Learn more about short sales

  Do I qualify for a short sale?

 

The qualifications for a short sale include any or all of the following:                                

  • Financial Hardship – There is a situation causing you to have trouble affording your mortgage.
  • Monthly Income Shortfall – “You have more month than money.” A lender will want to see that you cannot afford, or soon will not be able to afford your mortgage.
  • Insolvency – The lender will want to see that you do not have significant liquid assets that would allow you to pay down your mortgage

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 that makes it likely you will be 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.
                                                                         
How will a short sale affect my credit?
Allow us to give you the most honest answer here – it depends. It depends on how many (if any) mortgage payments you miss. It depends if you are late on other related payments (taxes, HOA, utilities, etc). The truth is, a person’s credit score takes into account MANY factors, and everyone’s situation is different. Anecdotally, we can tell you we have seen credit score hits from 50 points to 200 points. Here is what “Ask Experian” says about short sales’ credit impact:  The term ’short sell’ doesn’t actually appear on a credit report. It is simply the phrase used to describe negotiating with your lender to sell the house for less than is owed on the mortgage and for the lender to then consider the mortgage closed. As a result of such an agreement, the account status may be reported as paid, but will likely also indicate that the lender did not receive the full amount owed. In effect, that means the debt has been settled for less than actually owed.

What are the Advantages of a Short Sale vs. Foreclosure?
Future home purchase:A homeowner who successfully closes a short sale will be eligible for a Fannie Mae-backed mortgage in 2 years. A homeowner who loses a home to foreclosure is ineligible for a Fannie-Mae backed mortgage for a period of 5 years. On any future loan application, a prospective borrower will have to answer YES to question C in Section VIII of the standard 1003 form that asks “Have you had property foreclosed upon or given title or deed in lieu thereof in the last 7 years?” There is no similar declaration or question regarding a short sale.
 Credit Score:This varies, but if a homeowner loses their home to foreclosure we typically see their credit drop 200-300 points*. With a short sale, only late payments on the mortgage will show (which do negatively affect credit), but when the short sale is complete, the mortgage is normally reported as “paid as agreed” or “paid as negotiated”. It may also say “not full amount”, but it certainly won’t say “foreclosure” or “short sale”. If all other payments are made and the borrower has kept everything else paid in full, the credit hit can be as low as 50 points. Every person’s credit situation is different.
 
Credit History:
Foreclosure will remain as a public record permanently, and on a person’s credit history for 10 years or more. A short sale is not reported on a credit history. There is no specific reporting item for “short sale”.
 Dignified Solution:With a short sale, you are selling your home, not losing your home. Unless your friends and family members are members of the local Realtor association, they don’t even need to know your home was sold as a short sale. Some agents like to advertise their short sales to the public. We respect our clients’ privacy and would only advertise the property’s status as a short sale per the client’s request***. With a short sale, we sell your home just like your neighbors have done. It’s a dignified resolution to a tough situation. On the other hand, after a foreclosure, you are forced out of your home, locks are changed and a foreclosure notice and sign will be placed on your property for all to see.

Employment:
Employers have the right and are actively checking the credit of all employees who are in sensitive positions. This is also true of employers reviewing applications for potential employment. In many cases, a foreclosure is reason for immediate reassignment or termination. A short sale is not reported on a credit report and therefore not a challenge to future employment.

Security Clearance:
Foreclosure is the most challenging issue against a security clearance outside a serious misdemeanor or felony conviction. If a person has a foreclosure and is a police officer, in the military, in the CIA, security or any other position that requires a security clearance, in almost all cases clearance will be revoked and the position will be terminated.

How much will a short sale cost me?
In short, nothing. You will never be charged for our services. If you complete a short sale, we negotiate our fees directly with your lender. If you do not complete a short sale, you are not charged for our consultation or guidance. Furthermore, the cost of selling your home (Escrow, Title, transfer fees and other closing costs) are paid for by your lender. If you are an investor, and are looking to complete a short sale on an investment property, you may be asked by your lender for a “Seller Contribution”. In many cases we are able to negotiate this down to zero, and in other cases we can negotiate it down to a very manageable amount (ranging from $500 – $1000).

What are “deficiency rights”?
In California, some loans give the lender the right to pursue the homeowner for a deficiency after the foreclosure has taken place (each state’s laws are different).** These are called “deficiency rights”. During the short sale negotiations, in most cases we are able to have the lender agree in writing to release the homeowner from any future deficiency right after the close of escrow.

What are the tax implications of a short sale?
The Mortgage Debt Relief Act of 2007 (H.R. 3648) protects most homeowners that have completed a short sale. If the homeowner does not qualify under the Mortgage Debt Relief act, insolvency may be the other option to have the amount forgiven. We are designated Program 3648 representatives, and pride ourselves on making sure homeowners understand this protection when making their short sale decision. Certain “bloggers” or bankruptcy attorneys will scare you away from a short sale by telling you that after you complete your short sale, you will be taxed on your deficiency as income. At the end of the year, the lender will send out a 1099-C for the amount that they have written off. The 1099-C will show that amount as income in which the home owner may or may not be responsible for paying. In other words, if the deficiency is $100K, you would be taxed by the government on an additional $100K of income. If the home you are selling is your primary residence, you will be exempt from paying this deficiency tax. If you are an investor, you may be able to get an exemption through other means, but it is imperative that you consult your tax preparer on this matter**.

May I continue to live in my home while doing a short sale?
Yes. You don’t need to move out of your home until your short sale is fully approved and escrow is closed.


 * We are not credit experts, and encourage more specific credit related questions to the credit reporting bureaus directly.

** We are not tax experts or attorneys, and we HIGHLY RECOMMEND that you consult a CPA, tax advisor and/or a tax attorney regarding your questions BEFORE you consider a short sale, deed-in-lieu-of-foreclosure or foreclosure.

*** When listing a short sale in the MLS, we are required to list it as a “short sale” under “special conditions”, but this is not in the public remarks. Only licensed Realtors accessing the local MLS and potential Buyers will know it is a short sale.

 




 
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