What is a Short
Sale?
A Short sale is a phrase used to describe a
sale in which the cost of the product or service being sold is actually more
than the sales price of the product or service in question. Another common term used to describe a short
sale is being "upside down".
The term short sale has become synonymous with any real estate
transaction where the lender is agreeing to accept an amount less than is
owed. In real estate, a short sale is a
rather lengthy process in which an agreement is made between the bank and seller
for the bank to accept an amount that is less than the amount owed.
The typical steps in the Short
Sale process are as follows:
·
The seller needs to
be in a distressed state, most of the time the property is in foreclosure. If a homeowner is current on mortgage
payments the bank will not always approve a short sale. The loan is said to be
"performing”. This is rapidly
changing and some banks are now willing to negotiate with even
"performing" loans.
·
A document package will
need to be assembled to prove to the bank that the seller can no longer make
payments. Most of these documents are
the same ones used to qualify for the loan, but in this case the documents will
be used to disqualify the property owner, or prove that they are no longer able
to afford or pay for their home. In
addition to those financial documents a hardship letter needs to be drafted
explaining what caused the financial hardship. Market trend reports, recent sales, market
analysis, news clippings and other information that can help make the bank make
a better determination as to why they should accept a short sale should also be
included in this packet.
·
The property has to
be put on the market for sale and a concerted effort to sell the property at
market value must be made and documented. Banks will not accept just any amount; they
will only accept market value, whatever it may be. A detailed record of activity needs to be kept
and submitted to the bank along with all other documents.
Once a buyer is found, the purchase contract
and all of the documents already submitted to the bank for approval will be
reviewed. Once approved the sales
process will proceed as a normal real estate transaction would.
Most homeowners don't know that the bank will
pay almost all required fees and commissions to all parties on behalf of the
seller. Essentially the homeowner walks
away paying nothing. The exceptions to
this general rule are that the bank may require an appraisal which the homeowner
may be asked to pay for. Homeowner’s
association dues or assessments will also be the homeowner’s
responsibility. In no case may the
homeowner walk away with any proceeds from a short sale. In some extreme cases the bank may allow a
small amount, usually no more than $1,500, for moving expenses.
Along
with the steps above, diligent communication and follow-up is a must in order
to successfully negotiate, process, and close a short sale. The entire process can take anywhere from 3 to
12 months to complete.
Short Sale Consequences
When a short sale has been successfully negotiated,
the shortfall can be dealt with in various ways by the bank.
These are the most common methods used by the bank
to recoup losses.
· Deficiency Judgment: A deficiency judgment is sought by the bank in order to recoup
losses. A judge usually grants these
fairly easily however, the judgment itself only gives the bank the right to
recoup the monies, while the process itself has to be undertaken by the bank. This process can be expensive and most of the time
the bank only seeks this judgment so they have the flexibility to go after the
homeowner in the future. The statute of
limitations for this type of option is typically 2 years.
· 1099: Another
option the bank has is to issue a 1099. A
1099 is an IRS form alerting the IRS that the homeowner has profited from a
short sale. This means that the IRS will
consider the amount the bank lost in the short sale as profit for the
homeowner. The bank may issue a 1099 or
a deficiency judgment, but they cannot do both.
Foreclosure VS Short Sale -
Homeowner Consequences
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Issue
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Foreclosure
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Successful Short Sale
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Security
Clearance
|
A 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 their position will be
terminated.
|
A short sale on its
own does not challenge most security clearances.
|
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Current
Employment
|
Employers have the
right to actively check the credit of employees who are in sensitive
positions. A foreclosure may provide grounds
for immediate reassignment or termination.
|
A short sale is not
reported on a credit report and is therefore not a challenge to employment.
|
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Future
Employment
|
Many employees 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 may prevent employment.
|
A short sale is not
reported on a credit report and is therefore not a challenge to employment.
|
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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.
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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.
|
|
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 results in a lower sales
price and a longer time on a declining market. This may result in a higher
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.
|
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Future Fannie
Mae Loan Primary Residence (Effective May 21,2008)
|
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 investment mortgage after only 2 years.
|
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Future Fannie
Mae Loan Non Primary (Effective
May 21,2008)
|
An investor who
allows a property to go to foreclosure 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.
|
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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.
|
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Credit Score
|
Credit scores may be
lowered anywhere from 250 to over 300 points. This will typically affect scores for over 3
years.
|
Only late payments on
a mortgage will show up on a credit report.
After the sale, the 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's affect can be as brief as 12
to 18 months.
|
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Credit
History
|
Foreclosure will
remain as a public record on a person's credit history for 10 years or more.
|
Short sales are not
reported on credit histories. There is
no specific reporting item for a "short sale”. The loan is typically reported "paid in
full, settled”.
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