I recently met with a client who didn’t know what a short sale was. I was shocked. Then I remembered that most people are not immersed in the short sale/preforeclosure world as I am. That's when I decided to come up for air and write this blog post.
Below are straight forward answers to basic short sale questions. There is much more to know about short sales than what is written in this below but this will give you a general idea.
What is a Short Sale?
A Short Sale is the result of an agreement between you and your lender in which the lender agrees to accept less than your outstanding loan balance as payment in full to accommodate the sale of the property at current market value. It's like negotiating with your credit card company to take less than what you owe them to settle the account.
Why would a lender agree to a short sale?
Foreclosure is an expensive process. A short sale gives the lender the opportunity to liquidate potential “bad debt” and recover losses without the high cost of foreclosure proceedings. Another reason why lenders agree to a short sale is that it gives them the opportunity to liquidate bad debt and get it off their books. A short sale is the closest thing to a win-win for a seller who wants to get out and a lender who wants to get paid.
What are the benefits of a short sale?
There are lots of benefits to short selling. A short sale will:
- Prevent foreclosure
- Relieve you of the responsibility over the property with considerably less credit damage than foreclosure
- Allows for forgiveness of debt. The lender will accept the net proceeds of the sale as payment in full.
- No deficiency judgments for now (In California)
- No tax liability in many cases(check with your CPA)
How do I know if I qualify for a short sale?
In most cases, you must provide proof of present or future hardship. And although the Home Affordable Foreclosure Alternatives Program(HAFA) does not have income requirements to document a hardship, your lender will want to know why you want to short sale your property.
What is a hardship?
A hardship is any situation or event that hinders your ability to continue making your mortgage payments.
The following are examples of hardship:
- Loss of employment/business
- Loss of income
- Health issues
- Medical bills
- Increase in Monthly Financial Obligations
- Present or future rate/payment increase on current mortgage
- Separation or divorce
- Death of a spouse
How Long Does a Short Sale Take to Complete?
Every short sale is different. Time lines hinge on current market conditions, your lender's processing time, the experience of your real estate agent and your particular circumstances. On average, a short sale takes 45 to 90 days to finalize after an accepted offer is submitted to a lender for approval. So relax and put your feet up. We're gonna be a while.
How much does it cost to do a short sale?
Nothing. All fees including broker commissions, escrow and title fees will be paid out of the sale proceeds. The HAFA program includes a $3000 seller relocation incentive, which means you get a check at close of escrow. Some lenders offer homeowners additional cash incentives to sell their property.
The flip side is that sometimes lenders require sellers to contribute to the short sale via a “seller contribution”. The contributions can usually be negotiated down or eliminated altogether. A thorough explanation of seller contributions calls for another blog post, so stay tuned.
What is my potential liability after completing a short sale?
IN CALIFORNIA: Under the Mortgage Debt Relief Act of 2007 (H.R. 3648) and the Conformity Act of 2010 (SB 401- California) any amount forgiven on a mortgage debt secured by a principal residence cannot be taxed. CA SB 931 (2010) was put into law and it became Civil Code of Procedure 580(e), requiring that any first lender that agrees to a short sale must accept the agreed-upon short sale amount as payment in full of the outstanding balance. This law has been amended to include second liens. I recommend you seek the advice of an attorney or your CPA.
Please keep in mind that I practice in California. Just as short sales vary from lender to lender, they also vary from state to state. I hope you found this helpful. If you have any questions, feel free to drop me a line or two.