Short sale FAQ

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Frequently Asked Questions

What type of property qualifies for a short sale?
Banks may consider a short sale for various reasons. A home in any location, size, style and condition may be considered.
Normal steps to start the short sale process.
The property must be in distress and have a sales offer in writing. Discuss the potential short sale option with the homeowner. The homeowner must sign an authorization to release form. You must have a signed sales contract for an amount less than what will cover all of the sellers' costs. Contact the Loss Mitigation department at the bank.
Fax your offer along with the following to the bank.
Include a cover letter explaining why the offer is less than full price, the sales contract, justifying comps for the area and pictures, if you have them. A net sheet or closing statement (a sheet that shows the bank exactly how much they will net after closing costs, taxes, etc. are paid). A hardship letter from the homeowner that mentions the dreaded word... bankruptcy. Estimate a cost of repairs using retail repair prices that the normal homeowner would pay for these items.
What happens to the homeowner's credit?
Keep in mind that the agreed upon price is payment in full. However, the homeowners may still owe the difference between the mortgage balance and the discounted amount via a deficiency judgment. If granted, this judgment will affect the homeowners and their credit report just as any other judgment. You must get the bank to agree to accept payment in full without pursuit of any deficiency judgment. In addition, the difference between the mortgage balance and the short sale may be declared as income on your income tax return by means of a 1099. Homeowners should speak with their accountant for advice.
What other options are available?
Since Fannie Mae and Freddie Mac have additional programs to assist sub prime borrowers, many lenders are more willing to offer loan modification options. This option can extend the term of the loan, add on delinquent payments to the loan principal, and/or reduce the interest rate to make the loan more manageable for the homeowner. Also, there may be an option to utilize a repayment plan that requires homeowners to increase their monthly payments until the loan is current. Check with the mortgage lender and a real estate consultant who specializes in short sales. It may be possible to refinance an adjustable rate loan with a Federal Housing Authority (FHA) or Conventional Fixed Loan. Note that lenders will not postpone a foreclosure just because a property is listed, although they may delay the process, if you have a reasonable offer in the works. The ideal candidate for a short sale is still making loan payments and has a credit rating worth preserving. Otherwise, it may not be worth going through the complicated process.
What are the seller's options if a short sale is rejected by the lender?
There are a variety of reasons a bank will reject a short sale - from too low a price to too many files on the loss mitigator's desk. You can look for another buyer or even try resubmitting the same contract. A short sale might be rejected if the loan is less than a year old. In this case, the loan servicer that bought the loan may require the original lender to buy it back.
What financial liability will the sellers incur as a result of a short sale?
Many lenders ask sellers to sign a promissory note for all or part of the difference between the proceeds of the short sale and the debt obligation as a condition to a short sale. In such cases, the note gives lenders the right to sue a seller and attach other assets if the note is not paid when due. According to many professionals, it's important to understand this difference if you work in a non-recourse state which may not allow the lender to pursue a deficiency judgment against a seller for any deficiencies after a property is foreclosed. Seek the advice of an attorney and your lender to determine what financial obligations exist for both parties involved within your state.
Are there tax liabilities as a result of a short sale?
Seek the advice of a tax expert. The IRS requires lenders to submit a Form 1099 stating the forgiven amount. Sellers who meet the Internal Revenue Service definition of insolvency (either in bankruptcy or with debts exceeding assets) may not have to pay taxes on the forgiven amount. The U.S. House of Representatives has introduced the Mortgage Cancellation Tax Relief Act (H.R. 1876), which would eliminate taxes on any debt forgiven on a principal residence through either short sale or foreclosure. Ask an account or attorney to provide more information on this bill.
Are For Sale By Owners qualified for Short Sales?
Homes that qualify for short sales are identified primarily by word of mouth. However, we have agents that specialize in short sale counseling which happens prior to filing bankruptcy. For Sale by Owners are another source since many homeowners look for ways to cut their costs when selling their property. Their concern may not be warranted because many FSBO's don't realize that the bank covers the commission. With many more adjustable rate mortgages ready to reset to higher loan amounts in the next couple of years, short sales represent a growing sector of the market.

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Short sale FAQ

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