What is a Short Sale?

What is a short sale? Let's start off with some questions and answers below.

1) The definition of a short sale

A short sale is when a borrower must sell their home and the proceeds are less than the amount owed to pay off the mortgage balance. A short sale is desirable for owners whose financial situations demand that they sell their property and who are unable to qualify for other loss mitigation techniques. Simply put a short sale is when the value of the property has dropped below the current mortgage balance owed.

2) Can I be sure my bank will cooperate?

A foreclosure is a bad thing for the bank. A foreclosure cost the bank a bundle of cash and past experience has shown that after a bank gains a property by foreclosure it is in worse shape compared to other options because disgruntled mortgage holders don't leave the property in the best condition. A short sale helps the bank preserve losses and helps the home owner sustain their credit. If you are in a hardship situation your bank would much rather do a short sale than foreclose on your property.

3) I have an FHA loan. Will my bank do a short sale?

Yes a bank will allow a short sale for your FHA loan. In fact FHA has introduced the Pre-Foreclosure Short Sale Program or PFS that will pay you the seller up to $1,000 at the end of the short sale just for going through with the program. This allows you to transition to more affordable housing while avoiding a foreclosure.

4) Can I do a short sale if I'm current on my payments?

You do not have to be delinquent on your payments to to get short sale approval. There are more details below on the requirements for short sale but a short sale can be accomplished because of the value of the house dropping below the loan amount or if the seller has fallen on hard times. A hardship situation is all you need to qualify for a short sale. A short sale will not be approved if you want to move because the house next door lets their dog bark all night or if kids keep throwing baseballs in your yard. An approved bank short sale requires a true hardship situation.

5) Will I be issued a 1099 tax form on my short sale?

New laws have been passed that prevent lenders from sending you a 1099 tax form. In 2007 President Bush signed The Mortgage Debt Relief Act that eliminates taxes 1099 forms and tax losses on short sales. It was common practice for banks to deliver a 1099 tax form to the to the former home owner that required the seller to pay taxes on the loss. These activities have been temporarily halted due to our current economic state. The Mortgage Debt Relief Act has been extended through 2012. Please consult your tax professional in regard to this matter because not everyone is protected. For example investors selling an investment home through a short sale are not exempt from paying this tax.

6) How much time does a short sale take?

A good short sale package is designed to get quick results. Many uneducated realtors will fumble a short sale out over 8 months to over a year and often times fail to ever close the short sale. An experienced short sale real estate professional will promptly finish the short sale procedure and get your home sold in approximately 60 days from contract date. Completing a short sale is difficult and it takes qualified experts who will complete the process at a quick pace.

Before a short sale you should look at a few other options.

A short sale is when a seller must sell their property and the proceeds are less than the amount owed to pay off the mortgage. A short sale is needed for property owners whose financial picture or predicament dictates that they liquidate their home and they are left with no other course of action. A short sale happens when the property value has declined below the balance of the loan.

Before doing a short sale it is good to know your options. Occasionally if you are behind on your mortgage it is "curable" and there is a good possibility that you are able to replace lost earnings or reduce your expenses.

Special Forbearance - A special forbearance is a written repayment agreement between you and your lender that comprises of a arrangement to reinstate your loan after it has fallen behind. This could include repayment over a time period, a reduction of your payment for a limited time, or a plan for you to resume complete monthly payments while delaying the missed payments. In a sense your bank is allowing you to get caught up on your missed payments.

Loan Modification - Modification of your loan is a permanent alteration to your loan. It also allows your loan to be reinstated and deliver a payment that you can provide. Modifications allow for a number of options like dropping your percentage rate, or extending the time for you to pay off the mortgage by re-amortization of the balance due. It's is much like applying for a new loan. Not all loans will qualify for a loan modification.

Combining Options - It is possible that your mortgage lender will combine strategies to attain a desired conclusion. Each bank is a little diverse on how they deal with these situations. The idea behind the mitigation process is to keep you owning your house and assist you in recovering from a adjustment in your monetary state of affairs.

Often the situation has gone too far and there is no chance of you keeping your home. When loss mitigation is not a viable option or cannot work you are looking at a possible foreclosure. There are however options for you instead of letting your home go into foreclosure.

Deed-in-Lieu - A deed in lieu of foreclosure is when you as the property owner deed your house over to the bank. Basically you give away your property to your lender. This sounds like an easy out compared to foreclosure but there are a few hidden details.

1) A deed-in-lieu has just about the same effect on your credit as a foreclosure.

2) Banks don't really want your property. It results in a property on their books and selling homes is not the type of business they are in. Many mortgage companies will not agree to a deed-in-lieu and suggest you try some other option.

Short Sale - A short sale allows you to sell your home and use the proceeds from the sale to pay off part or most of your mortgage. In most situations your lender is willing to accept less than the amount of the mortgage balance. As mentioned this alternative is for borrowers whose financial situation requires that they sell their home.

Here are some of the reasons your lender will do a short sale:

A declining home market - This motive does not take into account your credit or your financial state of affairs. You are simply upside down in your home and obligated to pay more than it's worth. Remember you must be in a situation where you have to sell your home. This does not apply if you want to move because of crime in your neighborhood.

The Mortgage is in or Near Default Status - This is an obvious situation where a bank will do a short sale. There was a time when lenders would not do a short sale if all the payments were current. Banks have now realized that in many circumstances it is better to do a short sale before the payments are in default.

The Seller has Faced Hard Times - This is a short sale situation where there is a real hardship the home owner is facing. A hardship letter is required in all short sales explaining the reason you are in need of a bank short sale. Hardship letters can be over done. There are certain guidelines to writing a hardship letter. You should always mention that you request a short sale so that you won't have to do a foreclosure. Some examples of a hardship are: (Divorce, Illness, Unemployment, Death)

You must also think about your assets when submitting for short sale. Your lender is going to require you to fill out a financial statement listing your assets. If your lender decides you have an abundance of money they might not grant the short sale because they feel you have the ability to repay the deficient amount. Often times in this situation your lender will still allow a short sale but they might call for you to pay back the shortage with a promissory note. This can still become a win win option for homeowners who need to sell their house and has the capability to pay back a greatly reduced loan amount.

Negative Amortization - Some mortgages that were formed prior to the housing bubble were designed with a negative amortization. The amount of payment made every month is not adequate to cover the loan interest. This is a legitimate situation for a short sale.

Aggressive Secondary Financing - During the housing expansion period some lenders were creating second mortgages for more than the house was worth. This is another situation that will be considered when requesting a short sale. Second and Third mortgages get a little tricky when doing a short sale but we have experience in dealing with these tough situations.

The importance of a knowledgeable realtor cannot be overlooked when doing a short sale. Do a little research and find the right real estate agent for your short sale situation. Most agents do not understand the short sale process.