Short Sale FAQs

The short sale process is still a mystery to many people even though it has been gaining popularity over the past several years. Puzzled homeowners that are facing foreclosure want to know if this is the solution that they have been looking for, buyer’s want to know how they can take advantage of the great deals presented by a short sale, and many of agents don’t know enough about the process to help either. Over time we’ve collected the most frequently asked questions by homeowners who were considering the short sale of their home, and by buyers who are considering purchasing these homes.

An index to these questions follows. If you click on a specific question it will take you directly to the answer.

General Overview

What is a short sale?

What options other than a short sale might I have?

What is the typical situation leading to a short sale?

10 reasons why a short sale is better than foreclosure

Questions about qualifying for a short sale

Questions about the short sale process

What information do you need from me to submit to the bank?

What is “financial hardship” and why is it so important?

Why do I have to sign a Borrower’s Authorization?

Who pays the real estate commissions on a short sale?

Are short sales guaranteed to work?

How long does a short sale take?

Does a homeowner benefit from a short sale?

How does the bank decide what price to put on the property?

What do I do about my back property taxes when I do a short sale?

My home is really nice, why is the short sale offer price so low?

Who owns the house after a short sale?

I have heard that I could owe income taxes after a short sale, is this true?

Who can I contact about doing a short sale on my house?

What is a short sale?

A real estate “Short Sale” is where a bank (the mortgage lender) allows a homeowner to sell their home for less than what is owed on their mortgage, and the bank accepts that amount as full payoff and forgives the difference.

A bank may grant a short sale under the following conditions: the seller has a hardship which will prevent them from making their mortgage payments, and the seller owes more on the mortgage than the home is worth which makes it impossible for them to simply sell it and payoff the mortgage with the proceeds.

The bank needs to be convinced to do this by providing them proper documentation which is commonly called a short sale package. A real estate broker that is experienced in the short sale process will work with you to put this package together.

Short Sales are really a Win-Win-Win. The bank avoids having to go through the long, expensive foreclosure process, the homeowner gets to move on with their life and save what’s left of their credit, and the new buyers typically get a home that’s in “Move -In” condition at a substantial discount.

What options other than a short sale might I have?

You May be Able to Refinance
Attempt a loan modification that adjusts the terms of your loan
You Can Try to Selling the House Yourself
You Can Try to “Go Current”
You Can Deed Your House Over to an Investor or Lender
Bankruptcy
You Can Do Nothing

Note: You can find more details on these options under What are your options?

What is the typical situation leading to a short sale?

Most short sales are accomplished on properties that are in the process of being foreclosed on. This means the homeowner is at least 3 payments behind, and the foreclosure process has already begun. Recently however, more mortgages that are simply behind or “in default” are considered short sale candidates without actually being in foreclosure.

Next, the homeowner typically has no equity in the home or is “upside down” or “underwater” with their mortgage. In other words, the total balance owed to the lender is greater than, the price at which the house can be sold.

Lastly, the homeowner must have some type of financial “hardship” which is preventing them from paying the mortgage.

A few examples of a hardship are:

Unemployment / reduced income
Divorce
Medical emergency
Job transfer out of town
Bankruptcy
Death

10 reasons why a short sale is better than foreclosure

Reason	Foreclosure	Short Sale
1. Current Employment	Employers have the right and are actively checking the credit regularly of all employees who are in sensitive positions. A foreclosure in many cases is ground for immediate reassignment or termination.	A short sale is not reported on a credit report and is therefore not a challenge to employment.
2. Future Employment	Many employers are requiring credit checks on all job applicants. A foreclosure is one of the most detrimental credit items an applicant can have and in most cases will challenge employment.	A short sale is not reported on a credit report and is therefore not a challenge to employment.
3. Security Clearances	Foreclosure is the most challenging issue against a security clearance outside of a conviction of a serious misdemeanor or felony. If a client has a foreclosure and is a police officer, in the military, in the CIA, Security, or any other position that requires a security clearance in almost all cases clearance will be revoked and position will be terminated.	A short sale on its own does not challenge most security clearances.
4. Deficiency Judgment	In 100% of foreclosures (except in those states where there is no deficiency) the bank has the right to pursue a deficiency judgment.	In some successful short sales it is possible to convince the lender to give up the right to pursue a deficiency judgment against the homeowner.
5. Deficiency Judgment (amount)	In a foreclosure the home will have to go through an REO process if it does not sell at auction. In most cases this will result in a lower sales price and longer time to sale in a declining market. This will result in a higher possible deficiency judgment.	In a properly managed short sale the home is sold at a price that should be close to market value and in almost all cases will be better than an REO sale resulting in a lower deficiency.
6. Future Fannie Mae or Freddie Mac Loan – Primary Residence	A homeowner who loses a home to foreclosure is ineligible for a Fannie Mae backed mortgage for a period of 5 years.	A homeowner who successfully negotiates and closes a short sale will be eligible for a Fannie Mae backed mortgage after only 2 years.
7. Future Fannie Mae or Freddie Mac Loan – Non Primary	An investor who allows a property to go to foreclosures is ineligible for a Fannie Mae backed investment mortgage for a period of 7 years.	An investor who successfully negotiates and closes a short sale will be eligible for a Fannie Mae backed investment mortgage after only 2 years.
8. Future Loan with any Mortgage Company	On any future 1003 application, a prospective borrower will have to answer YES to question C in Section VIII of the standard 1003 that asks “Have you had property foreclosed upon or given title or deed in lieu thereof in the last 7 years?” This will affect future rates.	There is no similar declaration or question regarding a short sale.
9. Credit Score	Score may be lowered anywhere from 250 to over 300 points and typically will affect score for over 3 years.	Only late payments on a mortgage will show and after a short sale, mortgage will be reported as paid or negotiated. This will lower the score as little as 50 points if all other payments are being made. A short sale effect can be as brief as 12 to 18 months.
10. Credit History	Foreclosure will remain as a public record on a person’s credit history for 10 years or more.	Short sale is not reported on a credit history. There is no specific reporting item for “short sale” at this time. The loan is typically reported “ paid in full, settled.”

I’m already in foreclosure. At what point is it too late to do a short sale?

Each situation is different and must be evaluated individually however assuming that you meet the following main criteria for a short sale, you must be at least 60 days from the eviction date in order to have enough time to complete a short sale.

You are experiencing a personal financial hardship
You have little or no equity in the property

Does it matter what kind of loan I have?

Short sales can generally be accomplished on all types of mortgages, although each one has different criteria related to what the lender needs to net on the sale.

I am behind on my mortgage payments, but not yet in foreclosure. Can I do a short sale?

Yes, this is happening with much greater regularity. Sometimes these are the most attractive short sales for both the buyer and the lender because the buyer can take advantage of the lender’s ability to avoid the vast majority of the costs of foreclosure.

In these cases, it is more important to have a very clear “hardship” story to explain to the lender why you are unable to make any more payments.

My house needs a lot of repair; can I still do a short sale?

Yes, though it can make the process more difficult because the price must be lower to compensate for the repairs. Be sure to let the real estate broker that you are working with know everything that’s wrong with the house. The key is to make sure the bank’s appraiser sees all the work that needs to be done.

I have more than 10% equity in my home – can I still do a short sale?

Unless you just had your home appraised, the only way to know for sure how much equity you have is to have a qualifed real estate broker evaluate your home. If it turns out that you do have more than 10% equity, it does not meet the criteria of having little or no equity so the bank probably would not approve a short sale. However, you may be a candidate for these options.

Refinance your mortgage
Attempt a loan modification that adjusts the terms of your loan
Listing your home for sale with a real estate broker

Other people are on the deed with me, but they don’t want to sell. Can I still do a short sale?

No. All parties listed on the deed or mortgage must sign the short sale purchase agreement. There are no exceptions to this.

If I have other liens on my house such as mechanics, IRS, court judgments; can I still do a short sale?

Yes, but it gets much more complicated and will take longer. If this is the case with your home, be sure to COMPLETELY list all liens you have. Each lien holder must be negotiated with individually. A short sale in this circumstance will take substantially longer so the earlier the process is started the better.

I have property I inherited but I can’t afford the mortgage. Can I do a short sale?

Yes

I have 2 or 3 mortgages on my house. Can I still do a short sale?

Yes, each mortgage or home equity line of credit (HELOC) can be negotiated individually. It is important to know which mortgage filed the foreclosure or, if more than one are in foreclosure, which one filed first.

My home is already listed for sale on the MLS, but isn’t selling; can I still do a short sale?

Yes, you can and it is relatively common. Some lenders even require that a house be listed for sale before approving a short sale in order to show that it can’t be sold and a discount is necessary.

Can a short sale be done on a duplex or condo?

Yes

What information do you need from me to submit to the bank?

Each Lender has its own requirements to include in a Short Sale package. Here are the most common things that Lenders require before they will begin to consider a Short Sale:

A borrower’s authorization form for each mortgage giving your broker permission to talk to the Lender.
A hardship letter outlining what is causing missed payments and what you have done to try to change the situation.

The letter should start with a brief identification of the property, the loan number and a sincere apology for the situation.Then you should tell in your own words exactly what caused the missed payments. Extensive medical bills? Job loss? Did you retire, cutting income substantially? Has an adjustable rate loan readjusted? Is the home underwater on its mortgage? Have you been transferred to another part of the country and the home is not selling? All of these are valid hardships that can be explained in a letter to the Lender.
Also include a description of any efforts being made to resolve the problem. Has a new job been found? Have you eliminated all discretionary spending?
Two most recent pay stubs for each job held by all members of the family contributing to the household income. This includes pensions, regular draws from an annuity, commission income over the past two or three months, child support, alimony, etc.
If you have a business, the Lender will want to see profit and loss statements and a current balance sheet.
Last two months’ bank statements. They tell a lot about spending habits.
The last two years’ tax returns. They give an accurate picture of financial stability and ability to pay. It also gives the Lender an idea of other resources that might be tapped if the Lender goes through with foreclosure and files a deficiency judgment against you.

What is “financial hardship” and why is it so important?

“Financial hardship” is a critical part of the short sale equation. No matter what you hear about banks “not being in the business of owning real estate”, they DO NOT easily give homeowners a break.

They require GOOD REASON to give a discount for a short a sale.

The only reason a lender will agree to a short sale is if they determine that a short sale will net them more money than proceeding with the foreclosure which can be very lengthy and expensive. Understanding the homeowner’s financial hardship plays a major role in the lender’s estimation of whether or not it will be paid in full for the mortgage. Quite simply, lenders will make the borrower pay the shortfall if there is no hardship.

Many homeowners try to use a short sale as a “get out of jail free” card to dump a poor investment. Lenders will not allow this, and it is a waste of time to try. If you are employed and have some assets, but you have simply lost value in your home and want to sell, you probably cannot short sale. If you are current on your mortgage, it is very difficult to short sale. Lenders need to see that you simply cannot pay them before they will agree to a short sale.

Why do I have to sign a Borrower’s Authorization?

The Borrower’s Authorization gives the lender permission to speak to your representative about your loan. That’s all it does, but it is necessary. An authorization must be filled out for each mortgage and for each Realtor authorized to act on your behalf.

Who pays the real estate commissions on a short sale?

The commissions are paid from the funds the buyer places in escrow and because there is no equity in the house, the lender ultimately is the one paying the entire sales commission. The homeowner is not responsible for any of the costs associated with a short sale.

Are short sales guaranteed to work?

They are not guaranteed to work and to a large degree; the success rate is dependent on the skill level of the negotiator handling your short sale. It’s very important to choose a real estate broker who specializes in short sales to ensure the greatest chance of success.

All of the criteria must be met before a bank will even consider a short sale. Even then it isn’t easy to convince a bank that the market value of the home is lower than what they are owed.

Even if all the paperwork has been correctly completed it can take several weeks, or even months, only to be denied. If the lender does not approve the short sale, no transaction occurs. The Purchase Agreement becomes void and the listing continues.

How long does a short sale take?

A short sale can take 60 to 120 days or longer to complete. This is very important. The process is complicated and takes a lot of time. So if you qualify for a short sale, you must act quickly. If you wait until just before eviction, no one can help you with a short sale. It is simply impossible. DO NOT WAIT.

Does a homeowner benefit from a short sale?

First and foremost, a short sale relieves the stress of being in foreclosure and it allows the homeowner to get rid of their big mortgage payment and move on with their lives. A short sale allows you to stop a foreclosure proceeding and get a fresh start. However, it should be noted that all net proceeds from the sale go to the lender. The seller cannot profit.

On the credit side, short sales generally do not impact a seller’s credit score as much as a foreclosure. Having some late payments, and a foreclosure filed has already done damage to your credit. However, a completed foreclosure generally does more damage than a short sale agreed to by a lender. Obviously, a bankruptcy significantly damages your credit score.

How does the bank decide what price to put on the property?

Every bank has a specific method of deciding how much they’ll accept on a short sale. Factors such as the current market, comparable sales, and the condition of your home all play a part.

What do I do about my back property taxes when I do a short sale?

Just as in a normal home sale, the property taxes are the responsibility of the homeowner until the date the sale is closed. Then they become the responsibility of the buyer. If your property taxes have not been paid this will affect the negotiations between the buyer and the bank, so you must inform them of the taxes owed.

My home is really nice, why is the short sale offer price so low?

Sellers often have an emotional attachment to their home and may feel a short sale offer is too low. It is important to remember a few things. First, the seller in a short sale can never receive any money in the transaction. It should therefore be of little concern what price is offered as long as the short sale is done. The only real exception is when the seller has tax liability concerns. Otherwise, the price should not matter to the seller.

The important factor in a short sale is whether the lender will accept the price offered. Lenders often accept prices for short sales which may be surprising to normal homeowners or Realtors. Discounts of 30-50% are no longer uncommon (especially in severely depressed real estate markets such as Michigan). This happens for several reasons:

Sellers are often in denial about how bad the market really is for housing and therefore, how far the value has declined.

Lenders don’t like the foreclosure process any more than homeowners do. Lenders incur substantial costs during a foreclosure process that can last more than 12 months. They have attorney fees, filing fees, publication fees, lost interest on the money that is tied up, property taxes, insurance, maintenance costs, as well as the potential for vandalism of a vacant home. This is all BEFORE having to try to sell the home as a bank-owned (REO) property and pay sales commissions. A short sale is a way to avoid some or all of these costs. If a lender calculates his cost of eviction at $50,000 for a house, they will often take a $40,000 loss on a short sale instead and be better off for having done so.

Who owns the house after a short sale?

The purchaser of the house is the owner after a short sale, just the same as in a normal sale. The mortgage lender is paid off and the previous homeowner moves on.

I have heard that I could owe income taxes after a short sale, is this true?

Possibly, but it’s not that simple. Each homeowner’s circumstances are unique so the best advice is to consult with an attorney or CPA. However, here is a general overview.

When a lender writes off part of a loan (discounts it) the portion written off is the equivalent of a cash infusion to the owner. This “mortgage relief” is then reported as income to you by means of a 1099C form.

Even if you receive a 1099C and declare it as income, there is a good chance you will owe very little tax. This is because there is an IRS rule regarding “insolvency” which essentially says if you are insolvent (more liabilities than assets) at the time of the short sale, you don’t have to count the 1099C as income (instead you declare it, then obtain the exemption). There is an IRS form to complete to show you are insolvent. See the Internal Revenue Service website at www.irs.gov

In December of 2007, President Bush signed a new law into effect providing that for a specified period of time homeowners who satisfy certain requirements will not be taxed on mortgage relief. This bill is called the “Homeowners Debt Forgiveness Act” and it may or may not apply to your situation.

Who can I contact about doing a short sale on my house?

Short sales can be a good way for distressed homeowners to avoid foreclosure, but it’s very important that they choose a real estate broker who specializes in short sales to ensure the greatest chance of success. In order to have any success with the bank, great attention to detail and follow through is a must. The broker will be required to prepare the package of documents needed to send to your lender, help negotiate and set the right listing price for your home so that it will sell quickly, find and negotiate with potential buyers, and complete the sale.

The first step is to see if you qualify for a short sale by calling 800 975-4077 or by filling out the Property Information Form. Your information will be forwarded to a qualified local real estate broker who will evaluate your situation and respond to you within 48 hours to let you know if you qualify.

Rest assured that your information will be kept strictly confidential. It will not be used for any other purpose and there will be absolutely no charge or obligation for this service.

Click here to see if you qualify for a short sale

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Short Sale FAQs