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Short Sales



1. What is a short sale?

a. A short sale is a sale of property where the mortgage company has agreed to a discounted payoff, based on the market value of the property and the seller’s inability to pay the difference in the loan and the value of the property.

2. Who should look into a short sale?
a. Those struggling with their mortgage, especially if they must sell or if they have a hardship such as a divorce, job loss or transfer, disability, family crisis, family death, or health issue.
b. Having a property that is worth less than the mortgage is not enough of a hardship by itself.

3. Why is a short sale better than a foreclosure?
a. A foreclosure will lower a credit score more than a short sale.
b. A short sale seller can recover in two years to qualify for a mortgage again. A foreclosed owner must wait three years to get a new FHA mortgage and seven years to get a new conventional mortgage.
c. The property is transferred to a buyer in a regular closing, and the neighborhood does not have a vacant foreclosure, which affects property values and sometimes safety in the area.

4. How does someone qualify for a short sale?
a. Most lenders will not consider a short sale until the owner is at least one month late on the mortgage payment.
b. The owner must provide the same financial information requested when the loan was applied for: two years of tax returns, two months of bank statements (checking and savings, not investment accounts), and pay stubs for 30 days, plus the paperwork to support the hardship being claimed, such as an unemployment benefits letter, death certificate, divorce decree, job transfer info, or disability statement.
c. Once there is a contract or offer to buy the property, the lender will want to see the contract and a draft settlement statement to estimate its net proceeds. Some lenders will want to see the listing agreement and may even order a new appraisal, to be sure that the property is being sold at the current fair market value.

5. Can the seller ever get any proceeds in a short sale?
a. Some programs will allow the seller to have a “relocation allowance”. FHA will allow up to $1,000 and some conventional lenders will allow up to $3,000 under HAFA (the Home Affordable Foreclosure Alternatives). However, the seller may be required to use this allowance to pay for delinquent taxes, condo dues, homeowners association dues, 2nd mortgages, income tax liens, or other personal judgments and liens.
b. Other than these approved allowances, the seller can not receive any proceeds from the sale.
c. Sometimes the seller must still bring funds to closing to meet the minimum payoff required by the short sale lender.
d. Sometimes the seller must sign an unsecured promissory note to the payoff lender for a portion of the unpaid balance. This note survives the closing and is not a lien on the property being sold; it is a personal debt of the seller.

6. What is the time frame to complete a short sale?
a. Once the seller has submitted all financial documentation, and a signed contract and draft HUD-1 have been sent in, the typical approval period is 45-60 days. The approval may take longer if the lender is being asked to discount the payoff by a significant amount, depending on whether new appraisals must be done. All parties must be patient to complete a short sale.
b. Short sales can also be delayed by other title issues, such as negotiating payoffs with secondary lenders, homeowners associations, and other creditors.

7. What expenses will a Short Sale lender allow to come out of its payoff?
a. Most short sale lenders will approve a real estate commission up to 6%, as long as the seller is not one of the agents.
b. Tax prorations, attorney fees, and some seller-paid closing costs are generally allowed, but each deal is reviewed and approved on a case-by-case basis. The main component in the review is the net amount available to pay on the first mortgage payoff.

8. What are the legal and tax consequences for a seller who does a short sale?
a. The lender has the right to pursue collection of the unpaid balance (the portion not required to release the lien and allow the sale of the property). Some lenders will include language in their short sale letters that they will release the seller from further liability on the amount borrowed, but otherwise the individual lender makes the decision after closing on whether to continue collection efforts. Obviously every seller wants a complete release, but many times this is not approved by the short sale lender. Sometimes a lender will require the seller to sign a promissory note at closing for part or all of the remaining payoff; this is an unsecured note and is not a lien on the property being sold.
b. At the end of the year, the lender is required by law to send the seller a 1099-C (C is for “cancellation”) for the amount of forgiven or unpaid debt. This 1099-C is also sent to the IRS, and the seller may have income tax liability for the amount on the 1099-C. Some sellers will qualify for a waiver of all or part of the income tax liability, depending on whether they are selling their principal residence and whether the loan was their original mortgage from their purchase or a larger amount borrowed later in a refinance.

9. Are short sales harder than regular sales to get closed?
a. It is very important to work with experienced realtors, lenders, and attorneys to get a short sale done. This process is already difficult, labor-intensive, and time-consuming, and a seller is much better off by working with professionals who know how to deal with distressed property situations like short sales.
b. All parties must be patient, and buyers getting new loans need to get the longest interest rate lock possible.


If you are facing hardships and are considering a Short Sale. 
We will give you an in depth free consultation to evaluate all of your options.