What’s a Short Sale?
A short sale is when you owe more on the house than it’s worth and you need to sell it. Basically, you would be asking the lender (whoever has the loan) to take less money than what you borrowed. For borrowers, a short sale damages their credit score but not as severely as a foreclosure.
What happens in a Short Sale?
Every lender has their own way of doing things and what they’ll ask for (as far as documentation goes) but the following steps are generally true for most lenders:
- Call the Lender
This is often the most difficult step for an individual to do. It’s overcoming the inertia to get the ball rolling. You may need to make a bunch of phone calls and get transferred to many departments before you find the person responsible for handling short sales. For my clients, we either make these calls together or if the property owner prefers, I will get your signed permission to talk to you lender on your behalf.
This is where we gather up all the information the lender needs to determine if this really will be a short sale and how much of their loan they will get back. Documentation generally requires the following but is not limited to just these documents:
- Proof of Income and Assets
The lender will want you to fill out a form stating what all your expenses are and what all your assets are. Be truthful about your financial situation and disclose everything. Lenders want to see that the debtor truly cannot pay back any of the debt that it is forgiving. They may also ask to see copies of your prior year’s tax returns. Don’t worry though, lenders are not unreasonable and understand that you need money to live on once you move from the property.
- Copies of Bank Statements
The lender is looking for what’s going in and what’s coming out of your bank accounts. If your outgo is more each month than your inflow, you are a good candidate for a short sale. The lender may ask for an explanation of deposits and withdrawals.
- Hardship Letter
The sadder, the better. You are going to tell your story and describe how you got into this financial bind. You will end the letter with a plea to the lender to accept less than full payment you owe them. Lenders can understand if you lost your job, were hospitalized or other awful circumstances happened that were beyond your control. They will not be empathetic to situations involving dishonesty or criminal behavior.
- Listing Agreement
The lender will want to see that you taking action to move forward and resolve this situation. They will want to see that you and I have reached an agreement to sell your house. The lender may renegotiate commissions, decide on a different listing price than what we have and/or refuse to pay for items such as termite inspections or a home warranty.
- Comparative Market Analysis (CMA)
Most lenders will want to see that we’ve done our homework on the proposed listing price. This is my homework and I will prepare it. The lender will want to see what other homes have sold in the area and what price did they get for them. In addition to this, the lender will also order a BPO (Broker’s Price Opinion). The lender has their own Realtor do a CMA (called a BPO) to check that we are not under or overpricing the property. Typically, both these reports will include:
- Solds from the past six months
- Actives on the market
- Pending sales
- Purchase Agreement
It is interesting to note that we don’t have to wait for an “OK” to get your home on the market. Once we have a purchase agreement (and if there are multiple offers, you pick the one we will go with), the lender will want a copy of the offer. They are looking to see that it is a bona fide offer.
- Preliminary Net Sheet
This is an estimated closing statement from the title company that shows the offer price you expect to receive, unpaid loan balances, outstanding payments due, late fees, Realtor commissions, etc. The lender is looking at the bottom line…how much are they going to get towards what is owed them.
If the short sale package is approved, the property can be sold and the lender will accept less than what you owe on the property. The length of time approval takes ranges from almost immediately once all the paperwork is received to as long as a year. As banks have geared up their short sale departments, the length of time to approval is getting shorter.
Mortgages in the United States are generally non-recourse loans. This means that once it’s sold, it’s done. The lender usually does not come after you later to ask you to pay back the part they have forgiven.*
Also in the state of California, most short sales of primary residences carry no tax penalties anymore. Previously, if the lender forgave, for example, $50,000 of a loan, The state and federal government would consider that a gift and you would owe taxes on the $50,000.*
What are some of the benefits of a Short Sale?
- To your neighbors, a short sale looks just like a regular home sale
- The sale of your house will be handled with respect and dignity
- You are in control of the sale, not the bank
- You may sleep better at night knowing who is buying your home.
- You will spare yourself the social and credit stigma of the "F" word: foreclosure
- You can be current on your payments and still apply for a short sale
What happens to me AFTER a Short Sale?
You will need to find a place to move to. You may have to look out of the area. Most lenders will be reporting something to the credit agencies so it is best to find a place to live before your credit report is negatively affected.
How is my Credit affected after a Short Sale?
All lenders report short sales differently and it can be considered to be a derogatory mark on your credit. The 3 credit bureaus do not show the word "short sale" on your credit report. You will see instead phrases such as "paid in full for less than agreed," "settled for less," or as a charge off.
Certain HAFA guidelines allow for no hit to credit and can show up as paid in full. Some non-HAFA clients report small negative credit score drops from 50 points to 130 points. Major drops seem to be due to being in default (falling behind on your payments for months) rather than the short sale itself. Negative credit, however, stays on your report for 7 years.
How soon until I can buy another house after a Short Sale?
Fannie Mae guidelines may allow you to buy another home immediately if the lender does not require that you pay back the loan and if your payments were never behind more than 30 days. However, finding a lender who will fund that kind of loan is very difficult. It is easier to find a portfolio loan.
If your Fannie Mae payments were in arrears when the short sale happened, you may qualify to buy another home with a Fannie-Mae backed mortgage within 2 years, regardless of whether the home is your primary residence.
FHA loans may allow you to buy another home immediately if you were current on your mortgage. However, some lender requirements can be strange: you have to move more than 600 miles away for example.
If your FHA payments were in arrears when the short sale happened, you may qualify to buy another home with an FHA loan within 3 years.
When you do finally apply for a new loan, the loan application typically does not ask if you’ve had a short sale in your past. You may report that you sold your home.
Important to know
*I am a Realtor and NOT a licensed lawyer or CPA. I cannot advise on those consequences especially since new laws are constantly changing the legal and tax consequences.
Under 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 difference between the amount owed and the amount paid. In some states, this amount is known as a deficiency. A lawyer can determine whether your loan qualifies for a deficiency judgement or claim.
Always obtain legal and tax advice before making a decision between a short sale, foreclosure or keeping a property.