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About The Process
There are several things sellers can do to help the short sale along, some of which are:
  • Maintain the utilities until closing
  • Maintain the property to avoid problems with neighbors, owner associations, and municipalities (lawn care, debris removal, etc)
  • Open and forward all correspondence to the short sale facilitator
  • Submit requested documents in a timely manner
  • Notify the facilitator of relevant events (bankruptcy, relocating, pending legal matters, etc)
  • Notify the facilitator of any international travel plans
  • Make moving arrangements as soon as possible
Neglecting any of the above can delay the short sale or prevent It’s successful completion.
Your mortgage lender will request updated documents for each new request. So if you requested a loan modification 60 days ago, but are now requesting a short sale, they will likely ask for updated documents since you are seeking a different option. The lender also considers documents to be expired after a certain amount of time. Another reason duplicate documents are requested over and over is because incomplete documents were submitted. For example, the lender might ask for all pages of your last two months bank statements. If your bank statement has eight pages, but you only send seven because the eighth page is blank, it could result in the documents being rejected. Also, if you supply conflicting information, the lender may ask for more information. An example of this is if you put on the mortgage assistance application that you earn an amount different than what’s showing on your pay stubs. The bottom line … answer all questions completely and supply all required documentation within the given timeframe. The short sale request will not go into full review until all pages of the requested documents have been submitted by the deadline.
Because the right hand doesn’t always talk to the left. Although you may be under review for a short sale, you may still receive automated or live calls and letters from customer service about making payment arrangements. The customer service department may or may not be aware of the short sale review status, but that does not change the fact that they will still try to collect the debt.
The Basics
A short sale is the sale of real estate for an amount less than the debt that’s owed. This is only possible if all lien-holders pertaining to the property release their lien either before or upon closing. For example, let’s say homeowner Nick owes $500,000 on a house he needs to sell, but the current market value is only $350,000. In order for Nick to be able to sell, he needs his mortgage lenders to agree to accept less than the $500,000 that’s owed. With the approval of Nick’s lenders, he can now participate in a short sale.
Some of the benefits include:
  • Eliminate all debt pertaining to the property in most cases
  • No costly repairs or home improvements to make since short sales are sold as is
  • Avoid the negative consequences of foreclosure
  • More favorable impact to personal credit
  • Some lenders offer relocation funds to help offset moving costs
Despite the name short sale, the process is not usually short. It’s impossible to say exactly how long a short sale will take because it depends on many factors such as:
  • How many lenders are involved
  • The existence of liens such as homeowners associations, municipal citations, federal income tax, etc.
  • Whether the property is vacant or occupied, and if occupied, by whom
  • The seller’s timely cooperation
  • The lien holder’s cooperation, responsiveness, and reasonableness
  • The experience and aggressiveness of the short sale facilitator
  • The seller’s bankruptcy status
Some lenders have minimum timeframes just to review the short sale request, such as 30 days. Other lenders process the request as soon as they are able. But even under the most ideal circumstances, short sale approval will likely take at least 45 days. Ideal means a short sale that involves only one easy-to-deal-with lender and no other liens. Just keep in mind that each short sale is different, so one seller’s short sale can’t reasonably be compared to another seller’s under different circumstances. This is why some short sales take just a few months, while others can take several months or longer.
To answer this properly, we must first define foreclosure. There’s a difference between being “in foreclosure” and just “foreclosure”. These terms are not interchangeable, they are very different. To be “in foreclosure” means that the property is actually in pre-foreclosure and has not yet completed the final step of the legal process of foreclosure. So, to be “in foreclosure” means that the property is headed towards foreclosure. Many lenders refer to this as being in “foreclosure status”. On the other hand, Foreclosure is when legal authority is granted to the bank to take both possession and legal ownership of the property. This is generally referred to as a property that has “gone to foreclosure”. The property would then become a foreclosure. If you’re still not clear on this, think about it like the difference between dying and being dead. To be in foreclosure is the equivalent of dying because there is still life and hope. Foreclosure on the other hand is the equivalent of being dead because the judgment is final (unless your location has redemption rights). Most of us can’t be dying and dead at the same time. You also cant be in foreclosure and foreclosed at the same time. Sorry for the morbid example. Some lenders will consider a short sale even when the property is in foreclosure status or a foreclosure sale date has been set. However, a short sale is not an option if the property has already gone to foreclosure. Call us today so we can quickly determine if there’s still time to be considered for a short sale.
Some lenders will postpone or stop the foreclosure process while they are reviewing a short sale request. There are several variables that influence the lender’s decision such as:
  • How soon the foreclosure sale date is scheduled for
  • Whether or not the lender has stopped a sale previously
  • The purchase offer terms
  • Number of missed payments
  • Cooperation history of the borrower
  • The financial feasibility of foreclosing versus keeping the loan
Please understand that just simply having a short sale under review does not guarantee that a foreclosure sale will be stopped.
There are many reasons a short sale can be unsuccessful. Some of the reasons may include:
  • Seller negligence or lack of cooperation
  • Incompetent real estate professionals
  • Property value discrepancies
  • Missed deadlines and incomplete tasks
  • Unreasonable asset managers or lenders
Note that one failed short sale attempt doesn’t mean that it won’t work out under different circumstances. We have helped many sellers complete a short sale who had tried previously with other real estate agents.
Who’s Eligible
Each lender has different criteria, but there are some general guidelines. The one common thread among all lenders is that there needs to be a verifiable hardship causing the borrower not to be able to keep the property long term. There are many situations that can cause a hardship including, but not limited to:
  • Loss of employment
  • Death of a borrower
  • Relocating out of the area
  • Property value below the market due to inability to make repairs or improvements
  • Did not qualify for a loan modification or forbearance
  • Divorce
These are just some of the hardships that could cause a borrower to seek a short sale. If you have a different reason other than those listed above, please don’t assume that you won’t qualify. Your mortgage lender will make the ultimate decision based on your unique situation.
Yes, everyone on the deed will have to sign certain documents pertaining to the transaction such as the listing agreement, purchase contract, and closing documents. But usually just the borrowers on the mortgage loan will have their financial information reviewed for the short sale.
Probably not. Most short sale lenders require the transaction to be “arm’s length,” which means that the buyer is not a friend, family member, or close business associate.
We do not recommend that anyone ever purposely default on their mortgage. This is called a strategic default and is not only unethical, but also harmful to your credit and damaging to the market value of the neighborhood. It’s not advisable to use this tactic. Some lenders will actually consider a short sale even if the borrower is not behind on the mortgage, but a verifiable hardship is usually still required. It’s best to check with your lender to see if they’ll consider a short sale even though your payments are still current.
Yes, but your bankruptcy attorney will need to get permission from the bankruptcy court or trustee. We’ve successfully completed many short sales for people in active bankruptcy and for those whose bankruptcies have already been discharged.
Yes. Note that the process is often more simple since there is already a verifiable hardship.
The Fine Print
Each short sale is different. Many mortgage lenders choose to forgive the difference between the balance due and the amount they actually receive at closing. In rare cases, some lenders may require a deficiency judgment. This is an arrangement where the lender forgives a large portion of the debt while the borrower signs a promissory note for the difference. The difference would be paid over a mutually agreed upon amount of time. There is one more extremely rare situation where the lender forgives a large portion of the debt, but with the requirement of a seller contribution due at closing. So for example, if the total balance due is $100,000, the lender agrees to forgive $95,000, but requires the seller to pay $5,000 at closing towards the $100,000. The debt would then be considered to be settled in full. All other debts and liens pertaining to the property like homeowners association dues, property taxes, and municipal citations will be settled on or before closing.
Let me start by saying I’m not a tax professional or an attorney, but I am an experienced short sale facilitator. The answer below comes from my many years of experience in this area. Tax liability as it relates to a short sale will largely depend on whether the real estate was your primary residence or an investment property. Since the Internal Revenue Service (IRS) generally treats discharged debt as taxable income, the forgiven amount is usually included in the taxpayer’s gross income and could result in tax liability. However, at the time of this writing, the Qualified Principal Residence Indebtedness (QRPI) exclusion is still in effect, which allows some taxpayers to exclude the forgiven amount from their income for tax purposes. The QRPI exclusion was included in the Mortgage Debt Relief Act of 2007 and was added to the Internal Revenue Code. Although there have been extensions to the exclusion through the present (2020), there is no guarantee that this law will continue to extend year after year. Unless prohibited by state law, the mortgage lender will report the liability forgiveness to the IRS on Form 1099-C. If you typically prepare your own taxes, I highly recommend that you hire a qualified Certified Public Accountant (CPA) to prepare your taxes that pertain to the year in which the short sale was completed. I need to stress the fact that not all accountants have the same experience or knowledge, so please interview them first to be sure that they are current on the latest laws regarding mortgage debt forgiveness. The specific questions I would ask a CPA include the following:
  • What is the status of the Mortgage Debt Relief Act of 2007?
  • Is the Qualified Principal Residence Indebtedness exclusion still in effect? If so, do I qualify?
  • Is IRS Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness) applicable to my situation?
  • Are there any new or pending laws pertaining to mortgage debt forgiveness that I can benefit from?
  • Will I have an actual tax liability as a result of a short sale?
In addition to speaking with a qualified CPA, you may also find it helpful to speak with a tax attorney
The credit impact will largely depend on the length of delinquency, if any. For example, a borrower that was never behind on their mortgage will have less of a credit impact than a borrower with months or years of delinquency. So, it’s impossible to predict exactly how one’s credit will be affected, but it’s safe to say that the credit score will reflect your credit behavior. Generally speaking, a short sale will reflect on the credit report in the following manner (or using similar verbiage): “Settled-Less Than Full Balance”.
Even in the most ideal circumstances like a hot seller’s market, it still may not be possible to recover your investment dollar for dollar. Buyers may not see the value of your custom upgrades and won’t necessarily be willing to pay a premium for them. Remember that people have their own design ideas just like you probably did when you bought the property. Try to adjust your perspective and think of the upgrades as enhancements and amenities that you have enjoyed while living in the property. Relish the moments and cherish the memories. In a short sale, there are no proceeds to the seller, but there are many benefits. In some cases a monetary incentive may be available to eligible sellers, but the amount most likely won’t be anywhere near the amount you invested. The reality is if the bank forecloses, not only will you lose all your investment relating to the property, but you’ll also forfeit all the other benefits of a short sale. Consider if it’s best to cut your losses now rather than allowing the situation to go beyond your control.
That all depends on you! With serious effort, you can regain eligibility to buy another property. There are several determining factors such as:
  • Credit behavior
  • Employment history
  • Available loan programs
  • Your financial ability
We recommend that you take a holistic approach to credit improvement and maintenance, both during and after a short sale. We offer our short sale clients a complimentary credit improvement plan to get back on track.
Maybe. Some lenders require that the property be listed in the local MLS. Some also require the property to be listed “active” for a specific amount of time before they’ll review a short sale offer. Listing your property online gives you maximum exposure to potential buyers. Short sale lenders also understand this, which is why they tend to look more favorably on offers that have come after reasonable online marketing efforts. Your mortgage lender will do their own research to see if the property is being marketed online. If their search returns no results, they may conclude that you could have received better offers if the property were marketed long enough online. In some cases, this could result in the short sale offer being denied.
Despite having a buyer before the short sale even begins, many lenders have mandatory guidelines. This can include requiring the property to be listed on the MLS showing an active status for a certain number of days. There is no way around this. But, adhering to this requirement does not mean that you have to accept offers from other buyers. It just means that your buyer’s offer won’t be reviewed until the mandatory MLS timeframe has expired.
When an electronic lockbox is used, access is limited to pre-confirmed showing appointments. So, to be clear, people can’t just come and go as they please. They are forced to adhere to their specific showing appointment, otherwise the lockbox will not allow access. As the seller, you will always be informed of showing details such as who’s coming and when. If you really want to sell, the property needs to be accessible at the buyers’ convenience. To only allow showings at excessively restrictive days or times can cause some buyers to move on to competing properties. The result is potentially missed offers. Anyone serious about selling shouldn’t be willing to take that chance. Additionally, even if you intend to be home during a scheduled showing, it’s best that you leave when the buyer arrives. This allows them to enjoy a hassle-free private tour and to speak freely without you overhearing their comments. We hate to burst your bubble, but…buyers don’t want you to follow them around your house anymore than you want department store sales associates hovering over you while you shop…seriously. Let buyers shop in peace. If they need help, they’ll ask..
No problem, we don’t have to install a sign. This will not affect the short sale. Just know that your neighbors will know the house is for sale at some point. This is because many of them receive market updates through realtor mailings or through online alerts. Also, your neighbors will likely see the vehicles coming and going from showings and also see realtors and their buyers talking outside the property. And don’t forget…there’s always that one neighbor who knows everything that’s going on in the neighborhood. So, if you really want to control the information your neighbors have about you, consider being the first to tell them! This way they won’t rely on second-hand information. You don’t have to go into details, just make sure you’re the one to let them know you’re selling.
Yes you can. The property does not have to be your primary residence to do a short sale.
The property has to be vacant by closing. This applies to owner occupants, tenants, or anyone else that lives in the property. For this reason, we suggest that occupants make moving arrangements well in advance of closing since it’s more difficult to secure housing on short notice.
Possibly, but only if you keep the property out of official legal action. Many tenants find out by opening mail that was sent to the property, especially if it was certified and they signed for it. Assuming you have a different mailing address, certain legal notices will still be mailed to the property. Unfortunately, tenants do open mail that is not addressed to them. If at all possible, it’s best to do a short sale after the tenants have moved. But if you can’t wait that long, do your best to keep the property from an official foreclosure filing. This can prevent unnecessary problems with your tenants.
When tenants discover your pre-foreclosure status, they hold it over your head and think they can live rent free. You can treat this situation like any other where a tenant stops paying rent… you must file for eviction. Note that if your municipality requires rental permits, you may have to get that first before filing for eviction. Sometimes a mandatory property inspection is part of the rental permitting process. This can be tricky with uncooperative tenants so you may have to have the sheriff accompany you and any inspectors to the property. We highly recommend waiting until you have un-compromised property access before starting a short sale. You won’t get very far in the process while having uncooperative tenants. They will likely try to deny access to you, realtors, potential buyers, appraisers, etc. Disgruntled tenants may make it even harder…by trying to sabotage your transaction or doing retaliatory property damage. To top it off, they may slander your character to potential buyers, online, or wherever they can find an audience. We’ve seen it all! So trust us when we say…deal with problem tenants immediately…but above all, legally
We agree, difficult tenants are unlikely to cooperate. So let’s look at some options. First, consider the lease expiration date. Does it expire in a month or two? Then it might be worth it to just let the lease expire without any option of renewal. If you can wait out the lease term and keep the property afloat and out of foreclosure, this might be your best option. If you can’t wait out the lease expiration, then you could simply ask the tenants if they’re willing to move before the lease expires. Some tenants already have a desire to move but are afraid to break the lease, so this offer could be a win-win for all of you. Lastly, if all else fails, you can offer the tenants cash-for-keys. This means offering them a monetary sum to move by a certain date. With this arrangement, the tenant receives the funds only after vacating, never before. If you give the funds before, what do you think happens? That’s right…they don’t move! If you have a unique situation, call us so we can explore some other solutions.
It matters if you plan on continuing to live in the United States. Why…? Because personal credit is needed for basic necessities and conveniences like:
  • Buying or renting housing
  • Initiating utility services like water, gas, electric, or propane
  • Establishing telecommunication services like cell phone, landline, internet, or cable
  • Buying anything on credit like cars, furniture, or equipment
  • Gaining employment
The bottom line is that having decent personal credit is critical in order to maneuver through life without having to pay penalties. When you have poor credit, you may still be able to get whatever it is you’re seeking, but you’ll get it with worse terms than if you had good or even descent credit. You’ll pay higher security deposits, have higher interest rates, and have stricter loan terms.
Foreclosure has a more negative impact to personal credit than a short sale. Think of it this way… a foreclosure is an involuntary situation where the bank “does what it has to do” since you didn’t make any other formal arrangement with them. On the other hand, a short sale is a formal agreement between you and the bank, therefore the credit reporting is tagged as such. This reporting shows that you made the effort to correct the situation rather than just walk away from bad debt. Any future credit opportunities will surely consider how you’ve handled your other debts. So, if potential creditors see that you walked away from your largest debt, do you think they’ll be eager to give you another loan to “make bad on?” Probably not. Also, when the bank forecloses, it doesn’t necessarily remove all the debt. Let’s say for example, that you owed $500,000, but after the foreclosure sale the bank only recovered $400,000 including all their fees and costs. You may still be held responsible for that $100,000 difference if they choose to pursue it. Additionally, if you owed any other fees related to the property such as homeowners association dues, you may still be on the hook for those fees as well.