Specializing In

Riverside & North San Diego County

Short Sale Listing & Negotiation Services

Short Sale FAQ’s

What is a “short sale?”

When a property’s sale price is less than the total outstanding mortgage debt owed, and the lenders involved agree to accept the resulting lower payoff amounts, they have accepted a “short sale” on the property. 

In most respects, a short sale is like any other real estate purchase with the exception that all lenders involved must agree to accept the short payoff that would result before the sale can be completed. 

Generally, home owners who request short sales are dealing with some financial hardship which makes it impossible for them to continue making payments, or to catch up on past missed payments.

In order for this process to succeed, the lender must be convinced of three things:

1.    That the loan cannot be saved and/or modified in a way that will allow the homeowner to continue/resume making payments.

2.    That there is a logical reason why the homeowner cannot continue to make their payments.

3.    The value of the property is less than the outstanding loan amount.

Isn’t it Easier Just to “Walk?” Why Should I Short Sell?

There are a couple of reason why short selling is better than walking away:

1.    Reduce damage to credit. If you have any desire to purchase a home in the foreseeable future, or are interested in avoiding the severe damage a foreclosure will do to your credit, then you should seriously look at short selling.

First, let’s look at the credit effects you subject yourself to if you walk away and let you home go through the complete foreclosure process. First your score drops significantly due to the accumulated late mortgage payments that start piling up. These “dings” will stay with you for some time. However, the affect on your FICO score drops significantly one year from the date of your last missed, or late, payment.

Then once the bank files a notice of default and starts the formal foreclosure process, your score is eroded further and another major negative item added to your credit report to stay with you for some time.

If you fail to remedy the situation via a short sale, or through working out your loan with your lender thus stopping the damage at this point, and they proceed with a trustee’s sale, you will have a full blown foreclosure on your report which 2^nd only to bankruptcy in terms of credit score damage and long term ill effects on your credit rating.

To add further injury, if you fail to vacate the property in a timely manner after the bank repossess your former home, they will quickly remove you via an eviction proceeding with also slams your credit and makes it more difficult to obtain rental housing.

It is estimated that a full blown foreclosure, without eviction, reduces your credit score by between 250-280 points.

A short sale on the other hand, once completed will result in the initial damage done via the missed mortgage payments (remember, their drag on your score drops significantly after one year); any damage that results from the reporting that your were “in foreclosure” and your former loan will show “paid” on credit reports. Sometimes there is also language to the effect that the loan was “settled,” or “satisfied for less than owed.”

Estimates of the effects of a short sale on your credit score vary from 80-120 points, or about half the impact of foreclosure.

A significant change which makes short sales an even more attractive option has to do with when you can qualify to purchase a home again in the future. 

Guideline changes enacted in August 2008 now stipulate that a borrower with a foreclosure will not be eligible for a Fannie Mae, Freddie Mac, or FHA loan until 5 years after the foreclosure.

These same guideline changes state that those with a short sale in their past can purchase again in 2 years. This is a huge difference if you plan on buying again while the market is likely to still be down on home prices. 

Of course these “time to buy again” figures assume one has maintained clean credit after they have finished with their foreclosure or short sale.

If a short sale can be completed prior to the lender filing an NOD and/or reporting that you are “in foreclosure” to the credit reporting bureau’s, a significant amount of unnecessary credit damage can likely be avoided.

2.    Exit Your Home On Your Terms. One of the advantages of selling your home via a short sale is that you have more involvement in the process leading up to your’ moving from your home.

With a foreclosure, the bank is very much in control of the process and makes decisions which affect how soon you will be vacating your property. Often this is done with only the bare minimum communication that is required by law.

With our clients, we are in communication with their lender(s) on a weekly basis pushing their short sale through the lenders loss mitigation departments. By maintaining this level of communication, we can keep you informed every step of the way. This can make the process much more bearable for most sellers.

At least they know what’s happening with their transaction and can know what to expect. Plus, the terms of the move out can often be negotiated with the purchaser of the home rather than having to worry about some representative of the lender showing one day telling you when you have to leave.

How do I know if I’m a Good Candidate For A Short Sale?

If you are behind in your mortgage payments and have been unsuccessful in working with your lender(s) in having your loan payment modified in a way that works for you, then you are likely a candidate for a short sale.

Remember, the lender must be convinced that there is a logical reason, what they call a “hardship,” why you are unable to continue with your payments. Some examples of a hardship situation in which a lender would consider a short sale would be:

·        Loss of employment

·        Reduction in wages due to factors beyond your control

·        Illness or injury which impacts your income or ability to meet your loan obligation

·        Divorce

·        Increase in mortgage payment due to adjustable loan.

·        Job relocation

Generally most short sales are done on homes that are at some point in the foreclosure process. If you have been given a notice of default (NOD), or have had a trustees sale notice posted on your property, you are a good candidate for a short sale…if you are behind for a good reason.

As long as your trustee’s sale date is at least 45 days from the date you contact the lender requesting a short sale, this option should work for you.

You are not a good candidate for a short sale if:

·        You do not have a legitimate hardship situation that prevents you from meeting your mortgage obligation.

·        Are upset at the fact that you now owe way $200,000 more on your home than it is worth but can still make your payments.

Short sales are not an easy “out” for a homeowner looking to bail on what they view as a bad investment decision. Lenders take a very different view of folks simply trying to work the system to get out from under a large mortgage.

Lenders do not view short selling as a way of relieving you of a large debt that you now regret.

Often, they might allow a short sale to proceed, but will later seek a judgment against the homeowner for the amount of loss the lender incurred. In these situations, bankruptcy is often the only thing that will protect the borrower.

We will NOT act as an agent for homeowners who do not have a valid hardship situation. 

Why Would the Mortgage Company Agree to Accept my Short Sale?

Banks are not in the business of being benevolent. They exist to make money and their decision to accept a short sale in your situation has nothing to do with helping you.

Their decision is based on minimizing their loss on what they now view as a bad loan. Foreclosures are not only devastating to the homeowner, there are extremely costly for the lender.

The costs of a foreclosure over a short sale can be significant. In most cases, the lender will recover as much as 25%-30% less of the original loan value if they foreclose instead of accepting a short sale.

Attorney’s fees, recovery costs, carrying costs and marketing fees make foreclosing a last resort for lenders. They are not in the business of owning homes and have to expend a great deal of energy recovering them and selling them. This is why the credit industry looks so unfavorably on a foreclosure.

For all these reasons, lenders are making short sales easier to process than ever. Even loan insurers like Fannie Mae and Freddie Mac are pushing lenders to work out short sales quickly to prevent the flood of foreclosures we’ve been seeing in the past 18 months.

My [Brother, Sister, Friend, etc…] is a Realtor and He/She Says that Short Sales Are a Waste of Time. They Don’t Close. 

This is a common thing we hear. It has some basis in truth and stems from the fact that most agents who try to do a short sale don’t understand how the process works. They don’t have experience, don’t understand in the inner workings of the lenders loss mitigation departments, don’t know how to manage the expectations of the seller and/or the buyers involved and, as a result, had a bad experience.

Like most things in life, being a successful short sale agent requires repetition. The more you do, the better you get. Most agents coming off the roaring market we enjoyed are used to the quick and predictable money they could make selling homes. Short sales can take time and definitely involve much more work than a traditional transaction. As a result, many agents don’t like short sales because the process takes longer. 

Our view is that our clients were there for us during the boom times, we need to be there for them during the down times. Plus, short sales are the right thing to do for the homeowner, the lender and the community. They are, most likely, the right thing to do in many cases.

Short sales do close. We’ve done it many times.

Do All Short Sales Close

No. Like anything involving people, lenders don’t always see things they way we’d like. If done properly, and if started in enough time prior to the trustee’s sale date, most will close.

However, sometimes we get a lender that isn’t convinced of a hardship, or that the price in the area has really dropped that low, whatever. Often times this can be cured by a little more time on the market and additional offers on the property.

I Haven’t Missed a Single Payment and Am not in Foreclosure. Can I Still Qualify for a Short Sale?

If the lender is convinced that your hardship is going to result in the loan going into default without any hope of recovery, then yes, they will likely approve a short sale.

The hardship needs to be convincing to the lender and must be supported by the facts. 

Even if the situation is hopeless, often times you must be behind in your payments to get the lender to take notice. If the hardship is legitimate, then this is likely to happen anyway.

I Have a 2^nd Mortgage On My House. Can I Still Short Sell?

Yes. However, the process takes longer. The 2^nd mortgage companies know that they will get next to nothing in a short sale so they can make the process more difficult if not handled correctly. 

The most important thing for you to remember is to inform us if you have a 2^nd mortgage. ALL mortgages must be involved in the short sale. If the 1^st mortgage accepts, but the 2^nd does not, the short sale cannot proceed.

ANY loan that uses your home as collateral must be dealt with for a successful short sale. This means that home improvement loans, lines of credit (HELOC’s) and other similar loans you may have taken out over time have to agree to the short sale. 

What if I’m Delinquent on my Property Taxes? 

This must be negotiated with the lender at the time we are seeking approval of the short sale. In order for the sale to be completed, the buyer will need to get title to the property free from any liens or past due taxes (Their lender won’t let them purchase a home and inherit your past due taxes).

As a result, if you do not have the financial means to pay the taxes yourself (if you did, they’d want you to get the mortgage current!) these costs come out of the lenders proceeds from the sale.

How Much Do I Have to Pay You to Short Sell My Home?

Nothing. Our fees are paid by the lender with whom we negotiate the short sale.

How Long Does a Short Sale Take

At least 60 days and it could run up to 7 months. Add more time for complicating factors such as 2^nd mortgages, bankruptcy, IRS liens, etc. 

Additionally, the loss mitigation departments at most lenders are swamped with short sale requests. This can slow the process at some banks.

Keeping in mind that short sales take more time, you must act quickly in order to give yourself the time needed to complete the sale before the foreclosure process goes too far.

Nothing is worse than realizing you could have done something about the situation but acted too late to stop foreclosure.

My Home is in Bad Shape…Can I Still Short Sell?

Yes. Remember, a short sale is like any other sale in terms of the buyer/seller relationship. The difference is that a 3^rd party, your lender(s), have to approve of the deal.

The lender might actually be more motivated to complete the sale as your problems with the home will become theirs if they don’t help you sell the house.  

Will the Bank Come After Me For Money After the Short Sale?

Maybe. The bank only need remove their lien for a short sale to proceed. Forgiving the debt is optional for them.  

There are two basic documents you signed when you purchased your home. The PROMISSORY NOTE, in which you promised to repay the entire amount borrowed and the TRUST DEED in which you put your home up as collateral for your promise to repay. The trust deed is a lien. The promissory note is a personal guarantee you made to the bank. 

The bank will release a lien to get some of their money via a short sale. However, their agreement to do so does not mean you are off the hook for your promissory note. Hiring a competent short sale agent who knows how to get your lender to forgive your promissory note is key.

This will prevent your lender, or someone they sell the debt to, from coming back after you later by getting a deficiency judgment against you.  

I’ve Been Told to Expect a Huge Tax Bill if I Short Sell. Is That True?

Normally yes. The IRS has a name for a debt that is forgiven: INCOME. As such, in the past, when a lender forgave a borrowers debt, they would issue the borrower a form 1099C which showed the amount of debt they “forgave.” This, in turn, you were required to report on your taxes.

We are short selling some homes that result in a forgiven debt of over $400,000. Imagine the income tax burden that generates…that works out to about $120,000 for most people.

However, congress, seeing this tidal wave of foreclosures and short sales about to crash on the nation, enacted the Mortgage Debt Relief Act of 2007 (MDRA). This bill temporarily suspends the IRS from collecting on debt forgiven in a short sale between 1/1/2008 and 12/31/2009.

There are limited exclusions to MDRA that you should consult with your tax professional about if you are concerned about this.

ONE POINT – If you do not attempt a short sale for fear of a large tax bill, your lender can still come after you for what they lose as a result of your foreclosure. You have greater protection now than at any time in history against the lenders losses through a short sale.

Can My Brother, Sister, Father, Etc…By My House Through a Short Sale.

No. A short sale must be what the lenders call an “arms length transaction.” You or your family can in no way benefit from then lender accepting this huge loss. The best way they can ensure against any illicit motive a seller might have, is to prevent the opportunity for the seller to benefit from the sale. 

Lenders prohibit any proceeds from a short sale going to the seller. They have no confidence this is the case if a family member is involved.  

I Talked to a Guy Who Says He Can Save My House. Is This Possible?

If he’s going to give you a bunch of money to get your mortgage current then, sure, he can save your house.

Unfortunately, there are many predators out there who make an industry out of “helping” distressed homeowners. They typically involve some scam in which they try to talk you into giving them title to your house in exchange for letting you live there while they become your “partner.”

Here is a list of “Don’ts that you need to know:

1.    Don’t EVER allow an investor/buyer to negotiate with your lender directly to purchase your home as a short sale. These people are not agents and are not required by law to act in your best interests. In many situations, these folks negotiate the purchase of your home and leave you stuck with the debt liability. If you’re going to lose your home, at least give yourself the chance of not having to look over your shoulder for years to come, worried about debt collectors.

2.    Don’t EVER pay someone up front to do a short sale, loan modification or any way take some action in which they can “save” your home. Your lender has spent a great deal of money hiring and training people to help you work out your loan to the best of their ability. If that fails, a competent real estate agent, who only gets paid if they produce positive result for you and the lender, is your best bet. “WE STOP FORECLOSURE,” “WE CAN SAVE YOUR HOUSE,” these are all usually attempts by those trying capitalize on your circumstances and obtain up front fees. They get paid whether they help you or not.

3.    Don’t EVER deed your property to someone until you are sure they have paid your loan off. These scam artists promise to save your home if you just give them the deed. You have now given them the right to use what is now their property while you are still responsible for the mortgage payments.

4.    Don’t EVER cave into the pressure an investor/buyer might put on you to sell your home to them at some steep discount “before its too late.” Chances are, the home is worth more than the mortgage amount and they are trying to steal it by taking advantage of a bad situation. The elderly, with equity built up over years of ownership are most vulnerable to this type of theft.

5.    Don’t EVER DO NOTHING! We are absolute amazed at how many people just let a foreclosure run its course; not trying to work their loan out with their lender, not exploring a short sale and not seeking help. They then have to face the disaster of foreclosure and the prospect of being sued for the lenders loss. There are options. Working with your lender, through loan modification or short sale, is almost always preferable to foreclosure because you are trying to do the right thing. If it results in a far quicker recovery from a credit standpoint and your ability to not have to worry after it is over, why wouldn’t you take action?

What Is a Short Refi?

If your credit is still strong enough to qualify for a refinance of your property, you might qualify for a short refi. Not all lenders will accept this. However, under the right circumstances this is a great solution to those who might not be able to continue to make payments, but still have good credit and steady income.

Basically the process involves obtaining approval for a new loan on the home at the current market value. Then, the same basic short sale type negotiations occur with your lender to accept this new short payment via the new loan. Often, lenders willing to take this route will actually be the source of the new loan.

NO MORE STATE TAX ON FORGIVEN DEBT

Distressed homeowners no longer have to pay California state income tax on debt forgiven in a short sale, foreclosure, or loan modification.  Enacted into law yesterday, Senate Bill 401 generally aligns California's tax treatment of mortgage debt relief income with federal law.  For debt forgiven on a loan secured by a "qualified principal residence," borrowers will now be exempt from both federal and state income tax consequences.  The existing federal exemption is for indebtedness up to $2 million, whereas the new California exemption is for indebtedness up to $800,000 and forgiven debt up to $500,000.

"Qualified principal residence" indebtedness is defined as debt incurred in acquiring, constructing, or substantially improving a principal residence.  It includes both first and second trust deeds.  It also includes a refinance loan to the extent the funds were used to payoff a previous loan that would have qualified.

The tax breaks apply to debts discharged from 2009 through 2012.  Californians who have already filed their 2009 tax returns may claim the exemption by filing a Form 540X amendment.
 
Taxpayers who do not qualify for the above exemptions (e.g., second home or rental property) may nevertheless be exempt under other provisions.  Most notably, taxpayers who are bankrupt are exempt from debt relief income tax.  Also, taxpayers who are insolvent are exempt from debt relief income tax to the extent their current liabilities exceed current assets.

For more information about mortgage forgiveness tax consequences, go to California Franchise Tax Board's Mortgage Forgiveness Debt Relief Extended webpage and the Internal Revenue Service's Mortgage Forgiveness Debt Relief Act and Debt Cancellation webpage.  The full text of Senate Bill 401 is available at www.leginfo.ca.gov. 

Will My home rise in price over the next 10 years?

Most homes to begin building positive equity by late 2015
The typical U.S. homeowner in a negative equity position will begin to build positive home equity by late 2015 or early 2016, according to a forecast by First American CoreLogic. In some depressed markets, typical borrowers with negative equity may not experience positive equity until 2020 or later, according to the report.  Research conducted by First American CoreLogic indicates more than 11.3 million, or 24 percent, of all residential properties with mortgages, had negative equity at the end of the fourth quarter of 2009.

Although house price appreciation will, over time, offset negative equity, in most cases, amortization will be a more significant remedy to negative equity. According to the report, over the next 10 years, the average loan balance will decrease by an annual rate of 3.3 percent, while home price are expected to increase at a three-percent annual rate over the next decade.

We can help in this situation as well due to our lending experience contact us today to discuss your situation.

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