Frequently Asked Questions about Short Sales

"Short Sale" is a relatively new expression to many homeowners, yet this type of sale has been part of the real estate market for many years.  Unfortunately, most Realtors aren't familiar with the process, which has caused a lot of confusion in the community, with homeowners and even other Realtors. 

What Is A Short Sale?
A Short Sale is when:

• A homeowner is authorized, by the bank, to sell for less than what is owed on the mortgage.
• The lender authorizes or accepts the sales price as a payoff.
• The seller avoids a credit-destroying foreclosure, and sometimes they can also avoid a deficiency judgment.

A short sale occurs when a seller needs to sell their property for less then is owed on the mortgage (s) and the lender allows a release of lien from the property. In most cases the homeowner needs to show a HARDSHIP of either financial, medical, job related, such as a job relocation to approve a short sale. Most times the balance from the short sale is forgiven by the lender or the balance is negotiated as part of the short sale. Each short sale scenario is different, as the lenders decision depends on the sellers’ financial picture, market value of the property in relation to the purchase offer price, the lenders investor’s requirements and their own Foreclosure ratios.

The seller won't get any money at closing, yet they will avoid the financial and emotional damage that a foreclosure can cause.  During our negotiations with the bank, we work to include a favorable wording for the forgiven debt of the mortgage, which can help the recovery of the homeowner.  And we're able to do so in many circumstances.

Why Would A Lender Agree To Lose Money?

• A lender loses significantly more money if they have to incur the additional expenses of a foreclosure, as opposed to accepting a short sale.
• Lenders are in the business of lending money, not owning homes.  The more money they have tied up with a property that they own, the less they have to lend out.

A short sale has a better return on investment to the lender than a foreclosure.  They are able to cash out of the loan faster than a foreclosure process. Plus they do not have the legal fees which are normally attached to a foreclosure.

How Does A Short Sale Help Me?

• It helps you avoid a credit-destroying, and an emotionally draining foreclosure process.
• Avoiding a foreclosure will help save your credit.  Typically a foreclosure will drop your credit score up to 300 points per loan.
• You avoid having a foreclosure on your credit report anywhere from 10 to 15 years, which affects your future purchasing power and interest rates.
• It could help you avoid a deficiency judgment from the lender after the foreclosure, as they try to recover their losses. 

I've already received My Foreclosure Notice.  Is It Too Late For A Short Sale?

• The short answer is no.  There are a few variables, though, that can affect the foreclosure timeline.
•  A Certified Distressed Property Expert, can help you extend the foreclosure timeline up to 6 months, and in many circumstances up to 7 or 8 months.
• A home sale can be done and approved, up to the day of the bank sale, or auction of the home.

As a homeowner, why would I choose to attempt a short sale?
Let’s face it. Bad things happen to good people.
 There are many reasons why homeowners find themselves in a position of default…change in mortgage payments, loss of job, health issues, etc. When you get behind on your mortgage payments, the lender will start the foreclosure process, no exceptions. If the foreclosure takes place, you have ruined your credit for a period of up to 10 years. You can expect your credit score to go down about 200-300 points* or more, making it impossible to make any future purchases using credit. A foreclosure is usually a required disclosure you must make on any credit or job application.
The lender may also file a deficiency judgment against you. A deficiency judgment can arise if the lender sells your home at auction for less than the mortgage debt. The lender then holds you responsible for the unpaid portion of the loan. The lender may take legal action to pursue payment, such as garnishing your wages.
A short sale is usually listed as settled debt, and is much less harmful to your credit. You can expect a decrease in your credit score of approximately 50 - 75 points*. The loan may be forgiven, and no deficiency judgment will be placed against you.

Is it true I will be given a 1099-C by the IRS, and will owe taxes on the unpaid loan amount?
This has been a major concern for homeowners who choose to do a short sale. Previously, the IRS had the ability to consider the forgiven loan amount as earned income, and you could be taxed on that income. However, recently the House Ways and Means Committee voted to remove the phantom income tax that previously haunted distressed homeowners on primary residences. Contact your accountant or attorney for further information on 1099's in a short sale.

I Haven't Missed Any Mortgage Payments.  Can I Still Do A Short Sale?

• Oftentimes, the lender will not consider a short sale if there have not been any missed payments.  That issue can be overcome if we can show a compelling reason (hardship) why the payments have been made, and why the payments are going to stop in the near future.
• We would need to show how the payments were made, and where the money came from.  If the payments were made with your credit cards, by borrowing from family members, or even if the money came from retirement accounts, as an example, it would help build the case.  This will not guarantee that the lender will accept the short-sale however, there are instances where they have done so.

How Do I Pay The Realtor Commissions, Taxes And Other Expenses Associated With A Home Sale?

• The homeowner doesn't pay any of the expenses associated with the sale of the home, such as commissions and other closing costs.  Those expenses are paid by the lender.  They are, however, included as part of the total shortfall that the owner would be responsible for, if the bank is successful with a deficiency judgment or promissory note.
• The bank may ask the homeowner to reduce the lender's loss by making a payment, if the homeowner has any "extra" money in savings accounts, etc., or by signing a promissory note.
• In December 2007, President Bush signed into law, the Mortgage Forgiveness Debt Relief Act, which eliminates the capital gain income tax that used to be levied on the forgiven portion of the primary residence's sale.  The tax is still in effect for second homes, and investment properties.

To speak confidentially with The First King Team   about your options, simply contact us.

WHAT IS A SHORT SALE?

A short sale is the sale of a property, with the authorization of the creditors, for less than what is owed on it. Short sales are done all the time. Whether it is the forgiveness of debt owed by a nation or an individual, it simply means that someone is willing to settle for less than what they originally anticipated. It's part of business. All lenders know that they will not win all the time. Risk and loss of capital is an anticipated cost in the lending industry. Changing economic conditions, conflicts, and Mother Nature are among some of the many causes of unforeseen situations that turn good lending contracts into bad. In the context of foreclosure on secured assets, a short sale occurs when debtors agree to settle their liens for a known amount of money as opposed to taking a chance at auction. Auction prices are often unpredictable and usually greatly discounted. Many lenders are willing to mitigate further risk of loss by making deals before auction. Bad debt is sold by lenders all the time. For instance, there is a huge market for unsecured credit card debt that is sold for pennies on the dollar to collection agencies. That's self-effectuated short sales. Lenders are more than happy to discuss resolution of aged debt. Their business is to lend capital, not dispose of foreclosed assets.