Short Sales F.A.Q.
Short Sales F.A.Q.
What is a Short Sale?
A “Short Sale” is when all parties holding liens against a property agree to accept less than is owed to allow sale of the collateral. Basically, the lenders and any other lien holders agree to the sale of the property for less than what is owed to them. Why would a lender agree to this? Because of the decline in property values many properties do not have any equity left in them. And, due to the increase in property taxes and insurance as well as adjustable rate mortgage resets plus any unexpected hardships such as job loss or illness that a homeowner may encounter, many homeowners can no longer make their monthly mortgage payments.
A short sale benefits the lenders as they do not have to take back and resell a house with all the foreclosure and holding costs that are incurred. Lenders are in the money business not the real estate business.
What are the Benefits to me?
1. A short sale greatly reduces the damage done to your credit .
A short sale results in the paid-off mortgage noted on a credit report as “settled” or “satisfied in full but for less than the full amount” or something similar. This is scored by the credit models as a paid collection account, and along with the late payments listed will cause your credit score to drop in the short term but within 12-24 months will have very little or no effect at all on your credit score.
2. You avoid having a “Foreclosure” recorded on your credit report.
A foreclosure is an event recorded in the Public Records that stays on your credit report for 7 years. The judgment (deficiency balance) reported with it is valid for 10 years and can be renewed for an additional 10 years at the lender’s request. Although a bankruptcy can erase a deficiency balance the foreclosure event remains on your credit and in terms of credit “hits” the most damaging.
3 . With a short sale you will likely avoid a Deficiency Judgment.
First mortgages sold short are typically written off unlike a foreclosure. When a short sale occurs the balance of the mortgage not satisfied with the proceeds of the sale (the deficiency) is written off in most
4. There is no cost to you.
The Realtors commissions and processing fees are paid by the lender at the time of sale.
5. Wait time until you can receive another mortgage.
Depending on the type of mortgage (FHA, VA. CONV), the wait time is significantly lower than if your home is foreclosed on before you can qualify for a new mortgage. Sometimes there is no wait at all.
Why would my lender(s) accept less than the outstanding debt?
After the lender does an appraisal on the property and discovers that the value is less than the payoff, the lender will decide if it is worth further legal actions and cost. A business decision is made to either continue foreclosure action or accept the short sale offer.
What are the Consequences to Me?
1. Possible consequences are the issuance of a “1099-C” by the lender .
If the property is your primary residence (homesteaded) then the lender will issue a 1099-C. On December 20, 2007, President Bush signed H.R. 3648 “The Mortgage Forgiveness Debt Relief Act of 2007”. This benefits homeowners who participate in a short sale or foreclosure of their primary residence. Under current law, if the value of a property declines and a bank or lender forgives a portion of the mortgage, the tax code treats the amount forgiven as income that can be taxed. This new bill creates a three-year window for homeowners to pay no taxes on any debt forgiveness they receive. And this bill has been extended through 2012.
If the property is not your primary residence, the lender will issue a “1099-C” for the difference between what was owed to them and what they received. It will be reported as income to you from the cancelation of a debt and may be taxable only if assets exceed liabilities at the time of the sale.
That generally isn’t the case or the bank won’t approve the short sale anyway.
To address this issue, IRS Form 982 can be used when filing taxes to exclude the amount of discharged indebtness from the homeowner’s income resulting from the issuance of a 1099-C. There is also an IRS publication entitled “Questions and Answers on Home Foreclosure and Debt Cancellation. We suggest that you consult with your accountant or tax attorney and if he/she is not aware of Form 982 then give him/her a copy to review.
2. Another uncommon but possible consequence is a Deficiency Judgment.
The lender has the option of issuing either a 1099-C or retaining the debt but not both. A deficiency judgment is a judgment filed in the public records for the difference between what was owed and what was received by the lender. Your Lender would have to file a lawsuit in court in order to get a judgment.
Am I a Candidate for a Short Sale?
Before considering a short sale, the lenders will evaluate both the homeowner and the property. They will request documents to review that will allow them to determine whether to accept, reject, or counter the short sale offer. The following outlines what the lender will be asking while reviewing the short sale package.
Borrower (Homeowner) Profile
1. Does the homeowner have sufficient monthly income to make the monthly mortgage payments after reasonable living expenses?
2. Does the homeowner have assets that can be used to make the mortgage payments? Do liabilities exceed assets?
3. What has happened to cause the homeowner to no longer be able to afford to pay the mortgage? Remember, before being approved for the mortgage you had to prove you could afford to pay the mortgage!
4. Does the homeowner understand that they will not receive any money at closing? If the lender is taking a loss on the property, you, the homeowner, are certainly not going to benefit monetarily.
5. Does the homeowner understand there is no guarantee? (However, we will be working diligently on your behalf).
Property Profile
1. Does the property have any equity? If yes, you can sell the property without a short sale.
2. Does the property require any repairs?
How do I get started?
1. All lenders require that your property be listed with a Realtor. Choose a Realtor experienced with the short sale process to ensure the best chance of success.
2. Sign the documents provided by your Realtor.
3. Gather together the remaining documents in the Required Documents Checklist
4. Your Realtor/Certified Distressed Property Expert will begin processing and negotiating your short sale.
Timelines
Foreclosure
Florida carries out foreclosures through court proceedings. The length of time can vary widely but currently the process takes 6-24 months.
1. Homeowner misses a monthly payment. After 30 days delinquent the loan is considered “in default”
2. Lender files a court action and records notice of a pending lawsuit against the homeowner. This is called the “Lis Pendens” and as of November was typically after 4-5 months of missed mortgage payments.
3. Homeowner is served and has 20-30 days to respond to the lawsuit.
4. The Motion for Summary Judgment Hearing is set and homeowner is notified on the Hearing date.
5. The Sale date is set 20 – 120 days after the hearing depending on the Judge’s discretion.
6. The Court issues a Notice of Sale containing the location, date, and time.
7. The property is auctioned at the Courthouse. If it is sold, the new buyer takes possession. If it is not sold, the bank takes possession. Either way, the homeowner must leave if they haven’t already done so.
8. The lender files a Foreclosure Judgment at the courthouse against the homeowner.
9. Currently the entire process is taking 9 - 24 months from the time the homeowner misses the first payment to the auction date.
Short Sales
The Short Sale process is typically quicker than the foreclosure process although it depends heavily upon where the homeowner is in the foreclosure process (if the homeowner is in the foreclosure process), how quickly an offer can be obtained, and how quickly or slowly the lender responds to the short sale package submission.
1. Realtor lists the property on the MLS.
2. Realtor provides homeowner(s) with a list of required documents to get together.
3. Realtor reduces the listing price until an offer from a buyer is obtained.
4. Realtor and homeowners deliver all necessary documents to Short Sale Operations
5. The Short Sale package is put together and submitted to the lenders.
6. A Loss Mitigation Specialist is assigned to the case, usually 2-6 weeks after package submission to the Lender.
7. A “BPO” (Broker’s Price Opinion) or Appraisal is obtained by the lenders.
8. The lenders accept, reject, or counter the short sale offer. Now is the time for the loan payoff negotiations which can last several weeks.
9. The lenders agree to the loan payoff.
10. An “Approval Letter” is issued by the lenders stating the terms of the approval. The homeowner must sign this letter stating that they understand and agree to the terms.
11. The closing date is usually set by the lender and all parties now work quickly to close the transaction.
Required Document Considerations
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Hardship Letter
Handwritten is best. Put in everything that led up to this unfortunate situation (loss of job, sickness, divorce, increase in taxes, insurance and HOA fees, etc…) The sadder the better. Be sure to sign and date it.
2. Examples of Hardships:
Unemployment/Job Loss
Underemployment/reduced wages or hours
Divorce/Marital Difficulties
Injury/sickness of Borrower
Injury/sickness of Family Member
Death in the Family
Loss of Renters/Tenants
Mortgage Payment Adjustment
3. Financial Considerations:
Your lender wants to see that you really can’t afford the mortgage payments any longer.
If, for example, you have $60,000 in savings and are no longer making the mortgage payments because the house has declined in value and you just want out of it, the lender is unlikely to approve the short sale. Be aware that discrepancies or a big gap between current income/assets and the income assets used to obtain the loan may indicate mortgage fraud, unless employment or expense circumstances have drastically changed.
4. Supporting Financial Documentation will be required in ALL cases
Last 2 years tax returns with W-2’s or 1099’s
2 months Bank Statement(s)
2-3 months pay stubs
Profit and Loss statements if self-employed
Other sources of income (retirement, disability, social security, etc…)
5. Lender Hardship Packages:
Many Lenders require their own short sale paperwork to be fully completed before proceeding with your short sale request. Upon receiving your information and analyzing your file your We will send you the necessary paperwork required by YOUR lender. We will also review your file with you and make any suggestions that may be beneficial to a successful short sale.
