Short Sale Frequently Asked Questions
What is a Short Sale?
A short sale is an ?arrangement? between the current owner of a home and the bank that lent them the money to purchase their home to accept an offer for less than the total amount owed to pay off the home loan. The ?deficiency? is the difference between the amount owed and what the bank collects at the short sale.
The bank may approve the discount on the mortgage but may or may not approve the release of the deficiency. The short sale approval by the bank stops the foreclosure process.
For what type of situation is the Short Sale best?
Most short sales are done on properties in foreclosure. This means the homeowner is at least 3 payments behind and the foreclosure suit has been filed by one of the mortgage lenders. Recently, more mortgages that are simply behind or ?in default? are considered short sale candidates without actually being in foreclosure. The homeowner, also typically has negative equity or no equity in the home. In other words, the total balance owed on the mortgages is equal or greater than the price at which the house can be sold. This situation is growing increasingly common due to the easy availability of 100% mortgages (no money down) as well as the recent decline in prices.
How does a homeowner benefit from a Short Sale?
First and foremost, it relieves the stress of being in foreclosure and being hounded by the mortgage lender and it allows homeowners to get rid of their big mortgage payment and move on with their lives. A shore sale allows you to stop the foreclosure and get a fresh start.
A short sale also prevents additional damage to your credit. Having some late payments and a foreclosure filed has already done damage to your credit; however a completed foreclosure will do much more damage and lower your credit score tremendously. Having to declare bankruptcy, is a huge black mark on your credit. A short sale results in the mortgage actually being paid off, which reflects positively compared to a foreclosure. Many times my fee and the attorney?s fees are negotiated with the lender and it comes out of the fees at closing.
Why would a bank or mortgage lender want to do a short sale?
Banks are in the business of lending money and do not want to own real estate. When a bank takes a property back via foreclosure, it is a long and expensive process and often results in holding a property in their inventory as a non-performing asset. Banks have a limit to the amount of non-performing assets they want to hold. Once this limit is exceeded, they have strong incentive to get rid of the properties at discount prices.
For a lender, doing a short sale avoids many of the costs associated with the foreclosure process. Attorney?s fees, delays from borrower, bankruptcy, damage to the property, costs associated with resale, property tax, insurance, etc., must be paid by the bank during a foreclosure. In a short sale scenario, the lender is able to cut its losses by getting rid of the property faster.
Will a short sale save my house?
In the sense that you will be able to continue to live in the house, unfortunately no. A short sale is only done involving a legitimate sale of the home from the foreclosed owner to another unrelated party. Many letters you?ve received promised to save your house, however this is very seldom possible. Do not pay money upfront or sign away your deed (in lieu of foreclosure) to someone who promises to ?save your house? from foreclosure. It is probably a scam.
Will a short sale save my credit?
Yes and no!! A short sale may save you from the worst credit disasters. By defaulting on mortgage payments and having a foreclosure filed against your property, you have already done damage to your credit. Your credit score has declined and those negatives will stay on your credit report for some time. However, it will get much worse if you allow the foreclosure to continue and do not try to short sale the property.
Once a foreclosed property is sld at auction, your credit score is further reduced and when the foreclosure is completed via eviction and repossession of the home, your credit will be even further damaged. If you can complete the short sale BEFORE either of these take place, then you can prevent that further damage to your credit. In addition, when the short sale is completed, it shows up on your credit as a ?Paid? mortgage and a canceled foreclosure, which shows future creditors that you did take care of your obligations. If your situation eventually winds up in bankruptcy, then that is the worst item that could appear on your credit report and it will remain there for years and cause numerous difficulties in getting future credit. A short sale can avoid this, but the key is not to wait.
I am not in foreclosure and have missed NO PAYMENTS, can a short sale work for me or do I qualify for a short sale?
It is difficult to do a short sale if foreclosure has not been filed but it is possible if a couple of payments have been missed and there is a good hardship reason. The lender must be convinced that they will NOT BE REPAID without the short sale. If you are not in foreclosure and you have not missed any payments, a short sale is probably not likely, but it is possible. The key is to have a legitimate financial hardship that will keep you from making the payments. A short sale is not just an easy way out of a bad investment. If you are working and your house has just lost some value that is just a bad investment and you are responsible to pay the shortfall.
Short sales are when lenders agree to discount a mortgage for someone who has had legitimate hardships and who has little chance of paying the amount owed. You may be hearing stories that mortgage companies are hurting and they don?t want these houses and are giving big discounts away. NOT TRUE!! The opposite is happening. Since profits are down, lenders are getting tougher when negotiating prices. They are not letting properties go cheaply and without very good reason. They will try ANYTHING to get you to repay the mortgage in full. A short sale in only a last resort.
What if my mortgage is an FHA, or HUD, or VA mortgage?
Short sales can still be done on these but each one has different criteria.
What is Financial Hardship & why is it so important?
?Financial Hardship? is a critical part of the short sale equation. No matter what you hear about banks ?not being in the business of owning real estate?, they DO NOT give homeowners a break easily. They require ?good reason? to give a discount for a short sale. They have entire departments called ?Loss Mitigation? and their entire job is to reduce the loss the bank takes on a bad loan. Discounts increase that loss so they don?t take it lightly. They must know that this short sale will net them more money than proceeding with the foreclosure.
IF THERE IS NOT A LEGITIMATE FINANCIAL HARDSHIP, A LENDER WILL NOT SHORT SALE EVEN IF THE HOME IS WORTH LESS THAN THE MORTGAGE BALANCE. With no financial hardship the lender will make the borrower pay the shortfall.
A short sale is not a ?get out of jail free? cart to dump your poor investment. Lenders will not allow this and it is a waste of time to try. If you are employed and have some assets but your home has just lost value & you just want to sell, you probably cannot do a short sale.
What do I do about my back property taxes when I do a short sale?
Just as in a normal sale, property taxes are the responsibility of the homeowner until the date the sale is closed. If your property taxes have not been paid this will affect the negotiations with the bank, so you must inform me if these taxes are owed so that I can include them in the package for the bank?s consideration.
Can I short sale my own house?
This would be illegal. A short sale MUST be an ?arms length? transaction. You cannot Short sale your own home nor can close members of your family or friends do one for you. The lender is agreeing to discount the mortgage amount due to legitimate hardship but not so the homeowner can make a profit. You will not be able to take any money from a short sale.
Why are short sale offers so low when my house is so nice?
Seller often have an emotional attachment to their home and often feel an investor?s short sale offer is too low. It is important to remember:
- The seller in a short sale can never receive any money in the transaction therefore it is of little concern at what price the short sale is done. The only real exception is when the seller has tax liability concerns. Otherwise the price should not matter.
- The most important factor is whether or not the lender will accept the price. Sometimes we are shocked at the amount the lender will accept and the reasons are as follows:
a. Sellers are often in denial about how bad the market is.
b. Lenders don?t like the foreclosure process any more than homeowners do. The costs incurred by the lender during the foreclosure process can be astounding and include vandalism, sheriff sale fees, lost interest, taxes, insurance & maintenance costs. This is all before trying to sell the home.
c. Lenders are emotionless in business. They look at the numbers and make a decision.
The lender?s costs can exceed $40,000, so if the numbers work they make the decision. How nice the house is does not matter.
Are short sales guaranteed to work?
NO. Even though short sales are increasing they are still fairly rare. All the criteria must be met for a bank to even consider a short sale. It is not easy to convince a bank that the market value of the home is lower than what they are owed. They do not like to take a loss on a loan. On top of that they must be convinced to discount the mortgage enough to make it viable to a buyer or investor to make a profit for his work & risk. The discount must cover all repair costs, broker commissions, taxes & still allow for a profit for the investor. If the lender does not approve the short sale all purchase agreements that have been signed become void.
What if the bank doesn?t accept the short sale?
If the bank doesn?t accept the short sale offer, there is no transaction and the home is still owned by the foreclosed homeowner and the foreclosure process continues.
How long does a short sale take? I need to get out now.
A short sale takes 60-120 days to complete after the contract is signed and sometimes longer. This is very important. This complicated process takes time, so to have the option of a short sale, you must act soon. If you wait until a week before eviction, no one can help you do a short sale. It is simply impossible. DO NOT WAIT!!!
Do I have to move after I do a short sale?
YES. After the short sale transaction, the buyer will own the house and the seller must move, just as in a normal sale.
Will I still owe taxes after a short sale?
You will need to contact your attorney or CPA because this is a possibility. Sometimes the bank or mortgage company will write off the loan as a bad debt and sometimes they will issue you a 1099C in the amount forgiven. This is considered income. If the home goes to foreclosure you may be issued a Deficiency Judgment. The bank could go after you to collect the deficiency also. So whether you choose foreclosure or short sale there could be further liability for you. Your short sale attorney may be able to get the bank to remove this.
My house needs lots of repairs can I still do a short sale?
Yes, though it can make the process more difficult because the price must be substantially lower. The key is to be able to show the bank all the work that needs to be done. I will need to know if this is the case with your home.
My husband/wife/brother is on the deed with me but doesn?t want to sell. Can I still do a short sale?
No. All parties in title and on the current deed or mortgage must sign the short sale purchase agreement. There are no exceptions to this.
I have 2 or 3 mortgages on the house. Can I still do a short sale?
Yes. It is important to know which mortgage filed the foreclosure or if more than one is in foreclosure, which filed first.
I have already declared bankruptcy, can I still do a short sale?
Yes, but it is more difficult. If the property is currently involved in a bankruptcy, the lender is not the only one who has to approve a short sale. The bankruptcy trustee will also have to approve it. This creates an additional layer of oversight and an additional party who wants to squeeze all it can out of the homeowner. It can still be done, but all conditions have to be perfect. If you are considering bankruptcy as a way to stop the foreclosure, be sure to get good legal advise.
What paperwork must be done to do a short sale?
I will provide you with a list of paperwork most banks require to complete prior to accepting a short sale offer. The first phone call you should make is to your lender requesting a Short Sale Package. Each company is a little different and may require their own forms.
If you have any questions, please call Marita Maxwell 609-504-8557 cell
Broker Associate 800-437-4047x131
CRS, SRES, e-PRO
RE/MAX of Cherry Hill
1736 Rt. 70 East
Cherry Hill, NJ 08004