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You are about to learn what a short sale is. Here are some common questions and some quick answers below.
1) What is a short sale?
A short sale is when a borrower must sell their home and the proceeds are less than the amount owed to pay off the mortgage balance. A short sale is needed for home owners whose economic situations command that they liquidate their interest in the property and who are not able to qualify for other other modification options. Simply put a short sale is when the value of the property has dropped below the current mortgage balance owed.
2) Can I be sure my bank will cooperate?
Banks DO NOT want to do a foreclosure. A foreclosure will cost the bank lots more than other options and data has shown that after a foreclosure the bank receives the property in much worse condition than other solutions because angry owners who have been foreclosed on trash the property before leaving. A short sale helps the bank preserve losses and helps the home owner protect their credit. When your a suffering a true distressed scenario your bank is more willing to allow a short sale as opposed to foreclosing on your home.
3) I have an FHA loan. Will my bank do a short sale?
Absolutely a bank will do a short sale on an FHA loan. In fact FHA has introduced the Pre-Foreclosure Short Sale Program or PFS that will pays the seller up to $1,000 at the closing just for going through with the program. This allows you to transition to more reasonable living costs without the impact of foreclosure.
4) Is it true that you have to be delinquent on your payments to do a short sale?
No you do not need to be behind on your mortgage to complete a successful bank short sale. There are more details below on what is required for short sale but it is important to know that a short sale can be completed due to the value of the house falling below the loan amount or if the seller has met with tough times. Basically you don’t need to be late just in a hardship situation. A reason for NOT approving a short sale is: You don’t like the neighbors. A real hardship is what is required for a bank approved short sale.
5) Will I have to pay a tax loss if I do a short sale?
In most cases you will not be required to pay taxes on the loss. In 2007 President Bush signed The Mortgage Debt Relief Act that eliminates taxes paid on the loss in a short sale. It was common practice for banks to deliver a 1099 tax form to the recent short seller that ordered the seller to pay a tax on the banks loss. This procedure has been prevented because of the depressed economy. Currently the Mortgage Debt Relief Act has been scheduled to last through 2012. Please consult your tax professional in regard to this matter because not everyone is protected. For instance an investment property sold by short sale is not covered by the Mortgage Debt Relief Act but there might be other options.
6) How much time does a short sale take?
A good short sale package is designed to get quick results. Many uneducated real estate agents will muddle a short sale out over 8 months to over a year and many times fail to ever close the short sale. A good short sale realtor will rapidly complete the short sale procedure and get your home sold in approximately 60 days from time of contract. Short sales are a tricky business and it takes realtors with the know how who will complete the short sale in a timely manner.
Here are some other options to consider before a sort sale.
A short sale is when a seller must sell their property and the proceeds are less than the amount owed to pay off the mortgage. A short sale is required for sellers whose financial picture or predicament dictates that they sell their home and they are unable to qualify for other loss mitigation options. A short sale happens when the property value has declined below the balance of the loan.
Before doing a short sale it is good to know your options. Often times if you are in default on your loan it is “curable” and there is a good possibility that you are able to replace lost wages or cut your expenses.
Special Forbearance – A special forbearance is a written repayment arrangement between you and your lender that comprises of a arrangement to reinstate your loan after it has fallen behind. Some options could include settlement over a several months, a cut of your monthly payment for a limited time, or a strategy for you to resume full monthly payments while delaying the missed payments. What your bank is doing is letting you get caught up with you payments.
Loan Modification – A loan modification is a permanent alteration to your mortgage. It also allows your loan to be reinstated and supply a monthly payment that you can provide. Modifications allow for a number of options such as dropping your rate of interest, or expanding the time to pay back the loan by re-amortization of the balance due. It’s is much like applying for a new loan. Not all loans will qualify for a loan modification.
Combining The Above – Sometimes your lender might combine the above to accomplish a preferred outcome. Every lender is a little different on how they carry out these issues. The idea behind the mitigation process is to keep you owning your house and assist you in recovering from a modification in your economic situation.
So what happens when there is no way of helping you recover and keeping you in your home? When loss mitigation is not a viable option or cannot work you are looking at a possible foreclosure. Before you throw up your hands and give in to foreclosure there are a few more options.
Deed-in-Lieu – Deed-in-lieu of foreclosure is simply giving your property to the bank by deeding to them. Essentially you transfer your house to your lender. This sounds like an easy out as opposed to a foreclosure but there are some things you need to know.
1) A deed-in-lieu as far as your credit report is concerned is just as bad as a foreclosure.
2) Banks don’t want your home. It results in a property on their books and selling properties is not what they like to do. Many lenders will not take a deed-in-lieu and want you do do a short sale instead.
Short Sale – A short sale allows you to sell your home and use the proceeds from the sale to pay off part or most of your mortgage. Most lenders are willing to accept a short sale instead of going through a lengthy and expensive foreclosure. As already noted this alternative is for borrowers whose financial state of affairs demands that they sell their property.
Below are a few circumstances that will allow for a short sale:
A declining housing market – This reason does not examine your credit or your financial position. This is when you are just upside down in your home and obligated to pay more than it’s worth. Remember you must be in a situation where you have to sell your home. A short sale cannot be used if you want to upgrade to a larger home.
The loan is in default or close to it – This is how a majority of short sales occur. There was a time when lenders would not do a short sale if all the payments were current. Mortgage lenders have now figured out that in many circumstances it is better to do a short sale before the payments are behind.
The Seller has Fallen on Bad Times – This is a short sale situation where the owner of the property is in a distressed state of affairs. A hardship letter is required in all short sales explaining the reason you are in need of a bank short sale. Sometimes a hardship description can be overdone. It’s good to know the guidelines for writing a good hardship letter. Your hardship letter should always declare that you request a short sale so that you can avoid foreclosure. Here are a few common hardships: (Divorce, Illness, Unemployment, Death)
You must also think about your assets when submitting for short sale. Your lender is going to require you to fill out a financial statement listing your assets. If the bank realizes you have extra cash you are not using they could deny the short sale because they see that you have funds to get caught up on payments. It is still possible for you to be granted a short sale but they might expect you to pay back the shortage with a promissory note. This can still become a win win option for homeowners who need to sell their home and has the ability to pay back a reduced amount of their mortgage loan.
Negative Amortization – Some finance programs that were formed ahead of the housing bubble were designed with a negative amortization. This means that each month the amount the borrower pays is not enough to cover the interest on the loan. This is a legitimate situation for a short sale.
Aggressive Secondary Financing – Throughout the housing expansion period some lenders were giving out second mortgages up to and even over %100 LTV. This is another situation that will be considered when requesting a short sale. These types of loans situations get a bit more difficult but can still be considered as a short sale.
A short sale is not an easy process but a good real estate agent can take away much of the burden. Spend some time interviewing realtors and find the right real estate agent for your predicament. Most agents do not understand the short sale process.