What is a Short Sale?

A short sale means the sale is subject to the lender is accepting a payoff that is less than the existing mortgage balance. Lender accept a short sale when the value has fallen below the mortgage, and the seller has no other recourse. Of course the seller gets nothing except the debt forgiven.

Add up the total amount of loans, liens, other obligations, and closing costs against the your home. If you end up with a negative number, you have a short sale.

Lenders like short sales better than foreclosure, because they can avoid timely and costly foreclosure proceedings which could result in the bank owning the property – what we call an “REO” (Real Estate Owned.) Banks are not in the business of owning property, so getting a property sold, even at a loss, is often better for them than foreclosure.

If there are two loans, the first mortgage lender is going to get money even if the second lender doesn’t. It’s common to see a 2nd mortgage lender get nothing out of a short sale. Amazing as it is, it’s sometimes more profitable for the 2nd mortgage lender to just let the loan go instead of foreclosing because they’ll get nothing either way.

A lender is not going to agree to a short sale unless the seller is unable to pay the difference between the sales price and the loans.

Once the seller accepts an offer, they send it to the lender for approval, which can take several weeks to 6 months. The lender will want to see that the buyer has a loan approved, so as usual, the buyer should send a preapproval letter along with the offer.

In a short sale, lenders will not usually pay for the customary things that a seller would pay for, such as home warranties, closing cost credits, and termite inspections. The property will almost always be conveyed "as is."

A buyer should always get a professional home inspection and pay for other types of inspections needed.


How is the Seller's Credit Affected?

Sellers take as big a hit on their credit report by going through foreclosure as giving the lender a deed-in-lieu of foreclosure.

Short sale, Foreclosure or Deed-in-Lieu of Foreclosure - these affect credit the about same. Sellers take a hit of 200 to 300 points on their credit score, depending on overall condition of credit, and the effect of a short sale on a seller's credit report is basically identical to that of a foreclosure. The short sale can stay on your credit for up to 10 years, with the delinquencies that are associated with it. That doesn’t mean that 10 years later you won’t be able to get a loan, it just means lenders will still see it.

When can I buy a house again?
The good credit reputation you have will be gone when you complete a short sale. A seller who wants to buy another home after a short sale will most likely have to wait about 2 years before a lender will even consider a loan. But as lending rules are changing frequently, you could be surprised to find you have to wait even longer.

The bad news is that sellers can be subject to a deficiency judgment for the difference between the loan amount and the short sale price. To find out whether a foreclosure or short sale is subject to a deficiency judgment, talk to a real estate lawyer.

If you're trying to decide whether to go through a foreclosure versus attempting a short sale, remember there is no credit score advantage to doing a short sale. The only advantage is being able to buy another home within two years. You should seek legal and tax advice before making this important decision.


What documents are necessary to proceed with a short sale?

Lender often require a hardship letter detailing the circumstances behind the short sale. A signed purchase contract, a preliminary HUD-1 settlement statement and a preliminary estimate of proceeds to the lender. Lenders also want to see the financial condition of the seller, so they ask for pay check stubs, bank statements, a personal financial statement and monthly budget assessment, among other things. It’s a lot like applying for a loan.

Most lenders will not accept a short sale if the seller is in the middle of a bankruptcy proceeding, because negotiating a short sale is considered a collection activity which is prohibited in a bankruptcy.

Some Lenders require an appraisal be submitted in the short sale package, and other may only require the real estate brokers price opinion.


Tax implications in the short of real estate.

As a real estate agent, I am not licensed as a lawyer nor a CPA and cannot advise on tax or legal consequences. Except for some conditions pursuant to the Mortgage Forgiveness Debt Relief Act of 2007, be aware the I.R.S. could consider debt forgiveness as income, and there is no guarantee that a lender who accepts a short sale will not legally pursue a borrower for the forgiven debt, which in that case would not really be totally forgiven.

As a short sale represents a loss for the lender, they may report the amount lost in tax form 1099, and the seller may be responsible for paying taxes on the amount of debt forgiven.

Speak to the loss mitigation department and give a brief summary of your situation. Understand what the lender wants and their procedures for a short sale. Some lenders may have alternatives and want to modify your loan or pursue other alternatives.

Legal implications of a short sale.
Lenders are agreeing to a short because it will cost less for them than it would to foreclose on the home. You should consult a qualified tax and legal counsel before going through with any of this.

A seller with little or no assets, little or no income, and a willingness to file bankruptcy has little to lose except their good credit rating, by going forward with a short sale. Those with other assets, a job with garnishable wages, or a desire to avoid bankruptcy are at risk in a short sale and should avoid it. Those considering a short sale need to consult a lawyer regarding the short sale.

If you have other assets such as saving or retirement, the lender may not accept your short sale without you paying money to them to make up the difference.


Renting After a Short Sale
Due to the widespread credit meltdown, many landlords have seen short sales already. While your score will be very low, they will want to see that you have paid your other bills on time. A credit report with a lot of "derogs" over a long period of time would be viewed very negatively.

The nation’s two largest mortgage investors, Fannie Mae and Freddie Mac -- with certain exceptions -- won’t lend to you again for five years (foreclosure) and two years (short sale).

Not all lenders will accept short sales or discounted payoffs, especially if it would make more financial sense to foreclose; moreover, not all sellers nor all properties qualify for short sales.

If you are considering buying a short sale, there could be drawbacks. For your protection, I suggest that all borrowers obtain legal advice from a competent real estate lawyer and call an accountant to discuss short sale tax ramifications.


Submit Letter of Authorization
Lenders will not want to disclose your personal information without written authorization. If you are working with a real estate agent, closing agent, title company or lawyer, you will receive better cooperation if you write a letter to the lender giving the lender permission to talk with those specific interested parties about your loan.

The letter should include the following:

Property Address, Loan Number, Your Name, Your Agent's Name & Contact Information.

The Preliminary Seller’s Net Sheet
This is an estimated closing statement that shows the amount of money you expect to net (a negative number in every short sale) after all the costs of the sale, the loan balances, any outstanding liens and late fees, including real estate commissions. The escrow officer can prepare this for you.

Hardship Letter
If you want your short sale approved, then the more pathetic your hardship letter, the better. This letter describes how you got into this financial position asks the lender to accept less than the current loan payoff. If you lost a job, had a major illness, or if someone died, you’re chances are better at being approved.

Bank Statements
If your bank statements show big deposits, big cash withdrawals or a lot of income, the lender will want you to explain why. The lender might want you to account for every single deposit to determine whether deposits will continue. If they see that you will keep making money, they may want you to pay it to them!


Purchase Contract & Listing Agreement
When you get a purchase contract with a purchaser, send the lender a copy of the offer, along with a copy of your listing agreement. Be prepared to renegotiate commissions and everything else, even the price. If all goes well, the lender will approve your short sale after some negotiations. You can ask that the lender not report derogatory credit to the credit reporting agencies, but the lender is under no obligation to do this.