Short Sale FAQs
What is a Short Sale?
Who pays the real estate commission in a short sale?
How will a Short Sale Affect My Credit?
How long does it take to complete a Short Sale?
Is a Short Sale right for me?
In a Short Sale, how much will I have to pay to sell my home?
Can I deed my property to someone else and avoid a short sale?
If current on my mortgage, will my lender consider a Short Sale?
What qualifies as a "hardship" that will be considered legitimate by a lender?
I have two loans; can I still do a Short Sale?
My property needs work; can I still do a Short Sale?
Will I have to pay Personal Income Tax on the forgiven loan amount?
What is a Short Sale?
When the loan amounts that are secured by a property are greater than the current market value of the property, the property can only be sold as a “Short Sale”, in which the lender(s) settles for lower than their entitled loan amount.
Who pays the real estate commission in a short sale?
The lender ultimately pays the commissions. The real estate commissions are paid out of escrow and reduce the actual amount received by a lender in a short sale. The property owner does not have to come up with cash to pay a real estate commission in a short sale.
How will a Short Sale Affect My Credit?
The main advantage of a short sale is avoiding the foreclosure on your credit report. While the short sale may show up on your credit report as “pre-foreclosure in redemption” or such similar language, it is significantly different in its impact than the foreclosure on your credit report. A typical short sale will impact your credit score by 100-150 points, while a foreclosure will impact it by 250-350 points. In addition, having worked through a short sale with a lender, you may be eligible for a new home loan in as few as 2-3 years, while a foreclosure may require you to wait 5-7 years, pay a higher down payment, and maintain at least a 680 FICO creditor score.
How long does it take to complete a Short Sale?
It all depends on the lenders involved. Once you have a buyer, it can take as little as two weeks or as long as 3-4 months. These days, most lenders are approving short sales in 30-60 days. In most cases, this process can be expedited by beginning the process prior to a buyer being found.
Is a Short Sale right for me?
Mortgage lenders are increasingly willing to work with borrowers faced with a financial hardship to accept a discounted payoff on a mortgage. If you are faced with a hardship that makes it likely you will be unable to meet your obligation on your mortgage, your lender would prefer to settle the matter with you as opposed to taking the property through foreclosure. Your lender is looking to limit any potential loss on your loan. By completing a Short Sale, your lender has arrived at a solution that is, for them, much better than a foreclosure. Bottom line, your lender wants to work with you.
In a Short Sale, how much will I have to pay to sell my home?
Nothing. In most cases you will pay literally no sales costs if your lender approves the Short Sale. All commissions, title and escrow fees, and even most repair expenses are paid by the lender as part of the Short Sale approval. Remember, lenders approve Short Sales and accept the resulting loss in an effort to avoid bigger losses through foreclosure.
Can I deed my property to someone else and avoid a short sale?
Deeding your property to someone without paying off the loan is nearly always a bad idea. In the first place, the lender still considers you primarily responsible for payment on the loan. If loan payments do not get paid, or if the lender ultimately forecloses, this will show on your credit. Secondly, when you deed your property to someone else, you give up control of the property. Along with the deed goes the ability to control the property. Do not deed your property to someone without paying off the loan unless you have consulted with an attorney.
If current on my mortgage, will my lender consider a Short Sale?
The answer is, maybe. Some lenders will accept a Short Sale file for approval on loans that are not delinquent. Other lenders will not. We can put your Short Sale file together within a couple days and submit it for approval. (At no charge.) That is the best way to determine if your lender will accept a file for approval on a loan that is current.
What qualifies as a "hardship" that will be considered legitimate by a lender?
To some extent, that depends upon the mortgage company. Generally, so long as the hardship is real and the mortgage company believes the loan is likely to become delinquent as a result, the Short Sale request will be processed by the Loss Mitigation Department. A big key to getting Loss Mitigation to accept a hardship is to submit a strong hardship letter. The hardship letter sets the tone for the entire file. The list of “hardships” that are common and frequently accepted by mortgage lenders are:
- Family illness or injury
- Illness or injury in the extended family – particularly if it forces relocation
- Job relocation when the property is equity deficient
- Job loss or significant income loss
- Divorce or split of domestic partners
- Adjustment in mortgage payment or unforeseen increase in living expenses
Do lenders approve all Short Sales?
No. That is why it is critical to work with someone that has experience and training at working with Short Sales, such as a CDPE – Certified Distress Property Expert. From the presentation of the Short Sale package to the lender, to working with the lender’s Loss Mitigation Department, I know how to keep the file moving towards approval.
I have two loans; can I still do a Short Sale?
Yes. I work with both lenders (many times the same lender hold the 1st and the 2nd loans) to put together a Short Sale transaction. Even if the value of your home is below the balance of the 1st mortgage, I can normally get the two lenders to cooperate. In the end, neither lender wants to own another home through foreclosure.
My property needs work; can I still do a Short Sale?
Yes. Lenders are more motivated to do a Short Sale on a property that needs work. The lender knows the risk of loss goes up when they foreclose on a property that needs lots of work. Aside from the expense of completing the work, lenders are simply not set up to get the work done. They are in the loan business, not the fix- it business. As part of our strategy, my team typically helps you get reports and estimates on all repair items. These the costs revealed by these reports and estimates will be helpful in getting lender approval faster.
Will I have to pay Personal Income Tax on the forgiven loan amount?
In the eyes of the IRS, you experience a type of income known as "debt relief" when a loan amount is forgiven. You will receive a 1099 from your lender at the end of year when your short sale closes. This could result in a tax consequence to you. You should talk with your accountant BEFORE putting your house on the market, so you understand the potential tax issues for your individual situation.
