In real estate, a short sale is the process by which homeowners can sell their home for less money than they actually owe on the mortgage. If the sale is approved, the mortgage lender will actually take a loss on the mortgage and usually ‘forgives’ all or a large portion of the difference. If a bank approves the discount of a mortgage, the home can be sold for a price lower than the amount owed without the seller having to come up with cash to cover the shortfall. The mortgage is satisfied and any foreclosure process stops.

You will likely qualify for a short sale if:

  1. You are at least 3 payments behind on your mortgage.
  2. You have no equity or negative equity in the home; the total balance owed to the lender is equal to, or greater than, the price at which the house can be sold.
  3. You have a financial “hardship” which is preventing you from paying the mortgage.
A hardship is the result of a circumstance beyond your control that forced you into a position where you can no longer afford loan payments. The only reason a lender will agree to a short sale is if they determine that a short sale will net them more money than proceeding with the foreclosure. Understanding the homeowner’s financial hardship plays a key role in the lender’s determination of whether or not it will be paid in full for the mortgage.

Lenders will approve the following “hardships”:

  1. Unemployment or loss of a primary income source.
  2. Inability to work due to a health crisis.
  3. Mounting medical expenses.
  4. Employment relocation.
  5. Business failure.
  6. Bankruptcy.
  7. Death of spouse or significant other.
  8. Divorce or separation.

The short sale is a multi-step process consisting of the following:

  1. Pre-qualifying you and your home with your lender.
  2. Hiring a real estate agent, setting the list price, and scheduling price reductions.
  3. Reviewing and submitting your financial information to your lender.
  4. Documenting predatory lending violations by the lender.
  5. Negotiating offers with your lender, buyers, and other third parties.
  6. Negotiating post-sale liability and credit reporting with the lender.
Short sales can be a win-win situation. Lenders get the majority of their money back, and avoid having to foreclose and sell the property as “Bank-Owned” which often means selling for less than the short sale price. Sellers, like you, will be able to get rid of their mortgage payments and move on with their lives while at the same time evade the foreclosure process.
  1. The highest possible sale price is important to you since you may have tax liability for the difference between the loan and the short sale proceeds or owe this amount back to the lender in the form of a deficiency judgment. In a short sale, you take proactive steps to receive the highest possible price on the open market. In a foreclosure, the price will always be significantly less, which increases your liability.
  2. If you take action so the lender does not have to foreclose, the lender will be more inclined to legally forgive the amount they are shorted instead of obtaining a deficiency judgment against you.
  3. Your credit will be negatively impacted for 3 to 5 years less than a foreclosure. If, however, you are not late on payments, your credit will be affected very little by short sale.
Banks have the option of submitting the short sale to the credit bureau as “Paid in Full” or “Settled for less than full balance.” The way the bank reports the settlement of your loan to the credit agencies will determine the effect on your credit score; it is possible that a short sale will have a negative effect on your credit score. However, on the credit side, a short sale is arguably the lesser of two evils, as a foreclosure damages your credit score for 3-5 additional years.

Other options include the following:

  • Cure your mortgage default (bring your payments current).
  • Attempt a loan modification that adjusts the terms of your existing loan.
  • Refinance your mortgage with another lender.
  • Try to sell your home through normal channels.
  • Attempt to get your lender to accept a deed in lieu of a foreclosure.
  • File for bankruptcy.
Property taxes are your responsibility until the date the sale is closed, when they become the responsibility of the buyer.
Even though every bank has a specific method of deciding how much they’ll accept on a short sale, they usually ask agents to list properties at market prices.
The commissions are paid from the funds the buyer places in escrow and since there is no equity in the house, the lender usually pays the entire sales commission.

No. All of the criteria must be met before a bank will even consider a short sale and sometimes a bank will not approve the sale if they believe the home is priced below market value.

A short sale can take 60 to 120 days or longer to complete. The process is complicated and time consuming, so you should act quickly to list your property it you are already facing a problem.
Your foreclosure sale will usually be suspended during the short sale process. That’s why it’s imperative that you contact us as soon as possible!
There are a number of factors to consider. For example, are you an investor or is the property your primary residence? Is the debt on the property “purchase money” or has the home been refinanced? If you’re an investor or if the property was refinanced, are you insolvent? You can see how the matter can become complex in very short order.
When a lender writes off part of a loan (discounts it) the portion written off is the equivalent of a cash infusion to the owner. This “mortgage relief” is then reported as income to you by means of a 1099C form. Even if you receive a 1099C and declare it as income, there is a good chance you will owe very little tax. This is because there is an IRS rule regarding “insolvency” which essentially says that, if you are insolvent (more liabilities than assets) at the time of the short sale, you don’t have to count the 1099C as income (instead you declare it, and then obtain the exemption).
In December of 2007, President Bush signed the “Homeowners Debt Forgiveness Act,” a new law providing that for a specified period of time homeowners who satisfy certain requirements will not be taxed on mortgage relief. Please consult your CPA or tax advisor regarding these issues.

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