Short Sale FAQs

Short Sale Frequently Asked Questions (FAQs)

It is understandable to have questions when coping with a new and challenging situation, especially when a home is at stake. The reality is that millions of homeowners across the country are finding out that they have more questions than answers. We hope that the following information will help you better understand the circumstances. If you have further questions not addressed below, or would like additional information resources, feel free to contact me.

What is a Short Sale?
A homeowner is ‘short’ when the amount owed on his/her property is higher than current market value.
A short sale occurs when a negotiation is entered into with the homeowner’s mortgage company (or companies) to accept less than the full balance of the loan at closing. A buyer closes on the property, and the property is then ‘sold short’ of the total value of the mortgage.

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 – In other words: “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.

How late in the foreclosure process can you start a short sale?
In California, usually a homeowner needs to be 2 months behind in their mortgage payments to receive a “Notice of Default” (the beginning of the official foreclosure process). After the borrower has received the Notice of Default, a lender can complete the foreclosure in as little as 90 additional days. For that reason, time is of the essence and if you have received a Notice of Default or Notice of Trustee Sale, you need to take action to avoid foreclosure immediately.

What documents are necessary to proceed with a short sale?
The individual documents necessary to proceed with the short sale will depend on the lender. Typically the lender will require hardship letter detailing the circumstances behind the short sale. A signed, valid purchase and sales contract, preliminary HUD-1 settlement statement and a preliminary estimate of proceeds to the lender. There may be additional requests for more detailed information on the financial condition of the seller, ie; pay check stubs, bank statements, a personal financial statement and monthly budget assessment, amongst other things.

Will the seller’s credit rating be affected if they allow a short sale on their property to occur?
While it is up to the individual lender to decide what to report, what often happens is the loan will report as “paid” or “debt settlement” on the borrower’s credit report. There will likely be a reference that the debt was “settled for less than originally owed” or something similar. A “debt settlement” is much better than having a foreclosure on your credit report. note: many employers regularly check the credit report of current and prospective employees.

Will a lender allow the seller to make a profit on a short sale?
No. The seller will not receive any funds either directly or indirectly from the short sale transaction.

If a seller is in bankruptcy, will that affect the short sale of the property?
Absolutely, as most lender would not consider a short sale if the homeowner is in the middle of a bankruptcy proceeding. Negotiating a short sale between the parties is considered a collection activity and such a negotiation is prohibited in bankruptcy.

Will the bank or lender require an appraisal on the home in a short sale?
Yes. Most lenders will require that a full appraisal be submitted in the short sale package. Some may only require a Broker Price Opinion (BPO). The lender will require some formal assessment of the value of the home in order to make a decision as to accept or reject the short sale offer.

Are there tax implications in the short of real estate?
Much like the issue of credit reporting, the circumstances are individual to the lender. As a short sale represents a loss for the lender, they can report the amount lost a debt forgiveness to the seller. If a formal tax form 1099 is filed, the seller may be responsible for paying taxes on the amount of debt forgiveness. According to the IRS website The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief. Please consult a professional tax advisor to get an answer to how a short sale will affect you.

Why would a lender allow a short sale to occur?
A foreclosure proceeding is a costly process for the lender. A short sale can yield the lender a higher recovery value on the sale of the home. Additionally, often times the borrower remains in the home through the short sale transaction, which helps to protect the lender’s underlying asset – the home.

Trying to do a “loan modification”?
Did you know nationally only about 1% of the loan modifications submitted have actually been approved. People are unrealistically holding out hope the lender will modify their loan, and when they find out it’s not going to happen, it’s usually because they are being served paperwork to vacate their their home, because it’s been foreclosed! According to the Huffington Post “only 1 out of 1,600 Bank of America borrowers have received permanent loan modifications”.

What is a mortgage modification?
A mortgage modification is a process through which your mortgage lender changes any or all of the following:
Your interest rate
Your principal balance (through a reduction)
Your loan terms (example: from an adjustable to a fixed rate)

This process can allow borrowers to stay in their property when they can no longer afford their current mortgage payments.

Why would a lender modify my mortgage?
Lenders have realized that in some cases it is better for them to work with current borrowers to lower payments or possibly improve terms in order to keep homeowners in their properties. The average foreclosure can cost a lender from 35-50% of the value of a property, so keeping borrowers in their homes is a good option for everyone.

What do I need to qualify for a mortgage modification?
According to the Making Home Affordable Web site (www.MakingHomeAffordable.gov), you will need the following information for your lender to consider a modification:
Information about your first mortgage, such as your monthly mortgage statement
Information about any second mortgage or home equity line of credit on the house
Account balances and minimum monthly payments due on all of your credit cards
Account balances and monthly payments on all your other debts such as student loans and car loans
Your most recent income tax return
Information about your savings and other assets
Information about the monthly gross (before tax) income of your household, including recent pay stubs if you receive them or documentation of income you receive from other sources

If applicable, it may also be helpful to have a letter describing any circumstances that caused your income to reduce or expenses to increase (job loss, divorce, illness, etc.)

How do I qualify for a mortgage modification?
The first call you make should be to your lender, have the information above ready to discuss with them and call your customer service line to ask them what options you have available. If the person you speak with does not understand what you are asking, you can ask to be referred to one of the following departments (different lenders have different names for these departments):
Loss Mitigation
Mortgage Modification
H.O.P.E.

Prior to contacting your mortgage lender you can quickly complete an eligibility test atwww.MakingHomeAffordable.gov. This test will let you know if you are eligible for a modification through the government-sponsored Home Affordability and Stability Program (HASP). For a list of mortgage lenders and servicers, visit www.HopeNow.org.

What if I don’t qualify for a mortgage modification, can’t afford my home, and owe more than it’s worth?
You are not alone and foreclosure is not the only option. If your mortgage lender or servicer will not work with you to reduce your payment, you may want to consider a short sale. Agents like me, with the Certified Distressed Property Expert® Designation, have undergone extensive training in how to process and negotiate short sales. A short sale allows you to sell your home for less than what you owe and avoid foreclosure.

What is a “Home Affordable Refinance”?
If Fannie Mae or Freddie Mac owns your mortgage, you may be eligible for a Home Affordable Refinance. This will allow you to refinance your home and often lower your payments.

What are the qualifications for a Home Affordable Refinance?
According to the resources released by the government, following are a list of qualifications:
You are the owner occupant of a one- to four-unit home
The loan on your property is owned or securitized by Fannie Mae or Freddie Mac (see Useful Links)
At the time you apply, you are current on your mortgage payments (you haven’t been more than 30 days late on your mortgage payment in the last 12 months, or if you have had the loan for less than 12 months, you have never missed a payment)
You believe that the amount you owe on your first mortgage is about the same or slightly less than the current value of your house
You have income sufficient to support the new mortgage payments, and the refinance improves the long-term affordability or stability of your loan