What is a Short Sale?
A short sale can be a good solution for homeowners who need to sell their home but owe more on their home than what the home is currently worth. Here’s a more official definition of a short sale:
A short sale occurs when the seller’s lender agrees to accept less than the total amount due on the seller’s current loan balance. Let’s say your mortgage is $100,000, but your home’s current market value is $80,000, you are $20,000 short, not including costs to close the sale such as real estate commissions, recording fees, property taxes, HOA fees or title and escrow charges. Sometimes, to avoid going through the costs of foreclosure, a lender will approve a short sale via an Arms Length Short Sale Transaction which allows a buyer (not related to the seller) the ability to purchase the home for less than the mortgage balance while the home is in pre-foreclosure stage.
Sample steps of a short sale:
- Seller signs a listing agreement with a real estate agent subject to selling as a short sale with third-party approval.
- Seller, through listing agent, submits short sale package.
- The agent finds a buyer who makes an offer for less than the amount of the mortgage.
- Seller accepts the buyer’s purchase offer.
- Seller’s lender accepts the buyer’s purchase offer.
- Transaction closes when the buyer delivers the funds, the lender releases the lien and the seller delivers the deed.
Short Sale Requirements – Do You Qualify for a Short Sale?
1. The Seller Has Fallen on Hard Times. The most common justification for a short sale is financial hardship. The seller must submit a letter of hardship that explains why the seller cannot pay the difference due upon sale, including why the seller has or will stop making the monthly payments.
Examples of hardship are:
- Mortgage adjustment or loan payment increase.
- Unemployment and/or reduced income
- Medical emergency / sudden illness
- Death of a spouse or family member
- Excessive debt/Negative cash flow; where monthly expenses exceed monthly income
- Evidence of pending loss and insolvency
- Involuntary job relocation
- Business failure (for the small business owner)
- Inheritance (for heirs receiving ownership of property)
- Military service
- Significant tax or insurance increase
2. The Home’s Market Value Has Dropped. Hard comparable sales must substantiate that the home is worth less than the unpaid balance due the lender. This unpaid balance may include a prepayment penalty.
3. The Mortgage is in or Near Default Status. It used to be that lenders would not consider a short sale if the payments were current, but that is no longer the case. Realizing that other factors contribute to a potential default, many lenders are eager to head off future problems at the pass.
4. The Seller Has No Assets. The lender will probably want to see a copy of the seller’s tax returns and / or a financial statement. If the lender discovers assets, the lender may not grant the short sale because the lender will feel that the seller has the ability to pay the shorted difference. Sellers with assets may still be granted a short sale but could be required to pay back the shortfall. For example, if the seller has cash in a savings account, owns other real estate, stocks, bonds or even IRA accounts, the lender will most likely determine that the seller has assets. However, the lender might discount the amount the seller is required to pay back. Many entities profit from short sales, but there is no seller short sale profit.
Short Sale Consequences
A short sale is dependent on a buyer making an offer to purchase. If you do not receive an offer, you will not qualify for a short sale. So even if you meet all the other criteria, it is possible that no one will buy the short sale. It is also dependent on the lender accepting the buyer’s offer. If the lender rejects the offer, a short sale will not take place.
- Tax Consequences – If the lender agrees to the short sale, the lender may possess the right to issue you a 1099 for the shorted difference, due to a provision in the IRS code about debt forgiveness. Many situations are exempt from debt forgiveness, according to the Mortgage Forgiveness Debt Relief Act of 2007. You should speak to a real estate lawyer and a tax accountant to determine the amount of short sale tax consequences, and whether you can afford to pay those taxes, if any.
- Blemished Credit Report – A short sale will show up on your credit report. It’s a pre-foreclosure that has been redeemed. Short sales affect credit ratings. While the damage to your credit report may not seem as significantly bad as a foreclosure to you, creditors may not make the distinction. Experts say the drop in your FICO score is identical to a foreclosure reporting.
Understanding your options now could mean all the difference in the world. A Short Sale can be a complicated process best handled through the expertise of experienced professionals. We have agents in our office that have experience getting short sales Closed!. If you have questions or feel you may qualify for a short sale please contact Arizona Team Realty for a free consultation.