What is a short sale?

• What is a short sale?
  Also known as a real estate short pay-off or a pre-foreclosure workout, a short sale is an agreement with a lender to accept less than the amount owed by a borrower via a sale of the property to a third party. With this agreement, the lender releases the borrower from the mortgage, thereby preventing foreclosure.


• What are the advantages of a short sale?
  Minimize damaging impact to credit: Foreclosure can remain on your credit for up to seven years while a short sale usually gets reported as a “settled debt” and is significantly less damaging. With a short sale, your FICO score will not be as negatively impacted as it would be with a foreclosure, and you will be able to get into a new home much sooner as well.
  
  Minimize financial exposure/liability: In many foreclosure situations, the lender will ultimately sell the property at a significant discount once they foreclose and repossess the property. The homeowner can then be financially liable to the lender. While the same may be true with a short sale, the difference is with a short sale the homeowner is still involved in the process and can therefore contribute their input and have more control over the sale price of the property and the potential associated liabilities. In a foreclosure, however, once the lender repossesses the property, the homeowner is typically defenseless with respect to what follows next.
  
  
• How do I qualify for a short sale? What criteria must I meet to be considered in a “hardship” situation?
  In order to be eligible for a short sale, a homeowner must be able to prove to the lender that they are a victim to a “hardship” and are therefore unable to continue making payments on their mortgage.
  
  A hardship situation is one that is the result of some extenuating circumstance that forced the borrower into a position where they can no longer afford their mortgage payments. While every situation is unique, some common examples of hardship include:
  
  
  • Unemployment or loss of primary income source
  • Inability to work due to health crisis
  • Mounting medical expenses
  • Employment relocation
  • Failure of business
  • Bankruptcy
  • Death of spouse or significant other
  • Divorce or separation


• Keep Your Home Options
  The 4 options below are options that you might have to go through, before being able to qualify for a short Sale.
  
  
  • A Loan Modification is a change in one or more of the terms of a borrower’s loan, and results in a payment that the borrower can afford.
  
  
  • With a reinstatement, the homeowner brings the mortgage current by making up for all missed payments and paying any late fees and penalties.
    
    Typically, when foreclosure is a result of a temporary loss of income, the lender may agree to a forbearance wherein they will allow the homeowner to delay payments for a short period or negotiate a payment plan to make up for missed payments over the course of several months. The lender may also agree to some combination between reinstatement and forbearance, enabling the homeowner to delay payment for a short period and then bring payments current by a specific date.
  
  
  • A repayment plan enables the homeowner to submit payment of a portion of the past-due amount and penalties with future payments until the past-due amount and penalties are paid-off.


• What do I need to do to get started?
  In addition to the homeowner proving hardship, lenders require a specific set of supporting financial documents to consider a short sale.


• When should I begin the short sale process?
  As soon as you possibly can. Foreclosure situations tend to be extremely time sensitive. The sooner we can begin the negotiations with your lender, the greater the chances of a successful resolution. There is no need to wait until the lender sends you a notice of default or initiates formal foreclosure proceedings against you. Time is of the essence!


• How long does a short sale typically take to complete? Can the process be expedited if I am imminently facing foreclosure or an auction date has been set?
  Every short sale situation is unique and follows its own timeline. Typically a short sale is completed within one to four months from the time we have a complete short sale package ready to present to the lender. Having said that, we have successfully negotiated a short sale in as little as two weeks. Timing depends on how quickly we can begin negotiating with your lender. If you are imminently facing foreclosure or even if an auction date has already been set, the process can certainly be expedited and we have even had lenders postpone the auction date.


• What effect will a short sale vs. a foreclosure have on my credit?
  Foreclosure can remain on your credit for up to seven years while a short sale usually gets reported as a”settled debt” and is significantly less damaging. With a short sale, your FICO score will not be as negatively impacted as it would be with a foreclosure, and you will be able to get into a new home much sooner as well.
  
  ALM is not a credit counseling agency, but credit experts say that a foreclosure will typically reduce a borrower’s FICO score by 250 to 280 points and the borrower would usually need to wait more than 36 months before a lender will offer any kind of interest rate that makes sense. A short sale, on the other hand, will typically only result in an 80 to 100 point hit to the borrower’s credit and a significantly shorter waiting period before buying another home, usually about 18 months or less.


• What is my potential liability after completing a short sale? What is a deficiency judgment?
  As with all foreclosures, there are several potential tax and liability considerations when doing a short sale. With a short sale, however, these potential tax and other liabilities are typically less frequent and less severe.
  
  Tax ramifications: After completing the short sale your lender may decide to issue you a 1099 for the difference between the price your home sold for and what you owed, and you can later be taxed by the IRS on this amount as income.
  
  It is important to note that if specific criteria are met, the IRS may release the borrower from this tax liability. Furthermore, Congress is currently considering legislation that would eliminate this taxation of so-called “income” due to cancellation of debt.
  
  Lender recourse: In some states and with certain types of loans, lenders can pursue a court decision called a “deficiency judgment” making you personally liable for the remaining amount owed to them above the short sale price. In some cases, the lender may ask you to pay a portion of the difference back in the form of an IOU.


• Why would my lender agree to a short sale?
  In most distressed mortgage situations, foreclosure is a last resort for all parties involved. Simply put, both the homeowner and the lender usually want to avoid foreclosure at all costs. That is why lenders have come up with various alternatives to foreclosure, which they are typically very motivated to pursue prior to going to foreclosure.
  
  A short sale gives the lender the ability to cut its losses upfront thereby avoiding the expense and time of a foreclosure and potentially greater losses. Lenders want to make loans; they do not want to be in the business of owning and managing real estate. Whether the lender chooses to go through with a foreclosure or agree to a short sale, they are taking a loss either way, but in many cases they would take less of a loss with a short sale and resolve the matter in a comparatively shorter time frame. In nearly every case, a short sale offers a better return on the lender’s investment than a foreclosure does.