Short Sale Questions & Answers
What is a Short Sale?
A short sale is an arrangement between the current owner of a home and the bank that lent them the money to buy their home to accept an offer for less than the total amount owed to pay off the home. The “deficiency” is the difference between the amount owed and what the bank collects at the short sale. If the bank approves the discount on the mortgage, the home can be sold for a lower price without the seller having to come up with cash to cover the shortfall, and the mortgage is satisfied and the foreclosure process stops.
What type of situation is the short sale best for?
Most short sales are done on properties in foreclosure. This means the homeowner is at least 3 payments behind and the foreclosure suit has been filed by one of the mortgage lenders. Recently, more mortgages that are simply behind or ‘in default” are considered short sate candidates without actually being in foreclosure.
Also, the homeowner typically has negative equity or no equity in the home. In other words, the total balance owed on the mortgages is equal or greater than the price at which the house can be sold. This situation is growing increasingly common due to the easy availability of 100% mortgages (no money down) as well as the recent decline in prices. In addition, the homeowner must have some type of financial hardship that is preventing them from paying the mortgage. This is commonly job loss, medical bills, disability, or some other hardship.
A typical situation for a short sale is this:
Homeowner purchases a home for $100,000 in 2004 for 5% down payment; the mortgage balance is $95,000.
By 2005, the home’s value has increased and interest rates have declined so the homeowner refinances to pull cash out. Home value $120,000, new mortgage $120,000. In 2006, homeowner gets laid off and continues to make payments from savings, hoping to land a new job soon. By 2007, savings are gone and still no job. Homeowner begins to miss payments and decides to sell the home for $120,000. As the months pass. the home has not sold because values have dropped back to $100,000 and the foreclosure process has begun. The Real Estate Agent presses to lower the selling price to entice a buyer; however that would require the homeowner to come up with cash at closing to cover the mortgage shortfall. The homeowner is stuck in the house and the foreclosure is proceeding.
How do homeowners benefit from a short sale?
First and foremost, it relieves the stress of being in foreclosure and being hounded by the mortgage lender; and it allows Homeowners to get rid of their big mortgage payment and move on with their lives. A short sale allows you to stop the foreclosure and get a fresh start. In my experience, this is the primary benefit to homeowners. They are tremendously thankful to just relieve the burden that their home and mortgage have become. A short sale also prevents additional damage to your credit. Having some late payments and a foreclosure filed has already done damage to your credit. However, a completed foreclosure will do much more damage and lower your credit score tremendously. Obviously, if you have to declare bankruptcy, that is a huge black mark on your credit, A short sale results in the mortgage actually being paid off, which reflects positively compared to a foreclosure.
Why would a bank or mortgage lender want to do a short sale?
A common saying is that banks are in the business of lending money and do not want to own real estate. This is slightly misleading but is essentially true. When a bank takes a property back via foreclosure, it is a long and expensive process and often results in holding the property in their inventory as a non-performing asset, Banks have a limit to the amount of non-performing assets they want to hold. Once this limit is exceeded, they have strong incentive to get rid of the properties at discount prices.
For a lender, doing a short sale avoids many of the costs associated with the foreclosure process. Attorney fees, delays from borrower, bankruptcy, damage to the property, costs associated with resale, property tax, insurance, etc. All must be paid by the bank during a foreclosure. In a short sale scenario, the lender is able to cut its losses by getting rid of the property faster, again, this is particularly true in Oregon right now, not only because the real estate market is so depressed, but also because the Oregon foreclosure laws make the process of taking the property much longer and riskier for the lender than it is in other states.
Will a short sale ‘save my house”?
In the sense that you will be able to continue to live in the house, unfortunately the honest answer is no. A short sale is only done involving a legitimate sale of the home from the foreclosed owner to another unrelated party. Many of the cards and letters you have gotten have probably promised to save your house, however this is very seldom possible. I would recommend that you NEVER pay any money upfront or sign away your deed (In lieu of foreclosure) to someone who promises to ‘save your house’ from foreclosure. It is probably a scam. Read this for some more examples of how people will come to you offering their “help”.
Will a short sale “save my credit”?
The short answer is yes and no, a short sale can save you from the worst credit disasters. By defaulting on mortgage payments and having a foreclosure filed against your property, you have already done damage to your credit. Your credit score has declined and those negatives will stay on your credit report for some time. However, it will get much worse if you allow the foreclosure to continue and do not try to short sale the property. Once a foreclosed property is sold at auction, your credit score is further reduced and when the foreclosure is completed via eviction and repossession of the home, your credit will be even further damaged. If you can complete the short sale BEFORE either of these takes place, then you can prevent further damage to your credit. In addition, when the short sale is completed, it shows up on your credit as a “Paid” mortgage and a canceled foreclosure, which shows future creditors that you did take care of your obligation. If your situation eventually winds up in bankruptcy, then that is the worst item that could appear on your credit report and it will remain there for years and cause numerous difficulties in getting future credit. A short sale can help avoid this, but the key is not to wait.
I am NOT in foreclosure and I have missed NO PAYMENTS, can a short sale work for me or do I qualify for a short sale?
It is difficult to do a short sale if foreclosure has not been filed but it is possible if a couple of payments have been missed and there is a good hardship story. The lender must be convinced that they will NOT BE REPAID without the short sale. If you are not in foreclosure and you have not missed any payments, a short sale is probably not likely, but it is possible. The Key is to have a legitimate financial hardship that will keep you from making the payments. A short sale is not just an easy way out of a bad investment. If you are working and your house has just lost some value, that is just unfortunately a bad investment and you are responsible to pay the shortfall.
Short sales are when lenders agree to discount a mortgage for someone who has had legitimate hardships and who has little chance of paying the amount owed, You may be hearing stories that mortgage companies are hurting and they don’t want these houses and are giving big discounts away. Those stories are mostly urban myths and are not true. In fact, the opposite is happening, since profits are down, lenders are getting tougher when negotiating prices, They are not letting properties go cheaply without a very good reason. They will try ANYTHING to get you to repay the mortgage in full. A short sale is only a last resort, but we do know how to get lenders to agree to a short sale.
What if my mortgage is an FHA..,or HUD..,or VA mortgage?
Short sales can still be done on all types of mortgages though each one has different criteria.
What is “Financial Hardship” and why is it so important?
“Financial Hardship” is a critical part of the short sale equation. No matter what you hear about banks “not being in the business of owning real estate”, etc.; they DO NOT give homeowners a break easily. They require GOOD REASON to give a discount for a short sale. They have entire departments called “Loss Mitigation”, which means their entire job is to reduce the loss the bank takes on a bad loan. Giving big discounts to investors increases the loss on a bad loan so they don’t take it lightly, The ONLY reason a lender will agree to a short sale is if they determine that the short sale will net them more money than proceeding with the foreclosure. Understanding the homeowner’s financial hardship is a big part of the lender estimating whether they will be paid in full for the mortgage.
IF THERE IS NOT A LEGITIMATE FINANCIAL HARDSHIP, A LENDER WILL NOT APPROVE A SHORT SALE EVEN IF THE HOME IS WORTH LESS THAN THE MORTGAGE BALANCE.
Quite simply, the lender will make the borrower pay the shortfall if there is no hardship. Many homeowners try to use a short sale as a “get out of jail free” card to clump their poor investment. Lenders will not allow this and it is a waste of time to try. If you are employed and have some assets, but you have simply lost value on your home and want to sell, YOU PROBABLY CANNOT SHORT SALE. If you are current on your mortgage, IT IS VERY DIFFICULT TO SHORT SALE. Lenders need to see that you simply cannot pay them back before they will short sale. In order to try to short sale your home, you need to demonstrate a Financial Hardship or be in default on your mortgage. If you don’t have one of these, you should not attempt a short sale.
What do I do about my back property taxes when I do a short sale?
Just as in a normal home sale, property taxes are the responsibility of the homeowner until the date the sale is closed. Then they become the responsibility of the buyer or investor. If your property taxes have not been paid this will affect the negotiations between the buyer and the bank, so you must inform us or any buyer of those taxes owed.
Can I short sale my own house?
No, this would he illegal. A short sale must be an “arms length’ transaction. You cannot short sale your own house nor can close members of your family or friends do one for you. In a short sale, the lender is agreeing to discount the mortgage amount due to legitimate hardships; but not so that the homeowner can make a profit. No money from a short sale transaction can be paid to the homeowner (seller.) Lenders will not approve any short sale in which they suspect the foreclosed homeowner will profit.
Can’t I just go down to my branch or mortgage broker and talk to them about reducing my mortgage?
Unfortunately, things don’t work that way anymore in the banking business. Once you obtain a mortgage, it typically gets bundled with other mortgages and sold to other banks or investors. Oftentimes, the company to which you make your payments is not even the bank who holds your mortgage; they are simply paid to ‘service’ the loan. Also, once your mortgage lender begins the foreclosure process, the file is turned over to a loss mitigation company so the “lending” department or the branch no longer has anything to do with the loan. All negotiations regarding the short sale are done between the buyer/investor and whatever loss mitigation or asset management company works for the lender,
My house is really nice, why is your short sale offer so low?
Sellers often have an emotional attachment to their home and often feel an investor’s short sale offer is too low. It is important to remember a few things. First, the seller in a short sale can never receive any money in the transaction; therefore it should be of very little concern at what price the short sale is done. The only real exception is when the seller has tax liability concerns. Otherwise, the price should not matter to the seller. The important factor in a short sale is whether the lender will accept the price. Lenders OFTEN accept prices for short sales that normal homeowners or Realtors are surprised at. Discounts of 50% are no longer uncommon. This happens for several reasons:
1. Sellers are often in denial about how bad the market really is for housing and therefore how far the value has declined.
2. Lenders don’t like the foreclosure process any more than homeowners do. Lenders incur substantial costs during a foreclosure process that can last more than 12 months. They have attorney fees, filing fees, publication fees, sheriff sale fees, lost interest on the money that is tied up, property taxes, insurance, maintenance costs as well as the potential for vandalism of the vacant home. This is all BEFORE having to try to sell the home as a bank owned REO and pay commissions to do that. A short sale is a way to avoid some or all of these costs. If a lender calculates his cost of eviction at $50,000 for a house, they will often take a $40,000 loss on a short sale instead and they will be better off,
3. Lenders are an emotionless business. They simply look at the numbers and make a decision. If the numbers favor a short sale, they will accept even if it means taking a large loss. They do not want to wait; they want the deal done NOW. These numbers and factors are what a short sale investor is focused on, In a poor housing market, most of these numbers have very little to do with how nice a home is.
Are short sales guaranteed to work?
No. Even though short sales are increasing they are still fairly rare, as I have stated, all the criteria MUST be met for a bank to even consider a short sale. It is not easy to convince a bank that the market value of the home is lower than what they are owed. They do not like to take a loss on a loan.
What if a bank doesn’t accept the short sale?
Again, if the bank doesn’t accept the short sale offer, there is no transaction and the home is still owned by the foreclosed Homeowner and the foreclosure process continues.
How long does a short sale take, I need to get out now!
A short sale takes approximately 60 days to complete and sometimes longer. This is very important. This complicated process takes time; so to have the option of a short sale, you must act soon, If you wait until I week before eviction, no one can help you do a short sale. It is simply impossible. DO NOT WAIT.
What paperwork do I have to do to complete a short sale and what is the exact process?
There is some paperwork to do at the beginning that we can assist you with but most is handled by us. The homeowner must fill out a Borrowers Authorization form for each mortgage, allowing us to speak with the lenders about the short sale. The sale price of the home will mean very little to you as the seller once in a short sale. No money can go to the seller, nor will you pay any money at closing, the sale price and short sale details will simply tell the bank how much money they will net from the sale. That is the number that is the key. You will be asked to write a letter detailing the financial hardship that caused you to fall behind on your mortgage. Any other proof of your financial hardships such as bank statements, medical bills, pay stubs, termination letters, etc. should also be included. We will assist you in this process. After we have prepared and sent the entire short sale package to the lender, with an offer to purchase from one or more buyers.The lender will arrange a BPO, which is similar to an appraisal, to determine the value of the property. This can take a few weeks. Based on the BP0, the bank will negotiate with us on the details of the short sale and after several weeks, they will either approve or deny submitted offers. If approved, a date will be selected to close the transaction just like any other real estate transaction.
Why do I have to sign a Borrower’s Authorization?
In order to both determine if your lender will consider a short sale and then to actually negotiate the short sale, we need to be able to speak to your lender about the mortgage. The lender will only speak to people you have authorized them to speak with. By signing a Borrower’s Authorization, you give the lender permission to speak to my handpicked staff about your loan. That is all it does but it is necessary. An authorization must be filled out for each mortgage.
If you are not willing to sign this Authorization, we cannot proceed with your short sale.
Do I have to move after we do a short sate? Can I buy or rent my house back after a short sale?
Yes. After the short sale transaction, the buyer will own the house and the seller must move, just as in a normal sale.
In VERY rare instances the seller may be able to rent the home from new owner until the seller can get suitable housing. Those details would have to be worked out on an individual basis.
Can I buy or rent my house back after a short sale?
By law, owner can never resell the home back to the original homeowner.
I have heard that I could still owe taxes after a short sale, is this true?
Yes, this is true but it is not that simple. If this is a concern to you then you need to consult an attorney or CPA, but without trying to get too complicated, we can provide our experience with this problem. When a lender writes off part of a loan, it has to account for where that money went. In the case of a short sale, it is determined that the amount goes to the foreclosed homeowner, since it is their personal debt that is forgiven so that the house can be sold. The bank can account for this in one of 2 ways. Either the bank keeps the amount of the discount on the books as a bad debt or they can go through the courts to try to collect from you on the bad debt. Or, the bank can issue a 1099C form to you for the amount forgiven and that amount can be considered ‘income’.
In our experience, having the bank issue the 1099C is better far the homeowner for a couple of reasons. (Again, please consult a CPA or tax adviser if you have questions) When you receive the ‘l099C, the control is in your hands as to how to treat the 1099C income on your return. When the bank keeps the debt, the choice is in their hands as to whether they come after you to collect. Most importantly, even if you receive the 1099C and declare it as income, as you should do, there is a good chance you will owe very little, tax if any at all. This is because there is an IRS rule regarding “Insolvency’, which essentially says if you are insolvent (more liabilities than assets) at the time of the short sale, then you don’t have to count the 1099C as income. There is an IRS form to fill out to show you are insolvent. See www.irs.gov form 982.
The bottom line is the typical people who are in a foreclosure or short sale situation have little income or assets, so the 1099C is usually not counted as income or the tax rate you might pay is very low. You can call the IRS for free advice,
If you are concerned about owing a debt after the short sale, it is important to remember that if you do not use a short sale to satisfy your lender then the foreclosure process will continue. If the lender takes back the house and has to sell it for less than you owe, YOU COULD STILL BE HELD LIABLE for the amount they lost. This is called a Deficiency Judgment. The bank can go after you in court to collect the deficiency. So whether you choose foreclosure or short sale, you still have the potential to owe a liability to the bank, A properly presented Short Sale Proposal can alleviate this burden, In most cases the burden is forgiven. Clearly a short sale is the better way to go considering all things. So the short answer is that you can owe taxes both after a short sale or after a completed foreclosure; however, if a short sale is done properly the tax can often be avoided in large part. Again, each situation is unique.
My house needs a lot of repairs; can you still do a short sale?
Yes, though it can make the process more difficult because the price must be substantially lower. The key is to be able to show the bank’s appraiser all the work that needs to be done. Let us know if this is the case with your home.
My husband/wife/brother is also on the deed with me but doesn’t want to sell; can I still do a short sale?
No. ALL parties listed on the current deed or mortgage must sign the short sale purchase agreement. There are no exceptions to this.
I have 2 or 3 mortgages on my house. Can I still do a short sale?
Yes, it is important to know which mortgage filed the foreclosure or if more than one is in foreclosure, which filed first.
I have gotten dozens of cards and letters saying they can help me with my foreclosure but they never do, how is this different?
There are many different types of people who work in the ‘distressed property” area. Some are legitimate, some are not. Many claim, to be able to work miracles on your credit or save your house. Most will either charge upfront fees or cannot really help you. Most will only “help you’ if you have a large amount of equity in your home, They will use several techniques to get you to sell your house to them and take some of your equity. Try your best to avoid them.
I have already declared bankruptcy; can I still do a short sale?
Yes, but it is more difficult. If the property is currently involved in a bankruptcy, the lender is not the only one who has to approve a short sale. The bankruptcy trustee will also have to approve it. This creates an additional layer of oversight and an additional party who wants to squeeze all it can out of the homeowner, It can still be done, but all conditions have to be perfect. If you are considering bankruptcy as a way to stop the foreclosure, be sure to get good legal advice, since it is possible that a bankruptcy may not completely stop a foreclosure. Lenders often can get the bankruptcy set aside to continue to pursue a foreclosure,
How long does the foreclosure process take?
Complicated question depending on what you consider the start of the “process” to be. Generally, the Bank will send a NOD (notice of default) to the owner. From that time it takes between 120 days for the house to go up for auction, during which, you can pay the FULL delinquent amount to “cure” the foreclosure proceedings.
Will I have a higher interest rate on future mortgages or will they be harder to obtain?
It all depends on the arrangement between you and the lender. If you pay them a promissory note for the deficiency, then the damage to your credit will be minimal and you shouldn’t have a problem obtaining loans in the future. If the lender shows “settled for less than the amount due” on your mortgage trade line, some future lenders will look at that as a foreclosure. Some lenders even report short sates as foreclosures. Here’s what to do: Obtain, in writing, your lenders policies on short sale credit bureau reporting. Then ask your mortgage broker how that affects your ability to qualify in the future. Generally, when you get a new mortgage, as long as you don’t have a foreclosure, bankruptcy, or unsatisfied judgment, your ability to qualify will be the same as it is now (and your credit score needs to stay the same.)