Short Sale FAQ’s
What is a “short sale?”
When you “short sell” your home, your lender agrees to accept less than the full amount you owe as a settlement of your account and will charge off, or “forgive” the remaining balance on your mortgage. Over 90% of our clientshave no obligation to pay anyone once we have completed the short sale of their home. Your lender will report the amount of debt they have forgiven to the IRS using a 1099 form.
How Do I Know If I Am Eligible For Short Sale
Just complete the simple questionnaire on this website and we’ll call you back within 24 hours and let you know. Or, call me directly and I can tell you if you qualify in a few short minutes. Having closed over 100 short sales in our office, I know exactly what conditions your lender is looking at when considering your application for a short sale.
It is a general misconception that there must be some serious “hardship” in your life in order to qualify for a short sale. The fact is that many lenders will agree to accept a short payoff on your loan just because you owe too much! In fact, the more “upside down” you are, the more likely it is that your lender will do a short sale just because you owe too much.
The reason for this is that the cash generated from the sale of your home is much more valuable to banks today than what they might get if they sold your mortgage. Many banks today are actually profiting on paper when you short sell your home. You’d be surprised how motivated your lender is to have you short pay your mortgage in today’s economy…they need the money for other investments
Isn’t it Easier Just to “Walk?” Why Should I Short Sell?
There are a couple of reason why short selling is better than walking away:
1. Reduce damage to credit. If you have any desire to purchase a home in the foreseeable future, or are interested in avoiding the severe damage a foreclosure will do to your credit, then you should seriously look at short selling.
First, let’s look at the credit effects you subject yourself to if you walk away and let you home go through the complete foreclosure process. First your score drops significantly each month due as you accumulate more late mortgage payments. These “dings” will stay with you for some time.
Then once the bank files a notice of default (NOD) and starts the formal foreclosure process, your credit report get’s hit again because you were “in default.”
If you fail to remedy the situation via a short sale, or making your back payments (plus interest and penalties) they will order your home to be sold via a “trustee’s sale.” This last step is an additional negative credit event, if completed, will show up as a “foreclosure.”
To add further injury, if you fail to vacate the property in a timely manner after the bank repossess your former home, they will quickly remove you via an eviction proceeding with also slams your credit and makes it more difficult to obtain rental housing.
It is estimated that a full blown foreclosure, without eviction, reduces your credit score by between 250-280 points.
With all of the government and lender efforts currently in place to prevent you from foreclosing, a foreclosure is now view as a far worse credit event than even bankruptcy!
A short sale on the other hand, once completed will result in the initial damage done via the missed mortgage payments (if any) and an entry on your credit report that simply says “account settled for less than full amount owed.”
Industry experts agree that a short sale will drop your score, on average, by about 80-120 points. Many of our clients short sold their homes without missing any payments and have reported to us that their scores dropped by less than 50 points!
A significant change which makes short sales an even more attractive option has to do with when you can qualify to purchase a home again in the future. Guideline changes enacted in August 2008 now stipulate that a borrower with a foreclosure may not be eligible to buy again for up to 5 years.
These same guideline changes state that those with a short sale in their past can purchase again in 2 years. This is a huge difference if you plan on buying again while the market is likely to still be down on home prices. Of course these “time to buy again” figures assume one has maintained clean credit after they have finished with their foreclosure or short sale.
THE FACT IS, IF YOU ARE BEHIND IN YOUR MORTGAGE PAYMENTS, YOU HAVE ALREADY DONE OVER 60% OF THE TOTAL DAMAGE TO YOUR CREDIT A SHORT SALE WILL RESULT IN.
2. Exit Your Home On Your Terms. One of the advantages of selling your home via a short sale is that you have more involvement in the process leading up to your’ moving from your home.
With a foreclosure, the bank is very much in control of the process and makes decisions which affect how soon you will be vacating your property. Often this is done with only the bare minimum communication that is required by law.
With our clients, we are in communication with their lender(s) on a weekly basis pushing their short sale through the lenders loss mitigation departments. By maintaining this level of communication, we can keep you informed every step of the way. This can make the process much more bearable for most sellers.
More importantly, you can sell your home and know where you stand with your former lender. Even in the rare cases where you may still owe one of your lenders money, you at least know how much you owe and the terms under which you can settle the remaining balance.
I’ve Been Told to Expect a Huge Tax Bill if I Short Sell. Is That True?
Normally yes. The IRS has a name for a debt that is forgiven: INCOME. As such when a lender forgives a borrower of debt, they issue the borrower a form 1099C which showed the amount of debt they “forgave.” Your bank is going to want to write off the loss they incurred on your loan as debt relief. The IRS requires that your lender tell them who benefitted from that relief which is why you will receive a 1099C after your short sale.
However, in an effort to help homeowners from what would amount to a tidal wave of tax liability, George W. Bush signed the Mortgage Debt Relief Act of 2007 (MDRA). This bill took effect January 1st, 2008 and prohibits the IRS from considering forgiven debt as taxable income if the debt relief was for a purchase money loan (the loan you originally got to buy you home) on your principle residence. If you did not refinance and pull money out of your home, you are insulated from taxation on the forgiven debt.
If you have refinanced and taken money out of your home in order to make “significant improvements,” this forgiven debt is also excluded from taxation under the MDRA.
If you refinanced and pulled money out for other purposes, or are short selling a vacation or investment property, the IRS considers forgiveness of these debts as taxable events unless you qualify for insolvency under IRS rules.
The IRS does not require that you pay taxes on forgiven debt from a short sale if, at the time of the short sale, you were considered “insolvent.” Insolvency means that you had a negative net worth…that the sum of your debts, including the mortgage debt, equaled an amount greater than your assets. This is a very common situation for our clients and many, with the help of their CPA or tax attorney, have used IRS form 982 to prove they were insolvent at the time their short sale was completed and have legally avoided a potentially very high tax liability.
Since we are not tax professionals, please consult with your tax advisor to determine your potential for tax liability as a result of a short sale.
What About California State Taxes?
In April 2010, the State of California passed The Conformity Act of 2010 which conforms California’s tax code with that of the federal government under MDRA.
As mentioned above, please consult with your tax professional if you are concerned about your potential tax liability as a result of a short sale.
Will the Bank Come After Me For Money After the Short Sale?
A properly negotiated short sale results in the bank accepting the proceeds from the sale as “payment in full for less than full amount owed.” Bank’s don’t consider short sales unless they plan on forgiving a portion of your loan balance. Your bank issues you a 1099C BECAUSE they have written off the debt which means it is not legally collectable.
The only usual exceptions to this are some home equity lines of credit (HELOC) which is a personal debt similar to a credit card. Even if you have a HELOC, your lender will prefer to negotiate a reduce settlement rather than pursue you after the short sale is complete.
There are two parts to each loan, the promissory note in which you guaranteed to repay the loan REGARDLESS of what happens to the house, and trustee’s deed which is a lien placed on the property. In order for the short sale to be completed, only the lien need be removed.
If you choose an agent with little or no short sale experience (the average agent sells .4 homes per year and is part time let alone a specialist in short sales) you may end up having your home sold to another party and you are still liable for the unpaid balance of the loan.
Why Would the Mortgage Company Agree to Accept my Short Sale?
Banks are not in the business of being benevolent. They exist to make money and their decision to accept a short sale in your situation has nothing to do with helping you.
Their decision is based on minimizing their loss on what they now view as a bad loan. Foreclosures are not only devastating to the homeowner, there are extremely costly for the lender.
The costs of a foreclosure over a short sale can be significant. In most cases, the lender will recover as much as 25%-30% less of the value of the home if they foreclose instead of accepting a short sale.
Attorney’s fees, recovery costs, carrying costs and marketing fees make foreclosing a last resort for lenders. They are not in the business of owning homes and have to expend a great deal of energy and money recovering them and selling them. This is why the credit industry looks so unfavorably on a foreclosure.
For all these reasons, lenders are making short sales easier to process than ever. Even loan insurers like Fannie Mae and Freddie Mac are pushing lenders to work out short sales quickly to prevent the flood of foreclosures we’ve been seeing in the past 18 months.
My [Brother, Sister, Friend, etc…] is a Realtor and He/She Says that Short Sales Are a Waste of Time. They Don’t Close.
This is a common thing we hear. It has some basis in truth and stems from the fact that most agents who try to do a short sale don’t understand how the process works. They don’t have experience, don’t understand the inner workings of the lenders loss mitigation departments, don’t know how to manage the expectations of the seller and/or the buyers involved and, as a result, had a bad experience.
Like most things in life, being a successful short sale agent requires repetition. The more you do, the better you get. Most agents coming off the roaring market we enjoyed are used to the quick and predictable money they could make selling homes. Short sales can take time and definitely involve much more work than a traditional transaction. As a result, many agents don’t like short sales because the process takes longer which means they have to wait, and work, for their commission.
Our view is that our clients were there for us during the boom times, we need to be there for them during the down times. Plus, short sales are the right thing to do for the homeowner, the lender and the community. Short sales do close. We do it every week.
Do All Short Sales Close
No. Like anything involving people, lenders don’t always see things they way we’d like. If done properly, and if started in enough time prior to the trustee’s sale date, most will close.
The most common reason short sales do not close is that the home owner does not contact us until the day before their lender auctions their home to the highest bidder. Why do they wait? The most common reason homeowners wait until the last minute is that they believed their lender was actually going to give them a loan modification. If you lender is pursuing foreclosure (notice of default or notice of trustee’s sale) AND says their reviewing your loan mod request…you are not likely going to be getting a loan mod.
Lender do not pursue foreclosure on homeowners who are attempting a loan mod if they (the lender) thinks they are a good candidate for modification.
We close 97.3% of the short sales we start.
Do I Need To Be Behind In My Payments To Qualify For A Short Sale?
No. Many of our clients have to short sell because of a job relocation. They still have enough income to make payments, but now have to leave the area and have no need of a second home.
Often times we have clients whose job demands that they maintain excellent credit, in these situations we can complete a short sale without our client having ever missed a payment. As a result, the actual credit damage can be very minimal, as low as 35 points, and the home owner can actually buy again in their new community within one year of short selling their home here in Southern California.
The real question for many home owners is “Why SHOULD I continue to make payments if this home is now an investment gone bad?”
I Have a 2nd Mortgage On My House. Can I Still Short Sell?
Yes. However, the process may take longer. The 2nd mortgage companies are more aggressive in their efforts to recover money on their loans and they can delay approval in their attempts to do so.
The most important thing for you to remember is to inform us if you have a 2nd mortgage. ALL mortgages must be involved in the short sale. If the 1st mortgage accepts, but the 2nd does not, the short sale cannot proceed. ANY loan that uses your home as collateral must be dealt with for a successful short sale. This means that home improvement loans, lines of credit (HELOC’s) and other similar loans you may have taken out over time have to agree to the short sale.
Additionally, if you have knowledge of other liens or judgments, you will need to advise us so we can prepare your short sale package accordingly.
What if I’m Delinquent on my Property Taxes?
This must be negotiated with the lender at the time we are seeking approval of the short sale. In order for the sale to be completed, the buyer will need to get title to the property free from any liens or past due taxes (Their lender won’t let them purchase a home and inherit your past due taxes).
As a result, if you do not have the financial means to pay the taxes yourself these funds must come from your lender or the buyer of the property.
How Much Do I Have to Pay You to Short Sell My Home?
Nothing. Our fees are paid by the lender with whom we negotiate the short sale.
How Long Does a Short Sale Take
At least 60 days. Add more time for complicating factors such as 2nd mortgages, bankruptcy, IRS liens, etc.
Additionally, the loss mitigation departments at most lenders are swamped with short sale requests. This can slow the process at some banks.
Keeping in mind that short sales take more time, you must act quickly in order to give yourself the time needed to complete the sale before the foreclosure process goes too far. Nothing is worse than realizing you could have done something about the situation but acted too late to stop foreclosure.
My Home is in Bad Shape…Can I Still Short Sell?
Yes. Remember, a short sale is like any other sale in terms of the buyer/seller relationship. The difference is that a 3rd party, your lender(s), have to approve of the deal. The lender might actually be more motivated to complete the sale as your problems with the home will become theirs if they don’t help you sell the house.
Can My Brother, Sister, Father, Etc…Buy My House Through a Short Sale.
It depends. Some lenders require that all short sales are an “arms length transaction.” You or your family can in no way benefit from then lender accepting this huge loss.
However, many banks have no such requirement and, as long as we disclose your intent, will approve the short sale of your home to a relative or a friend.
I Talked to a Guy Who Says He Can Save My House. Is This Possible?
If he’s going to give you a bunch of money to get your mortgage current then, sure, he can save your house.
Unfortunately, there are many predators out there who make an industry out of “helping” distressed homeowners. They typically involve some scam in which they try to talk you into giving them title to your house in exchange for letting you live there while they become your “partner” in whatever scheme they are selling.
Here is a list of “Don’ts that you need to know:
1. Don’t EVER allow an investor/buyer to negotiate with your lender directly to purchase your home as a short sale. These people are not agents and are not required by law to act in your best interests. In many situations, these folks negotiate the purchase of your home and leave you stuck with the debt liability. If you’re going to lose your home, at least give yourself the chance of not having to look over your shoulder for years to come, worried about debt collectors.
2. Don’t EVER pay someone up front to do a short sale, loan modification or any way take some action in which they can “save” your home. Your lender has spent a great deal of money hiring and training people to help you work out your loan to the best of their ability. If that fails, a competent real estate agent, who only gets paid if they produce positive result for you and the lender, is your best bet. “WE STOP FORECLOSURE,” “WE CAN SAVE YOUR HOUSE,” these are all usually attempts by those trying capitalize on your circumstances and obtain up front fees. They get paid whether they help you or not.
3. Don’t EVER deed your property to someone until you are sure they have paid your loan off. These scam artists promise to save your home if you just give them the deed. You have now given them the right to use what is now their property while you are still responsible for the mortgage payments.
4. Don’t EVER cave into the pressure an investor/buyer might put on you to sell your home to them at some steep discount “before its too late.” Chances are, the home is worth more than the mortgage amount and they are trying to steal it by taking advantage of a bad situation. The elderly, with equity built up over years of ownership are most vulnerable to this type of theft.
5. Don’t EVER DO NOTHING! We are absolutly amazed at how many people just let a foreclosure run its course; not trying to work their loan out with their lender, not exploring a short sale and not seeking help. They then have to face the disaster of foreclosure and the prospect of being sued for the lenders loss. There are options. Working with your lender, through loan modification or short sale, is almost always preferable to foreclosure because you are trying to do the right thing. If it results in a far quicker recovery from a credit standpoint and your ability to not have to worry after it is over, why wouldn’t you take action?
I Have A Luxury Home & Owe More Than $1,000,000 On It. Will My Bank Allow Me To Short Sell?
Absolutely. However, short selling a luxury home takes experience, additional care and planning. The financial situation of many of our clients who own homes with loans in excess of $1,000,000 is more complex as they often own their own businesses and have used their home to help finance their business and/or investment activities. There are often several loans on the property with many having been refinanced several times.
The process of using the short sale to eliminate this huge debt burden is also referred to as Strategic Default.
Short selling in this situation usually requires planning in advance of submitting our request to your lender so that deficiency and tax liabilities can be eliminated, minimized and/or planned for. We typically will be working with your CPA or attorney to ensure that the process produces the best outcome given your circumstances.
The biggest mistake we see sellers making in this situation is hiring an agent who 1) Does not understand the short sale process or has limited experience completing short sales. This is your typical neighborhood agent. 2) Does not have enough business experience to understand the complex legal and tax implications that strategic default requires.
Most of our luxury home clients still have high income and significant assets. As a result, the government regulations and lender considerations are completely different than the typical homeowner would face. Hiring an inexperienced agent can be catastrophic to your estate and business interests. Make sure the agent you are considering knows what they’re doing. Ask to see results.
If you would like a private over the phone consultation with me to discuss your circumstances, please feel free to contact me personally at (951)314-1856.