What is a short sale?
A short sale happens when a lender is willing to accept a lower pay off on a loan than what is currently owed. In a short sale, the borrower will owe more on the property than the home is worth at its current state, however, a short sale happens only when a homeowner qualifies through some kind of hardship.
Why should I short sale my home?
To settle for a foreclosure means accepting the damage to your credit a foreclosure would bring. It also means accepting the fact that in many states, the lender will seek a deficiency judgment in the amount that is owed. A short sale by itself will typically lower your credit score by 50-120 points, however the hardest hit on your credit will be from missed mortgage payments, not the short sale itself. Your credit will usually recover from a short sale in as little as two years, whereas a foreclosure could dampen your ability to take out any future mortgage loans for at least five years.
Do I get any money back from a short sale?
In many cases, cash back incentives are given to homeowners who complete the short sale successfully. The Home Affordable Foreclosure Alternative program offers homeowners $3,000 cash back to help with relocation expenses. This money is in addition to any other relocation assistance and incentives specific to your lender.
How do I qualify for a short sale?
While lenders have become more lenient in recent times, there are typically three qualifications required for a short sale.
- Financial Insolvency (no other major assets),
- The proceeds from the sale of the property, after all closing costs are paid, are less than the amount currently owed on the property, and
- Financial hardship. Acceptable hardships may vary, but some common ones are; loss of income or employment, divorce or separation, relocation or job transfer, property in need of repairs without resources to make repairs, major illness and medical expenses, death of a family member, vacant rental properties, etc. In most cases, a short sale is not for those who want to sell, but only for those that have to sell.
Who will pay the short sale Realtors© commission?
The lender will customarily take care of all fees associated with the short sale process; this meaning your short sale specialist as well. In most cases, borrowers pay nothing out of pocket to complete a short sale.
What happens with the money that is forgiven by my lender?
Any difference on your mortgage will typically be written off as a loss by your lender. Some lenders may send out a 1099 for the amount that was forgiven. However, the Mortgage Debt Relief Act of 2007 states that you will not be required to pay taxes on the money if you did a short sale on your primary residence before the expiration of the bill. The bill however is not quite that simple. Consult the appropriate representation in all tax and legal matters.
Can I still do a short sale even If I am going through a foreclosure?
Absolutely. You will not be asked to move out until the closing. If your specialist is actively working with your bank, your lender will typically delay the foreclosure proceedings making it possible for you to stay in your home a little longer.
What should I be aware of when doing a short sale?
There are unfortunately many who crave individuals who are in a financial hardship or facing foreclosure to take advantage of them and profit from their misfortune. These scammers will make deals sound enticing, but are only in it for themselves. Never sign a quit claim deed, power of attorney or an option contract without consulting an experienced short sale Realtor© and an attorney. Remember, nobody can look out for your interests in a transaction while trying to make as much profit from your situation as much as possible at the same time.
Can my current Realtor© handle my short sale?
This is a question that really needs to be researched. Short sales are specifically designed to be handled by experienced short sale specialists who have many short sales completed under their belt and the proof to back it up. There may be Realtors who claim they can take on a short sale, but it’s very important to check out their proof to those claims. It would be devastating to begin a short sale only to see it was rejected due to an incompetent Realtor© who claimed to be able to bring you to a successful completion of your short sale. When searching for a short sale specialist, make sure you have a list of questions you would like them to answer and make sure you can feel completely comfortable with them. There are also many who claim to be distressed property experts after taking a weekend training class and earning a certification. While proper training is one factor to consider, experience is everything.
Peter is a Real Estate agent at Professional Brokers Group (License No. 023000), covering the greater Denver Metro area.
This article and content is for general informational purposes and may not be accurate. This should not be taken as legal advice, technical or tax advice under any circumstance. Seek legal advise and representation in all legal matters.