Frequently Asked Questions about Short Sales

What is a Short Sale?

There is really nothing “short” about a short sale.  Many people refer to them as “quick” sales, but they are mistaken about what a short sale really is.  The easy definition is this:

A short sale is a real estate sale in which the net proceeds of the transaction are not enough to pay off all the liens on the property.

 

What are the benefits of doing a Short Sale?

There are several.  First, it relieves the stress of foreclosure and being harassed by the lender.  It also gets the borrower out from under a mortgage payment that they were not able to pay.  And it stops the monthly negative credit reporting for each missed payment.  Last, the borrower has the opportunity to negotiate a full settlement of all the liens on the property (1st mortgage, 2nd mortgage, equity lines of credit, property taxes, HOA dues, etc.).

 

Why do lenders allow a short sale?

For lenders, it is far more expensive to foreclose on a home than it is to approve a short sale. The lender avoids costly foreclosure proceedings, and short sales typically sell for more money than foreclosures.

 

How do I qualify for a Short Sale? 

The main requirement for a short sale is financial hardship.  A borrower’s hardship can be the result of unemployment, decrease in income, divorce, illness, medical bills, death of a spouse, bankruptcy, etc.  It used to be that lenders would not consider a short sale if the payments were current, but that is no longer the case (in most situations).

 

If I have equity in my home, will my lender allow a short sale?

Yes.  There may be other factors for the lender to consider, such as whether the borrower is in default on mortgage payments or if it may take a long time to sell the house at a high enough price to realize the equity.

 

Can I still profit on a short sale?

No – a seller may not receive proceeds from a short sale.  This is because the lender is agreeing to take a loss on the sale, and so any money generated from the sale (other than closing expenses) must go to the lender.

 

Can any Realtor do a Short Sale?

Short Sales are much more challenging and more complicated than conventional sales.  Many Realtors choose not to do short sales.  In fact, basic real estate licensing training does not include short sale training.

It is extremely important to work with a Realtor who understands the process and has closed SEVERAL short sale transactions.

 

How much time do I have to start a short sale?

In pre-foreclosure situation, “Time is of the Essence.”  If the borrower is in default on the mortgage payments, the clock is ticking on the foreclosure proceedings.  North Carolina is a “non-judicial” foreclosure state; essentially, this means that lenders can foreclose very quickly.

 

Do I have to be in default on my mortgage payments in order to do a short sale?

In the past, many lenders would require that the borrower be behind on their payments (sometimes as much as 90 days behind).  However, that has changed.  Most lenders now realize that a buyer may be current, but that the borrower’s money is about to run out.  Or, the borrower may have other hardship circumstances that will indicate imminent default.  Federal guidelines have also changed, allowing many lenders to move forward with a short sale without the borrower being delinquent.

 

Do I need an attorney in order to do a short sale?

The law does not require this, but it’s always a good idea.  Keep in mind that the ramifications of a short sale are huge (tax implications, settlement of debt, etc.), so an attorney is best to advise on these things.

 

How will a short sale affect my credit rating?

This can vary, but some estimates are that short sales will lower a person’s credit score by 50-100 points.  Each lender differs in how they report to credit bureaus, but often the loan will be noted as “paid” on the credit report, with a footnote that says “settled for less than amount owed.”  Though it is a mark on the credit report, it is more favorable than a foreclosure, which typically lowers a credit score by about 250 points.

 

After a short sale, how soon can I buy another home?

Borrowers who have done a short sale can usually by another home in about 2 years.  However, borrowers who go through a foreclosure may have to wait 7 years or longer.

 

What are the tax implications in a short sale?

Consult a tax accountant as each case varies. Generally, taxes are reported as a loss to the lender and a gain to the buyer. If the lender forgives $50,000 on your mortgage, you would receive a form 1099C showing income in that amount.

However, the Mortgage Forgiveness Debt Relief act of 2007 allows a tax exemption on debt forgiveness of up to $2 million on the principal residence.  This is for purchase mortgages only – meaning the mortgage you took out to purchase your home.  An attorney or tax professional should be consulted to work out the details.

 

 

Can I get relocation expenses in a Short Sale?

Under the Home Affordable Foreclosure Alternatives program (HAFA), some homeowners will earn a “relocation incentive” up to $3,000 to cover moving expenses.  Some individual lenders, such as Bank of America, have their own relocation incentives; they can sometimes be quite sizeable.

 

Can the lender come after me in the future after doing a Short Sale for the deficiency?
It depends.  However, a borrower should always ask their attorney if the short sale approval letter (issued by the bank) specifies a full satisfaction of the debt.  This is the most important stipulation of any successful short sale negotiation and should be the goal from the outset.

 

Who will pay the Realtor’s commission and attorney’s fees?
In a short sale, attorney fees and real estate commissions are subtracted from the money going to the lender.  The lender evaluates each offer based on the expected net proceeds from the sale, so all seller closing costs should be factored into this amount.

 

How long can I stay in my home? 

Sellers can remain in their home up until closing, just as in a conventional sale.  In many cases, a short sale will delay the foreclosure action, so the seller ends up getting more time to stay in the home.