SHORT SALE QUESTIONS & ANSWERS

WHAT IS A SHORT SALE?

A "Short Sale" is when your Lender agrees to take less money than what is owed to them due to a hardship on the part of the Seller.

WHAT A SHORT SALE IS NOT?

A Short Sale to avoid foreclosure is NOT a "get out of my mortgage free card".  A Seller MUST be able to demonstrate a valid, financial hardship.  A Seller who is merely "upside down" on their mortgage and wants to sell is NOT a potential Short Sale client.  A Short Sale client has to be financially insolvent.

AM I ELIGLBLE FOR A SHORT SALE?

In order to qualify for a short sale, you must have already missed, or know that you are going to miss, a mortgage payment. The property must be put on the market for sale and must show an effort to be sold at current market value. Some people believe that a bank will accept any amount on a short sale, but this is not true. The bank will negotiate, but in order to qualify for a short sale, you need to get as close to market value as possible.

1. Job loss
2. Divorce
3. Death of a wage earner
4. Inheritance
5. Business failure
6. Military service/relocation
7. Incarceration
8. Damage to property due to a natural disaster
9. Too much debt

Please note that these timelines can vary by lender and that the above timeframes are meant to provide a general timeline, again taking into account that nearly all lenders are overwhelmed with short sales. 

• Reinstatement - If the reason a homeowner missed payments was temporary and it has been resolved. A reinstatement is a one time payment of all delinquent funds in full.
• Forbearance or Re-Payment Plan - If the issue that caused the homeowner to miss payments was temporary, and the homeowner is not able to make a onetime reinstatement payment, they may qualify for this. The lender allows the buyer to pay the missed amount over a period of time, or they place the missed payments on the end of the loan.
• Deed-in-Lieu of Foreclosure - Also known as the “Friendly Foreclosure”, the property owner essentially gives the deed back to the bank.
• Mortgage Modification - If the homeowner does have the means to come close to affording their mortgage payments, the Lender(s) may allow them to modify their mortgage.  

I have two loans, can I still do a Short Sale?  (* a line of credit/HELOC is a 2^nd mortgage)

• Yes.

Will Lender's consider Short Sales on both primary and investment properties?   

• Yes- Owners of investment properties, and/or 2^nd home properties that sell through a short sale, may be liable for the debt forgiven amounts that the Lender will send via a 1099.  

Is a Short Sale "right" for me?  

• Mortgage Lenders are increasingly willing to work with borrowers faced with a financial hardship to accept a discounted payoff on a mortgage. If you are faced with a hardship, and are unable to meet your obligation on your mortgage, your Lender would prefer to settle the matter with you as opposed to taking the property through foreclosure. As you consider the option of pursuing a short sale, remember your Lender is looking to limit any potential loss on your loan. By completing a Short Sale, your Lender has arrived at a solution that is, for them, much better than a foreclosure.

What sort of hardship would my Lender consider legitimate?  

• To some extent, that will depend upon the mortgage company considering the short sale request. Generally, as long as the hardship is real and the mortgage company believes the loan is likely to become delinquent as a result, the short sale request will be processed by the Loss Mitigation Department. A big key to getting Loss Mitigation to accept a hardship is to submit a strong hardship letter. The hardship letter sets the tone for the entire file. We would be happy to provide examples of hardship letters upon request

*Very Important Note: If you have a FHA/VA Loan, or if you have PMI Insurance (private mortgage insurance), or have filed for Bankruptcy (or going to), you may not be eligible for a Short Sale.  Let your real estate agent know any of the above before listing your property.

What about my credit? 

• The big key here is to avoid foreclosure. By nearly any measure, a foreclosure is the most damaging event a credit status can encounter - worse than bankruptcy. In the course of getting your Short Sale approved, you may miss your mortgage payments, and these will show on your credit. But, by avoiding foreclosure, you will likely be able to resume normal borrowing (car loans, credit cards, consumer goods and such) relatively quickly. Your credit will recover much quicker from the credit dings of a few late mortgage payments, if you keep your other accounts current. Always stay on top of your consumer credit. So, consider allocating your funds to meet basic necessities (food, utilities, household needs, auto expenses and such) first. Beyond paying for necessities, plan to pay other bills to keep as many accounts current as possible. Keep “necessary” accounts current when deciding which credit bills to pay. If you are using a credit card to temporarily pay for necessities, you want to be sure to not jeopardize the availability of that account. A Short Sale may be just one part of a larger effort to get through a tough period. I want to help make it possible for your credit to recover quickly.

Will I still owe money if I get foreclosed upon, or if I do a Short Sale?  

• There is an issue as it relates to the deficiency and the infamous 1099. The "deficiency" is the difference between what the homeowner owed and the amount the property sold for. When you complete a short sale, the Lender is required to report that loss to the IRS. If this is your primary residence, the IRS cannot tax you on the deficiency anymore - please see the link for more information. http://www.whitehouse.gov/news/releases/2007/12/20071220-6.html
• The Lenders and the IRS are 2 separate areas you have to deal with. The Lenders may ask any borrower to sign an unsecured promissory note before the Bank will approve a Short Sale. Lenders may also pursue a Deficiency Judgment against borrowers and attempt to collect the amount that was short. If a Lender is asking you to sign an unsecured security note, you better believe if you go into foreclosure they will probably file a Deficiency Judgment against you - and it will be for a much higher amount.
• If the property is not the borrower’s primary property, and the borrower is truly insolvent and their debts are higher than their assets, there is a good chance that the IRS will not tax them as income on the deficiency amount if their taxes are filed properly. 

About Deficiency Judgements:  

• If Tom owes me $50,000 and doesn’t pay me, then I have two choices: 1) I can write it off (thereby forgiving the debt) that’s where HR 3648 may apply; or 2) I can go after Tom in court and pursue a judgment. A judgment is only the result of a court order.  The deficiency in a Short Sale can be settled by: 1) a court order, which is a judgment; or 2) the bank/lender gets the homeowner to sign a voluntary unsecured Promissory Note (a "Promise to Pay" in writing) before they will approve the Short Sale. Something you should know: 1) this Promissory Note is negotiable. The Lender is asking for it, but this is a part of the negotiation process. For more info on the 1099s and The Mortgage Forgiveness Debt Relief Act, go to http://www.irs.gov/individuals/article/0,,id=179414,00.html 

What are my possible tax consequences?

• Pertaining to the IRS:  If the borrower does not qualify for the tax exclusions above, then they may be required to pay taxes on the cancelled amount. The IRS defines the amount the borrower is ‘short’ as having been ‘cancelled’. It is required for the Lender that allows this debt cancellation to issue the seller a 1099 for the cancelled amount, and the seller is required to claim this amount as income.