If you don’t qualify for a loan modification or if your loan modification has not provided you with the relief you need, then selling your house as a Short Sale might be your best option. Your may prevent Foreclosure, save your credit, and you may walk away from the sale with no debt and no tax liability. After a short sale, you may qualify to purchase another property within the next 12-24 months. There is no cost to you to sell the property; your bank will pay all closing costs including delinquent taxes, real estate commission, escrow, and title fees.
In a Short Sale time is of the essence. Sellers of a Short Sale need to be aware of the foreclosure timeline. Been aware of how much time you really have will create a realistic expectation through your Short Sale Listings process. Also, working with a listing agent that has experience working with short sales is crucial. We had represented 100’s of short sale listings, and we have experience working with most major lenders.
Please review the following information carefully, prior to making a decision. Our information about Loan Modifications, Short Sales, Credit, and Distress Homeowner’s options is purely informative and is not intended as legal or tax advice. Please consult an attorney or a tax professional if you have specific questions about your particular scenario.
Frequently Asked Questions about Short Sales
01. What is a Short Sale?
02. What alternatives do I have if I’m facing Foreclosure?
03. When should I consider a Short Sale?
04. Do I Qualify for a Short Sale?
05. What is an acceptable hardships to qualify for a short sale?
06. What are the benefits in doing a Short Sale vs. Foreclosure?
07. How is my credit affected with a Short Sale vs. Foreclosure?
08. Can my lender come after me for the money it lost (deficiency)?
09. Do I pay federal and state taxes on my lenders’ forgiven debt (deficiency)?
10. What if I have 2 loans with different lenders?
11. What is a Deficiency Judgment?
12. Do I have to be delinquent on my mortgage to qualify for a Short Sale?
13. Should I file for Bankruptcy to stop a foreclosure on my property?
14. How long will a Short Sale take to complete?
15. Is there any cost to me in a Short Sale?
16. Does your company negotiate directly with the bank?
17. Can I Short Sale my rental property?
18. Do I need an attorney to do a Short Sale?
19. How do I start my Short Sale?
1. What is a Short Sale?
A Short Sale, also known as a ‘Short Payoff’ is the sale of a property where the lender agrees to accept less than the balance owed on the loan. The lender cooperates with the borrower’s attempt to sell the property and agrees to accept less than the balance owed to avoid the Foreclosure process.
At the close of escrow the property is sold, and the lender accepts the sale proceeds as full payment of the loan and the homeowner gets relief from the mortgage debt. Back to Top
2. What alternatives do I have if I’m facing Foreclosure?
Loan Workout/Modification – When the borrower is no longer able to make the original mortgage payments and the lender agrees to modify the original loan terms. You can attempt a modification yourself or you can use a company to do it for you. For more details about loan modifications please refer to our ‘Loan Modification’ section. These are your options:
Repayment Plan: Your lender establishes a schedule to make a full regular monthly payment plus a little extra each month to pay the delinquent amount over a determined period of time. This program can work well if you’ve experienced a temporary financial setback, but are able to make up your late payments.
Forbearance: Your lender will provide you with a temporary reduction or suspension of payments by renegotiating interest rate, monthly payment amount, principal amount or maturity date. The lender will require your financial information to prove that you can keep the new payment plan. This temporary relief will change at a later point to repay the delinquent amount. Statistics show that more than 50% of loans modified in 2008 by the nation’s 14 largest banks were delinquent again after six months, putting those homeowners at risk of Foreclosure again.
Short Refinance: Your current lender agrees to reduce the balance owed on your loan to market value to enable you to refinance the loan with another bank. The obstacles of a short refinance involve convincing your current lender to accept a payoff shortage as well as having the good credit and sufficient income to qualify for financing with your new lender.
Deed in Lieu of Foreclosure – When the homeowner voluntarily delivers title to the lender and the lender accepts the property back. Lenders are reluctant to accept a deed in lieu before there has been an attempt to sell the property.
Foreclosure – When a homeowner has missed 3-4 consecutive mortgage payments on the property the lender will begin the Foreclosure process. In a Foreclosure the property will be sold at a public auction. The negative impact of a Foreclosure stain will remain on an individual’s credit for the following 7-10 years and will affect your ability to obtain credit cards and car loans, rent property and may likely even affect employment opportunities.
Bankruptcy – This may be an alternative to discharge some of your debt, but unlikely to help you keep your home. Bankruptcy costs are often between $3,000.00 and $5,000.00. These are the different type of Bankruptcies:
Chapter 7: (Liquidation) often enables individuals to discharge most of their debt. This process takes usually 3-4 months. But due to the new federal bankruptcy law, ‘The Bankruptcy Abuse Prevention and Consumer Act of 2005’ it is more difficult for filers to discharge all of their debt.
Chapter 13: (Wage Earner Plan) enables individual filers to arrange installment payments with creditors over a 3-5 year period. Creditors will receive more money than they otherwise receive in a Charter 7.
Short Sale – When there is equity in the property and it is sold without lender approval this is a traditional sale. When the property does not have equity then it is sold via a Short Sale or Pre-Foreclosure. Here the real estate professional will negotiate with the lender to accept less money that what is owed and the lender will cover all closing costs associated with the Short Sale, there is no cost to you. Back to Top
3. When should I consider a Short Sale?
A troubled homeowner should take action the minute they realize that their changing financial situation may make it difficult to remain current with their mortgage payments. It’s vital to start exploring all options available, including a Short Sale, as soon as you realize their might be a future hardship.
Unfortunately, denial often plays a big role in many homeowners’ lack of quick reaction to their financial troubles. The problem may begin when a homeowner falls behind on property taxes, then credit card payments, then HOA payments. Often, it’s just a matter of time until the homeowner falls behind on the mortgage. Waiting until the last minute to consider your options may eliminate many of the options available to you, including a Short Sale. It’s vital that you act as soon as possible to ensure the likelihood of a successful resolution. We encourage you to get informed by contacting us today for a free consultation. Back to Top
4. Do I qualify for a Short Sale?
In general terms, if you can prove to your lender that you have experienced some type of financial hardship making it difficult to make your mortgage payments, then you are likely a candidate for a Short Sale. Lenders don’t want to foreclose on your property; it’s a long and expensive process for them. During these distressed economic times, lenders are receptive to Short Sale negotiations. When presented to them in the correct manner, lenders can be open to working with a homeowner who is experiencing financial hardship and are often willing to accept a discounted payoff of their loan.
A Short Sale is not for everyone. Each situation is unique and only after a detailed analysis of your situation can we determine if a Short Sale is the best solution for you. Back to Top
5. What is an acceptable hardships to qualify for a short sale?
When negotiating a Short Sale with your lender we will need to submit a 1-2 page letter explaining the reason why you are having difficulty making your mortgage payments. Following is a list of acceptable financial hardship reasons:
• Mortgage Interest rate Increase
• Loss of employment
• Reduction in employment
• Reduction in income
• Employment relocation
• Medical emergency or sudden illness
• Divorce
• Death
• Lost of tenants
• Unforeseen increase in living expenses
The following reasons DO NOT constitute a hardship:
• Buying another property
• Unhappy with the neighborhood
• Bad purchase decision
• Increase in family size, pregnancy
• Moving into an apartment
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6. What are the benefits in doing a Short Sale vs. Foreclosure?
First, the main reason to consider a Short Sale versus a Foreclosure is to save your credit. The term ‘Foreclosure’ and the stain that it carries will remain on your credit for 7-10 years. Any attempt to obtain credit will most likely be negatively impacted by the Foreclosure. Creditors will not be able to extend credit; qualifying for credit cards and car loans will be virtually impossible for a lengthy period of time, even your ability to rent property will likely be hindered.
Second, a short sale shows a good faith effort on the part of the homeowner to work with the lender in getting out of a difficult situation. It shows an honest attempt to ‘work things out’ with the lender. A Foreclosure may be viewed by potential creditors, employers and lenders as an event in which the homeowner turned their back on an obligation and walked away, indicating negligence and lack of responsibility.
Third, after the successful completion of a Short Sale it’s likely that you are able to walk away from your mortgage obligation with no debt nor deficiency owed to the lender and many times with no tax liability on the money your lender lost. However, following a Foreclosure you may still be liable for paying the deficiency amount (balance owed) back to your bank.
Fourth, after a Foreclosure your present or future employment may even be at risk. Potential employers often run your credit and the black mark of a foreclosure may prevent future employment opportunities. A short sale on your credit will read something much less threatening such as ‘Settled for less’ or ‘Settled in full’.
Finally, if you lose your property in a Foreclosure, you will not likely be able to purchase another property again for a period of 5 years. On the other hand, current underwriting guidelines may allow a homeowner involved in a Short Sale to purchase again in as little as 12 months. Back to Top
7. How is my credit affected with a Short Sale vs Foreclosure?
There is a misconception about the damage that a Short Sale creates on your credit. The reality is that the damage to your credit is linked to mortgage and credit card late payments rather than the Short Sale itself.
Experts on credit say that after a Foreclosure your credit score will likely be reduced by 300-400 points or more, while in a Short Sale your credit may be impacted by less than 80 points. Back to Top
8. Can my lender come after me for the money it lost (deficiency)?
It depends. California has ‘Non-recourse’ and ‘Recourse’ loan status and depending on which loan type you have will establish your lender’s right to pursue a deficiency.
A ‘Non-recourse’ loan is a loan obtained to purchase an owner occupied 1-4 unit property. This type of loan is also called ‘Purchase Money’ loan. To qualify as a non-recourse loan, it can not have been refinanced since the original purchase loan. If you have a Non-recourse loan and you go through a Short Sale or Non-Judicial Foreclosure your lender has no right to proceed against you for any deficiency. You walk away free of debt.
A Recourse Loan is one that has been refinanced for ‘cash out’. A HELOC (Home Equity Line of Credit) is also considered a recourse loan. With a ‘Recourse’ loan the lender has the right to proceed against you to collect any deficiency. However, just because the bank has the right to collect doesn’t mean they will. In order for the bank to collect they need to start a legal process to pursue what is called a ‘Deficiency Judgment’. This legal process is expensive to them as they have to file a lawsuit against you. Our experience has shown us that banks often choose not to pursue collection, as they are aware that there are no funds available to collect upon. Remember, when your lender approves you for a Short Sale you have already demonstrated to the lender that you are insolvent and have no money to pay them back.
When negotiating a short sale, our goal is always to obtain a full release of your debt with your lender. In fact, in our negotiations with your lender, we will always demand a full release of debt, allowing you to walk away without owing anything. Back to Top
9. Do I pay federal and state taxes on my lenders’ forgiven debt (deficiency)?
When your lender forgives or cancels your debt they classify the forgiven amount as their loss. The lender may issue you an IRS Form 1099-C also known as a Cancellation of Debt, regardless of whether your loan is Non-Recourse or Recourse and whether the property is sold in a Short Sale or lost in a Foreclosure. This forgiven debt will be considered as ordinary income by the IRS. It is important to note that if your lender reduces the principal balance of your loan in a ‘Loan Modification’ or a ‘Loan Workout’, that discounted amount is also treated as debt forgiven. The IRS treats this debt forgiven as ordinary income tax as well, in which case you may also receive an IRS Form 1099-C.
Fortunately, under the ‘Federal Mortgage Forgiveness Debt Relief Act of 2007’ (HR 3648) signed by President George W. Bush you may be exempt from paying federal taxes for your forgiven debt if your loan was on your primary residence and if the loan is a ‘Purchase Money’ loan (this is when you have not refinanced your original purchase loan). This provision applies to debt forgiven in calendar years 2007 through 2012. For more details go to IRS Link
On the other hand, if your loan is not on your primary residence or you have refinanced your original ‘Purchase Money’ loan you may also qualify to be exempt from paying income tax by filling insolvency on IRS form 982. The reason for this is that the lenders short sale qualification requirements will also likely meet the IRS guidelines for insolvency, therefore you will likely be exempt from paying federal income tax on any forgiven debt, as well.
The State of California enacted its Senate Bill (SB) 1055 that conforms to the Federal Mortgage Forgiveness Debt Relief Act of 2007, exempting forgiven debt from state taxes, similar to the Federal Act. SB 1055 provisions apply to debt forgiven in calendar years 2007 through 2008, but the Senate is revising the bill for an extension.
For details on your particular situation in regards to federal and tax implication and possible exceptions we strongly recommend you consult with your tax advisor. Back to Top
10. What if I have 2 loans with different lenders?
It is not unusual to have more than one loan on your property; in fact most of our Short Sales have both a first and second mortgage. We will negotiate with both your first and second lien holder during the Short Sale process.
There are two types of second mortgages; a closed end second mortgage (fixed rate) and an adjustable rate HELOC (Home Equity Line of Credit). Lenders treat these two loans differently and your liability differs with each.
We know how to negotiate for both types of loans. Back to Top
11. What is a Deficiency Judgment?
A deficiency judgment is a judgment obtained by the lender in court against the borrower for the difference between the unpaid balance of the loan and the amount produced by the sale of the property. Back to Top
12. Do I have to be delinquent on my mortgage to qualify for a Short Sale?
Being delinquent on your mortgage is not a requirement for lenders to accept your Short Sale, although due to the high volume, delinquent loans are usually a priority. The key is to first find out if your lender is accepting Short Sales before you become delinquent. Since the Short Sale process can be time consuming we advice clients not to wait until they have defaulted on their mortgage to begin the Short Sale process. Back to Top
13. Should I file for Bankruptcy to stop a foreclosure on my property?
An attorney will likely recommend that you declare Bankruptcy to allow you to delay the Foreclosure process so you can stay in your property for more time. The reality is that a Bankruptcy is very unlikely to help you save your home. The American Bar Association reported that 96% of homeowners who declare bankruptcy end up losing their home to Foreclosure. By declaring bankruptcy you will potentially end up with both a bankruptcy and a Foreclosure on your credit, a double dent.
There are some specific circumstances when a Bankruptcy might be the best choice and you may want to explore this route with a competent Bankruptcy attorney. We can refer you to qualified attorneys experienced in Bankruptcy if this is your goal. Back to Top
14. How long will a Short Sale take to complete?
From beginning to end, the Short Sale process usually requires 3-4 months. Sometimes the process can be lengthier, depending on how backlogged your lender may be. However, we have completed bank approvals in as little as 7 days. Having completed Short Sales with every major bank, we have developed a streamlined submission process along with the right points of contact within each lending institution to enable us to expedite your approval. We make things happen faster!
After commencing the Short Sale process you may choose to stay in your property until the close of escrow or you may decide to vacate the property to make it more accessible to prospect buyers. Our experience has shown us that a vacant property is more likely to produce more offers, enabling it to sell quicker. Back to Top
15. Is there any cost to me in a Short Sale?
Unlike many other companies, we charge you nothing for our services. There is NO cost to you whatsoever. We will list your property for sale, find a buyer, negotiate with your lenders,and you won’t pay anything. Once the lender approves the Short Sale they will pay all of your closing costs. These include delinquent property taxes, Real Estate commissions and escrow and title fees. Back to Top
16. Does your company negotiate directly with the bank?
All of our Short Sale negotiations are handled by our company, locally here in San Diego. Short Sale negotiations are very complex and involve the coordination of many parties including sellers, buyers, agents and lenders. We have created a consolidated, streamlined process in which everything is performed under one roof. Unlike many Loss Mitigation companies that outsource their negotiations to a 3rd party we do everything in-house, creating a more efficient system. Back to Top
17. Can I Short Sale my rental property?
Any property can be negotiated for a Short Sale. We have had successful Short Sale approvals on residential, investment, units, condominiums, and duplexes. Back to Top
18. Do I need an attorney to do a Short Sale?
If you work with an experienced Short Sale Specialist you don’t need an attorney. You are best represented by an agent that is actively involved in bank negotiations and experienced in today’s current market. Lenders have a system in place that facilitates negotiating with Real Estate agents as the majority of their Short Sale negotiations are done with agents. If you choose to hire an attorney to process your Short Sale, they will charge you out of pocket fees in advance. Back to Top
19. How do I start my Short Sale?
To start your Short Sale process you begin by filling out our website form (to the right side) or you can contact us at 1-800-291-0053 for a free confidential consultation. We will detail your options and provide you with solutions. There is no obligation. If we work on your Short Sale negotiation and you don’t get a satisfactory approval from your lender you have no obligation, you can cancel the listing agreement and you don’t pay anything. Back to Top