the challenge of showing a property for sale when you have tenants. Vacant investor/rental properties can often go to the bottom of the negotiator’s stack. California has enacted laws that penalize a landlord for receiving rent but not paying the mortgage. Contact a tax expert or CPA to make sure you have a plan to address any tax consequences in advance in order to avoid or minimize your tax liability.

What is a Deed In Lieu?

A Deed In Lieu essentially gives you the same result on your credit report as foreclosure. If you have two loans, Deed In Lieu is not an option for you.

How will the short sale affect my credit?

Banks have the option of submitting the short sale to the credit bureau as either “paid in full” or “settled for less than full balance,” which are better statuses then bankruptcy or foreclosure. In a short sale, the bank is simply allowing you to pay less than you owe and all collection activity stops, so a short sale will actually help your credit.

Will I ever be able to buy another home?

Yes, as long as you are working with a good short sale expert who understands all the important details of a short sale negotiation. As of November 2008, you need to have a closed short sale with no deficiency followed by 2 years of good credit to qualify for a new home loan. If you enter into foreclosure, it can take at least 5 years of good credit before you are eligible.