What is a short sale?
A short sale occurs when the market value of a property is less than the outstanding balance on the mortgage. The lender(s) agree to accept less than what is owed on the property in order to avoid a possible foreclosure situation. Upon approval from the lender, the seller is able to walk from the property limiting their potential credit damage and tax liability. You should note that short sales may not be for everyone, call or read on to see if it is a viable option for you.
Is a Short Sale Right for Everyone?
NO! There are too many agents that make it sound like anybody can do one, with very minimal credit consequences, that the bank will give you a full release of your debt and you can happily move one and buy your next home in two years. The bottom line is that these agents make it sound like it this to attract more business. This is NOT a one size fits all solution. Every person’s situation has to be assessed by a professional during a consultation. So please read the answers to these questions and when you are ready call Christopher Terry at 508.646.4777 X105, where he will give you a FREE, NO OBLIGATION 1 hour phone consultation to determine what solution is best for you, and what your likely outcome will be.
What are the CREDIT benefits of doing a short sale vs. foreclosure?
There are two parts and scenarios that need to be considered for this answer. Let’s start with how it will be reported to the credit bureaus. While in cases of short sale and foreclosure, the delinquent mortgage will negatively affect their credit rating, at least short sellers will have type of verbiage stating that they worked out a deal with their lender. Such terms reported by lender are “debt settled for less than what was owed”, “debt settled”, “debt settled with agreement” or some other similar verbiage dependent on each lender. A short sale can possibly be less damaging to your credit point wise compared to a foreclosure which mortgage and credit experts say that, after bankruptcy, having a foreclosure on your credit report is the worst result for your credit score.
The next situation that plays out as to your credit damage is whether you are late on your payments or not. Once you stop making payments lenders will report you 30, 60, 90 days late all the way out to 150 days late which all contributes to the degradation of your credit. If you have two loans, then the damage can be even greater. People who are late on their payments will suffer much more severe credit damage than those who never miss a payment and do a short sale. And YES, you can do a short sale even if you are not behind on payments. (See below)
People who successfully complete a short sale may also qualify for a mortgage at a reasonable interest rate in as little as 24 months. So, if buying a home is a future goal, then a short sale is the better option for many families. Fannie Mae and Freddie Mac have recently changed their guidelines (August 2008) stating if you have a short sale on your record, you may be able to buy another home in 24 months with financing that is ultimately going to be backed by them. While if you have a foreclosure on your record you will have to wait 5-7 years with financing backed by Fannie or Freddie.
Are there TAX consequences of doing a short sale vs. foreclosure?
Every situation is different for each person, so it is important to consult with a tax professional, CPA, tax attorney or someone who is qualified to make this determination for you. But here is some information to get you started, after which you should confer with a CPA to see if any of this applies to you. When you do a short sale or a foreclosure the lender is allowed to write off the loss and pass it on to you as income in the form of a 1099-C. The IRS considers this income for you and is taxable. For example, you borrowed $200,000 to purchase a home, but only were able to repay $175,000 in the short sale, you will receive a 1099-C for that $25,000 and possibly taxed on that according to your tax bracket.
It is important to understand tax implications can apply whether you do a short sale, deed in lieu or a foreclosure. Please consult a CPA or Tax Professional.
Can My Lender Come After Me for the Difference?
There are two types of loans, “non-recourse” and “recourse”. A “non-recourse” loan is one you obtained to initially purchase the home. If you do a short sale with a “non-recourse” loan, some attorneys feel you should be protected and not have to worry about the bank coming after you. Other attorneys feel that the Civil Code procedure does not address the short sale issue and does not protect “non-recourse” loans, only a foreclosure does. The bottom line is there is no precedent set in court and no lender has challenged it that I know of, yet. It is important to have an attorney explain to you the Civil Code of Procedures, as we cannot give legal advice.
If you have done any type of refinancing or obtained any cash out financing or have a Home Equity Line of Credit taken out after the date of purchase, then these are considered “recourse” loans and the ability is there for a bank to come after you for the difference if you go through a short sale. Unless you receive a short sale approval letter specifically stating that they will not pursue a deficiency judgment or some other verbiage of that sort. Every lender issues a completely different approval letter with different verbiage, so it is important to review your approval letter when it is issued. This is one reason why we use attorney negotiated short sales, they will help you review your approval letter so that you fully understand whether the verbiage and whether or not the lender will come after you. It is also our goal to always get you a full release from any liability from your bank when obtaining a short sale approval, and we have an excellent success rate of approval letters.
The ultimate goal of a short sale, however, is to get a full release in an approval letter which will absolve you from having to pay back any deficiency.
If I can't Get an Approval Letter Removing the Deficiency, then Why Would I do a Short Sale?
If you are worried about a lender coming after you or your financial future, then you might not want to. But some homeowners are willing to accept an approval letter with a without a deficiency removal for the following reasons:
- To stop the payoff clock and stop incurring future or larger deficiency, or payoff.
- To avoid a foreclosure on their credit.
- To settle the deficiency issue at a later date.
- To try and do the most responsible thing and get the bank the highest price possible for the home.
- To avoid any attorneys or additional fees out of pocket to dispose of the home.
- They simply will take their chances and file for Bankruptcy if the lender does try to collect.
- They simply will take their chances that the lender will not come to collect and “write off” the loss instead.
While any or none of these reasons may apply to you, it is important to understand every homeowner has different levels of comfort and risk tolerance, personal goals, and opinion on the matter. You will always have the chance to review your approval letter with an attorney before selling your home and you can cancel your listing at any time prior to entering into an escrow with a buyer without any fees paid to us.
If I Sell "Short", How Can I Pay You?
Our real estate fees will cost you absolutely nothing. We have a network of qualified attorneys who will negotiate your short sale with your lienholders to have our fee paid through the transaction, costing you nothing. Your attorney can typically negotiate to have the lender pay for all the costs associated with selling the home. Also, any past property taxes and possibly any past HOA dues outstanding, allowing you to have to pay nothing out of pocket. There have been recent changes however from some lenders in what they will and will not pay for. One of the costliest is past HOA dues and past water/sewer charges. Each situation is completely dependent on which lender you have and your personal scenario.
How Would I Know If I Qualify for a "Short Sale"
In order to be eligible for a short sale and for us represent you we must be able to prove to the lender that you are a victim of a “hardship” and therefore unable to continue making payments on your mortgage. A hardship situation is one that is the result of some extenuating circumstance that forces the borrower into a position where they can no longer afford their mortgage payments. While every situation is different, some frequent examples of hardship include:
- Unemployment or loss of primary income source
- Inability to work due to health crisis
- Mounting medical expenses
- Employment relocation
- Failure of business
- Death of spouse or significant other
- Divorce or separation
It is best though to get a free consultation to see if you would qualify.
When Should I begin the Process?
As soon as you realize that you will be in a situation that will prevent you from being able to continue to make your mortgage payment. The process starts with you and inaction will ultimately result in your lender having no choice but to foreclose. Foreclosure and Short-Sales are time sensitive and time-consuming negotiations. The sooner we can begin the greater the chances of success are with your lender. There is no need to wait until your lender sends you a notice of default or initiates foreclosure proceedings. Time is of the essence. Call Chris today for a FREE Consultation.
Do I have to Stop Making Payments?
No, not Always. So, you called your particular lender, and they told you that you could not do a short sale unless you miss some payments? Don’t believe it to be true! These people who answer the phones at these mortgage companies are low level personnel who do not care about your credit. We always recommend that homeowners continue to make mortgage payments and would never suggest otherwise. Every borrower's situation is different, and a short sale can be done while staying current on your mortgage payments. However, recently more and more investors (owners of loans) deny short sale requests, due to the fact that there have not been any missed payments. Fannie Mae, FHA, and some other investors are starting to claim this once again. The important thing to note, is that if you are able to afford your payments, you should continue making them. Many times, in short sales you need to gather further information from the lenders to determine what they want and are willing to do. If you have a true hardship and simply cannot afford your payments, well then there is no need to worry. Be sure to call for a consultation before to decide to miss any payments if you don’t have to.
How Long does a "Short Sale" Take?
Depends on many different factors. Who your lender is, how long it takes to get an offer, how many loans you have, if you are behind on payments, the list goes on and on. With an inexperienced agent it could take 6-8 months or longer! We have an average turnaround time of 4 months with many being done in 30 - 60 days. The quickest approval we have received was 7 business days.
Why Would a Lender Agree to a Short Sale?
In most distressed property situations, a foreclosure is the last resort option for both the lender and the homeowner. A short sale gives the lender the option to cut its losses up front and avoid the expense of a foreclosure and possible greater losses in the future. Lenders are in the business of making loans, not owning real estate. Whether they agree to a short sale or decide to foreclose they are going to take a loss. With a short sale the matter is resolved in a shorter time frame and statistics have shown usually with much lesser loss, giving a better return on the lender's investment than a lengthy foreclosure process.
What about a Loan Modification?
In the potential solutions tab of this website, I review the pros and cons of potential homeowner solutions. If it is your intention to keep your home, then YES, a loan modification should be one of the first things you pursue. There are two ways to do a loan modification. One way is to do it yourself, the other is to pursue professional help.
If you do it yourself, be prepared to provide a substantial amount of information to your lender. The process can take 3 - 4 months. I have posted some links in the Resources section of this site.
If you decide to hire a professional be sure to do some research first. Companies have been springing up everywhere making claims that they can help. Check the Resources section of this site for more info.
Do I Need an Attorney?
In many cases, YES. Your ultimate goal is a short sale approval letter releasing you from any deficiencies, we are members of networks with attorneys who specialize in this. Attorneys do cost additional fees, however these fees are negotiated with your lender just like any of the other costs to sell. Real Estate agents and brokers are not qualified to properly explain the legal and tax consequences of a short sale. It is recommended that homeowners considering a short sale seek independent legal and tax advice and counsel. Please feel free to contact us for more information regarding our No-Cost Attorney Negotiated Short-Sales program.
How Do I Get Started?
The first step is to call Christopher Terry for a FREE, No-obligation 1 hour consultation at 508.646.4777 X105. He will set a time to consult with you, either in person or over the phone. No-obligation, No Fees.
IMPORTANT NOTICE: EZ Home Search Real Estate is not associated with the government, and our service is not approved by the government or your lender. Even if you accept this offer and use our service, your lender may not agree to change your loan. If you stop paying your mortgage, you could lose your home and damage your credit rating. The brokerage and owners of this website assumes no responsibility nor guarantees the accuracy of the information provided and is not engaged in the practice of law nor gives legal or tax advice. It is strongly recommended that you seek appropriate professional legal/tax advice regarding your rights as a homeowner.