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Learning About Short Sales
You are about to learn what a short sale is. Let’s start off with some questions and answers below.
1) Short Sale Defined
A short sale is when a borrower must sell their home and the proceeds are less than the amount owed to pay off the mortgage balance. A short sale is desirable for home owners whose financial situations command that they liquidate their interest in their house and who are not able to qualify for other loss mitigation techniques. A simple definition is when the owner must sell and the property value has fallen below the loan amount.
2) Why will my bank do a short sale?
Banks want to avoid foreclosure too. A foreclosure cost the bank lots of money and statistics have shown that when a bank receives a property through foreclosure it is in much worse condition than other solutions because angry owners who have been foreclosed on trash the property before leaving. A short sale minimizes the banks losses and helps the home owner protect their credit. When your a suffering a true distressed scenario your bank is more willing to allow a short sale as opposed to foreclosing on your home.
3) Will my FHA loan be considered for a short sale?
Yes a bank will allow a short sale for your FHA loan. In fact FHA has introduced the Pre-Foreclosure Short Sale Program or PFS that will pay you the seller up to $1,000 at the closing just for finishing the short sale. This program was designed to help you transition to more reasonable living costs without the impact of foreclosure.
4) Is it true that you have to be delinquent on your payments to do a short sale?
You do not have to be delinquent on your loan to complete a successful bank short sale. There is additional info below on what is required for short sale approval but a short sale can be done because of the value of the home falling below the mortgage value or if the seller has faced difficult times. A hardship situation is all you need to qualify for a short sale. A short sale will not be approved if you want to move because the house next door lets their dog bark all night or if kids keep throwing baseballs in your yard. An approved bank short sale requires a true hardship situation.
5) Will I be issued a 1099 tax form on my short sale?
In most cases you will not be required to pay taxes on the loss. In 2007 President Bush signed The Mortgage Debt Relief Act that does away taxes 1099 forms and tax losses on short sales. It was normal for short sale banks to issue a 1099 tax form to the recent short seller that ordered the seller to pay a tax on the banks loss. This has been temporarily stopped and has become a huge benefit for sellers in a distressed situation. Currently the Mortgage Debt Relief Act has been scheduled to last through 2012. It is important to consult a certified accountant in regard to your personal situation because not all short sales are protected. For instance an investment property sold by short sale is not covered by the Mortgage Debt Relief Act but there might be other options.
6) How long does a short sale take?
A carefully designed short sale strategy will yield speedy results. Many inexperienced agents will drag a short sale out over 8 months to a year and many times fail to produce an approved short sale. A good short sale realtor will promptly finish the short sale procedure and have your property sold in approximately 60 days from contract date. Short sales are a tricky business and it takes qualified experts who will finish the short sale at a quick pace.
Here are some other options to consider before a sort sale.
A short sale is when a seller must sell their property and the proceeds are less than the amount owed to pay off the mortgage. A short sale is required for property owners whose financial picture or circumstances calls that they liquidate their home and they are left with no other course of action. A short sale is when the value of the property has dropped below the current mortgage balance that needs to be paid off.
Knowing your options before a short sale is important to know. Occasionally if you have defaulted on your mortgage it is “curable” and there is a good possibility that you are capable of replacing lost income or reduce your expenses.
Special Forbearance – A special forbearance is a payment arrangement between you and your lending bank that involves of a arrangement to reinstate your loan after it has fallen behind. This could include repayment over a several months, a cut of your payment for a short time, or a strategy for you to start full monthly payments while delaying the missed payments. What your bank is doing is letting you get caught up with you payments.
Loan Modification – A loan modification is a permanent alteration to your loan. It lets your loan be reinstated and sets in place a payment that you can pay for. Modifications give a number of options such as lowering your percentage rate, or expanding the time to repay the loan by re-amortization the amount owed. It’s similar to applying for a new loan but not all will get approved for a modification.
Combining Options – It is possible that your mortgage lender will combine strategies to reach a desired outcome. All mortgage companies are a little different on how they conduct these issues. The purpose of mitigation is to keep you in your home and help you come back from a change in your economic situation.
Often the situation has gone too far and there is no chance of you keeping your home. When loss mitigation fails or is not an option you are presented with a likely foreclosure. Before you throw up your hands and give in to foreclosure there are a few more options.
Deed-in-Lieu – A deed in lieu of foreclosure is when you as the property owner deed your house over to the bank. Basically you give away your house to your mortgage lender. This may sound like a viable option compared to foreclosure but there are a few hidden details.
1) A deed-in-lieu effects your credit just like a foreclosure.
2) Mortgage companies don’t want your house. It results in a property on their books and selling homes is not the type of business they are in. Many lenders will not take a deed-in-lieu and suggest you try some other option.
Short Sale – A short sale will let you eliminate most of your mortgage loan. In most situations your lender is willing to accept less than the amount of the mortgage balance. As previously stated this alternative is for borrowers whose financial situation demands that they sell their home.
Below are a few circumstances that will allow for a short sale:
A declining housing market – This cause does not take into effect your credit or your financial circumstances. This is when you are just upside down in your home and obligated to pay more than it’s worth. Remember you must be in a situation where you have to sell your home. This does not apply if you want to move because you don’t like your neighbors.
The loan is in default or close to it – This is the reason for most short sales. There was a time when lenders would not do a short sale if all the payments were current. Lenders have now figured out that in many cases it is logical to do a short sale before the payments are in default.
The Seller has Fallen on Hard Times – This is a short sale situation where the owner of the property is in a distressed state of affairs. All lenders require a hardship letter detailing the reason for the short sale. Sometimes a hardship description can be overdone. There are certain guidelines to writing a hardship letter. Your hardship letter should always cite that you seek a short sale so you will not have to go through a foreclosure. Here are a few common hardships: (Unemployment, Divorce, Death, and Illness)
Assets are something to consider when doing a short sale. Part of the short sale paper work is to fill out a sheet detailing all of your assets. If they find that you have a bunch of money lying around they might not grant the short sale because they feel you have the ability to repay the deficient amount. It is still possible for you to be granted a short sale but they might expect you to pay back the balance by asking you to execute a promissory note. This can still be a good solution for a seller who must sell their property and has the ability to pay back a reduced amount of their mortgage loan.
Negative Amortization – Some finance programs that were created previous to the housing bubble actually have a negative amortization. The amount of payment made every month is not adequate to cover the loan interest. This is a legitimate situation for a short sale.
Aggressive Secondary Financing – During the housing boom some mortgage companies were giving out second mortgages up to and even over %100 LTV. This is another situation that will be considered when requesting a short sale. These types of loans situations get a bit more difficult but can still be considered as a short sale.
A short sale is not an easy process but a good real estate agent can take away much of the burden. Do a little research and find the best realtor for your short sale situation. Most agents do not understand the short sale process.
Scott Marvin is a Columbus Short Sale professional helping home owners avoid foreclosure.