What SELLERS need to know about SHORT SALES
An alternative to foreclosure
For the past seven years, I have specialized in assisting clients that have become behind on their mortgage payments and are facing foreclosure. Solutions do exist, you are not alone! It is my job to identify your options and, with you, develop an effective plan to remedy your specific situation. One such option to avoid foreclosure is the short sale. My office has negotiated and closed hundreds of short sales in this troubled market. Although I have a large data base of bank loss mitigation departments and have dealt with most banks in my experience, I work for the seller, not the banks. I work with you to determine what is best for you.
I hope you find the information below helpful, but to discuss your specific circumstance, please call or email to arrange a free no obligation consultation by phone or in person.
What is a short sale?
A short sale occurs when the homeowner owes more than the current market value of the home, faces a hardship and obtains their lender’s approval to sell the home for less than what is owed. If there is more than one loan on the home, such as a first loan and a home equity line, each lender will have to approve the transaction.
Why is there so much talk about short sales now?
Short sales have always been around but recent economy and market conditions have led to an increase in short sales, as well as foreclosures.
Why must my lender(s) approve the transaction?
A mortgage loan, home equity loan, and other secured loans are all liens against the property; in order for title to the property to pass to the buyer legally, those liens must be satisfied. Therefore, getting your lender(s) to accept less than is owed is a critical step in a short sale.
Why would a seller want to complete a short sale?
- The seller can no longer afford to own the property due to hardship from economy, increase in adjustable rate mortgage, divorce, medical bills, increase in expenses, loss of job or decrease in income or other unforeseen life changing events.
- Foreclosure is a very public and sometimes embarrassing option.
- Continuing to be late on mortgage payments or entering foreclosure is damaging to credit.
- Seller wishes or has to move, but due to area market conditions, cannot sell for what is owed.
- One of the biggest reasons is that the seller is able to purchase a home again in most cases in two years after short sale, while foreclosure can be many more years.
What will I have to do to get the short sale approved?
There is a simple list of necessary documents required. You will need to provide a letter detailing why you are unable to pay the difference between market value of the home and the actual loan amount. You will have to provide bank statements, tax returns, pay stubs and other documents to prove that you do not have the ability to pay the loan. You will have to sign an authorization letter allowing the lender to speak directly with your real estate professional to facilitate the approval process.
How long will the process take?
It depends on the lender’s workload, but the process will move faster with an experienced short sale listing agent, like myself. Sellers and buyers must be prepared to wait at least one to two months for the seller’s lender to approve the transaction. In some instances, it may take as long as three to four months. Other contingencies may have to be met (home inspections, buyer’s loan qualification) before the transaction actually closes. Your lender’s approval is only one piece of the puzzle.
Are there any tax or legal ramifications?
Though the lender may allow a short sale with the seller having no obligations after closing, some may ask the seller to sign a promissory note in rare instances. The lender may forgive the debt, but it is possible that the IRS may treat the forgiven amount as income, making it taxable. This also occurs in the event of a foreclosure, as well, though. You should seek professional advice from an attorney, certified public accountant or other professional as to the credit, legal and tax consequences of a short sale.
Alternatives to Foreclosure
Your lender may be willing to work out an alternative to foreclosure that may help you save your home, or at least to prevent a foreclosure from further harming your credit. Some alternatives include:
- Repayment Plan: Your lender may give you a fixed amount of time to repay the amount you are behind, plus any late fees, by adding a portion to your regular monthly payment. This is a good option if you only missed one or two payments.
- Forbearance: Your lender may agree to suspend your payments for a period of time. At the end of this time, you will resume your regular monthly payments, and you may be required to either make one lump sum payment or additional partial payments. This may be a good option if you have a temporary medical issue.
- Loan Modification: Your lender may agree to reduce your interest rate, extend the term of the loan or add missed payments to the loan balance.
- Selling Your Home to Avoid Foreclosure: Depending on the strength of the housing market in your neighborhood or area, selling may provide funds needed to pay the mortgage debt in full. In a “short sale,” the lender allows you to sell and agrees to forgive any shortfall between the sale price and the mortgage balance. You still may face a tax liability on the amount of debt forgiven if it is not your primary residence.
- Deed in Lieu of Foreclosure: You voluntarily transfer title to the lender in exchange for cancellation of the remainder of your debt, but you may lose any equity in the home and may have to pay taxes on the debt forgiven.
Short Sale Seller Advisory
The Arizona Department of real estate has issued a consumer publication called the Short Sale Seller Advisory. It offers basic information to homeowners regarding short sales and the presence of various scams that exist. The Short Sale Seller Advisory attempts to lay out the major issues facing a homeowner who is considering a short sale to assist them in deciding if a short sale may be right for them.
The main topics of the Short Sale Seller Advisory are:
Before Proceeding With a Short Sale:
- Understand the options of a lien holder after borrower default
- Watch out for predatory “rescue” scams
- Obtain legal and tax advice
Short Sale Considerations:
- The need to understand deficiencies
- The need to understand the tax consequences
- Use a qualified and experienced real estate professional
- Investigate documentation and eligibility
- Determine the amount owed on the property
- Determine the estimated fair market value on the property
- Be aware of the impact on your credit score
- Understand there may be a waiting period before buying another home
- Loan Workout
- Loan Modification
- Deed-in-Lieu of Foreclosure
Contact me today to receive a free copy of the most current version of the Arizona State Short Sale Seller Advisory.