Short Sale FAQs

What is a short sale?

In the world of real estate, a short sale refers to the sale of real property for an amount less than the amount owed on the property. In the short sale scenario, the bank agrees to accept less than the full balance due on the debt, and usually ìforgivesî all or a large portion of the difference. A short sale is a settlement of debt and acceptance of a short sale is 100% at the lenders discretion.

How will the short sale affect my credit?

Short sales are still a relatively new concept. Banks have the option of submitting the short sale to the credit bureau as “Paid in Full” or “Settled for less than full balance”. As far as your credit score is concerned, there is no evidence whatsoever to support that a short sale alone will lower your credit score. Some have the idea that this is like a bankruptcy or a foreclosure. That is far from the truth! In a short sale, the lender is simply allowing you to pay less than you owe!

If you are currently behind on your mortgage or facing foreclosure, the short sale will actually help your credit in most cases! How? Because once you are approved for the short sale, all collection activity will generally STOP and you will be on your way to avoiding foreclosure!

Who benefits from the short sale?

Short sales are a win-win situation. Lenders, mortgagees, and real estate agents all benefit from the successful short sale. Mortgagors get the majority of their money back, Mortgagees get the relief they need and are able to sell their property and avoid foreclosure, and real estate agents can facilitate the transaction and receive compensation (commission) from the sale of the property.

Why would banks forgive the difference?

To mitigate their losses, banks often accept a settlement of less than what is owed on the property. When faced with the option of getting the property ìbackî through foreclosure, a short sale often is a much wiser business decision for the bank.

What is a HAFA?

HAFA is basically a short sale that has been pre-approved by the lender. It is a voluntary program so lenders do NOT have to participate. Because it is pre-approved, a HAFA short sale is typically faster to complete than a traditional short sale.

Is everyone a candidate for a short sale?

Banks typically have 4 requirements to approve a short sale.

1. The home must be upside down in value (see What is negative equity? below)
2. The borrower(s) must have less income than expenses each month
3. The borrower(s) must have a verifiable hardship, that is something that changed after they bought the home that keeps them from being able to stay current on the mortgage
4. The borrower cannot have a pile of money that could be used to pay the mortgage but the borrower decides they just don’t want to pay the money because the home has lost value.

When all of these circumstances exist, the homeowner is a strong candidate for a short sale. The short answer is that both the home AND the borrower need to qualify to have their debt settled with the lender as a short sale. Talk to a Realtor who has a track record of success with getting short sales approved to discuss your specific situation.

Do I have to make repairs on my home?

The goal is to obtain offers on the home so the home should be presented at its best. However, buyers should know that if you have the home listed as a short sale, the seller most likely does not have the money to make any repairs. If there are repairs to be made and you do not have the money to make them, then the home will be sold as is. Obviously, the price will be lower on a home that needs repairs than a home that is in move in ready condition.

There is special financing available for homes that are in need of repair, the most common of which is a FHA 203K loan. You want to be sure that the listing agent you choose is qualified to screen buyers who make offers to determine whether they qualify for this type of financing.

Are there any state law required items in California that must be done?

Yes. There are three things that are required by California state law. They are smoke detectors, proper water heater strapping and carbon monoxide detectors. One of the required disclosures is that the smoke detectors and proper strapping for the water heater will be done prior to the close of escrow. There is some question about if the buyer or seller will do the carbon monoxide detectors but they are to be done one way or the other prior to the close of escrow and the seller typically does them.

This sounds too good to be true!?

Not really. Things that are too good to be true usually don’t make good economic sense. The short sale makes good common and financial sense for the banks who grant them. The fact of the matter is mortgage companies and banks are NOT in the real estate business. They are in the LENDING business. The last thing they want is that property back.

Can FHA, Conventional or VA loans receive a short sale?

Yes! Successful negotiations on short sales for each of these loan types happen every day. What it takes is an experienced agent, like us, who knows what to do.

What is negative equity?

Also known as being “upside down” negative equity is the difference between the value of an asset and the outstanding portion of the loan taken out to pay for the asset, when the latter exceeds the former. For example, if your car is worth $10,000 and you owe $15,000 on it, you would have a negative equity of $5,000. Negative equity can result from a decline in the value of an asset after it is purchased.

Some areas decline in value. In other areas, prices may remain flat so that the properties in that area do not appreciate. If a seller wants to sell within 2-3 years of purchasing their property, they may be in a situation where they have negative equity.

Why does my property have negative equity?

Here are a few common reasons:

1. The home was purchased at the height of the market and the market has now declined or the homeowner paid more for the home than the property was worth.
2. The area has become less desirable for any number of reasons, so property values have declined.
3. The home was purchased with little or no money down and the homeowner wants to sell within a few years of purchase. †However, the property value has not increased enough†during this time. Therefore, costs associated with selling the property may create a balance due at closing from the seller.
4. The homeowner refinanced the home before home values declined and now the home has little or no equity.
5. The buyer bought in a brand new subdivision or recently developed area that has not been fully developed or has not appreciated (or may have even depreciated) in value.
6. The market is soft because there is too much builder (new home) inventory or too many existing homes on the market (buyer’s market)

What if I owe what my home is worth?

Even if you owe exactly what your home is worth, you may still need to do a short sale in order to pay for the costs of the sale (agent fees, title policy, and other seller closing costs).

Why not just let my lender foreclose?

NO! What is the first thing banks do when they foreclose on a property? Hand it over to a real estate agent to get rid of it quick! The foreclosure process is a legal process. It involves attorneys and it costs MONEY. Once they get the property back via foreclosure they must often sell it for MUCH LESS than market value and pay agent commissions and all customary closing costs. Doesnít it make more sense for them to take at or a little below fair market value before foreclosing?

And, even when they do sell it through foreclosure… this does NOT automatically remove your obligation to repay the remaining balance! It may not be wiped away!!! This is why you must seek the advice of both legal and tax professionals about your specific situation. We can provide a referral if you need one.

What if I’m not behind on my payments?

Short sales sometimes work even if you’ve never missed a payment! Yes, I know short sales have gotten a stigma of being only available for folks who are in foreclosure. But short sales have been successfully negotiated for folks who have never missed a mortgage payment! They just happen to be in a negative equity position and need the short sale in order to sell their home.

How long does it take?

Short sale approval can take 30-45 days, sometimes longer, depending on the lender(s). If you have more than 1 loan on your home, the process takes longer.

What if my home is already in foreclosure?

Your foreclosure sale will often be suspended once a short sale letter has been issued by the homeownersí lender, though that is not guaranteed! With some lenders, if the trustee sale date has already been set, it may be too late to start the short sale process. That’s why it’s imperative that you contact our office right away!!!

NOTE: Most lenders continue to pursue foreclosure while they are considering short sale offers. This means that your agent should be aware of any pending foreclosure on your home. Many homeowners who were in the process of a short sale had their home foreclosed on. Real estate agents who are proactive in their advocacy of a homeowner who is in foreclosure should be aware of your foreclosure timeline to offer you the best assistance.

Will my lender send me a 1099 on the debt forgiven?

In 2007 the U.S. Congress passed the Mortgage Debt Forgiveness Relief Act and it is in effect until 2012. As a result of that act, most borrowers no longer pay taxes on the debt forgiven on their primary residence. There is a 1099A (abandonment) and a 1099C (cancellation). Talk with your tax professional for answers on your specific situation. We can make a referral if you need one.

For investment property, the lender does have the right to report to the IRS the amount they have ìforgivenî in a short sale transaction. The amount of the resulting tax will be far less than the debt forgiven. For example, we had one client who did get a 1099 for $30,000 of “forgiven” debt. This resulted in additional taxes of $1,300 for that year for this borrower. The resulting tax is far superior to paying the difference of the debt. Also, if the property is in foreclosure, the foreclosure would have a much more devastating effect on you than the amount of the 1099. Talk with your tax professional for answers on your specific situation. We can make a referral if you need one.

How much will the short sale cost me?

In most cases, the cost to you is $0. We strive to complete the entire short sale process without asking the seller to bring any money to closing. However, in late 2007, some lenders changed their policies and there are certain expenses that the lender might not pay, such as unpaid Home Owners Association dues, home warranty,†certain escrow fees, and some minor closing costs. In most cases, these items total $300 to $800 per home. We will not know exactly how much they may be, if any, until we are closer to closing. Consequently, it is a good idea to set aside $500 to $1000 for these incidental expenses to insure that you get your short sale completed.

Although this may sound high, it is usually less than one month’s mortgage payment. We here at Smith Real Estate Services, Inc. will strive to get the lender to forgive your unpaid taxes, unpaid mortgage payments, pay all of the real estate agentís fees associated with the sale and customary seller closing costs. The savings to you is typically in excess of $20,000, so the amount you might have to bring is a small price to pay in exchange for the large debt forgiveness.

Our compensation is in the commission if you elect to list your home for sale with us. Again, our commission is paid by your lender, making our experience and service “free” benefits for you.

Can the lender come after me legally for the “forgiven debt”?

In 2011, legislation (SB 931 and SB 458) was passed in California that prohibits lenders who accept a short sale on a home from demanding compensation from a homeowner as a condition of approving a short sale or from pursuing a deficiency judgment against that borrower. There still may be legal implications for you with a short sale or foreclosure so it is imperative that you consult with a real estate attorney to discuss your specific situation prior to taking action. We can make a referral if you need one.

Can you help me if my home is not in the Greater Sacramento area?

Yes. Because we are licensed in the state of California, as long as your home is in California, we partner with an agent in your area that will handle the buyers and we retain negotiations with your lender(s). This way you get the comfort of working with a seasoned short sale specialist like me as well as the expertise of a local agent in your market.
If your home is outside of California, we can refer you to agents all over the country who specialize in helping people avoid foreclosure.

Our personal experience coupled with our strong national and international networks make us the first call you should make to help with all of your real estate needs, regardless of your geographic location.

Naturally, when your concern is that you will lose your home to foreclosure, you want to take action to avoid that. Contact us today to schedule your free phone consultation and get started toward some relief. We can help.

Please contact us or call 916-939-2040

Smith Real Estate Services, Inc.is a real estate brokerage company in California (DRE 01381095 and 00676207). We do our best to provide you with current and accurate information. However, we are not attorneys or accountants. Please consult with your attorney or CPA for further information and how this information may affect you personally. Visit our Resources for a list of professionals who specialize in helping distressed homeowners. This was written in October 2011.