Short Sale
What is a short sale?
Short Sale Considerations
Other Options besides Short Sales
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What is a short sale?
A short sale is a real estate transaction in which the sales price is insufficient to pay the debt(s) and obligations encumbering the property along with the costs of sale, and the seller is unable to pay the difference.
Every short sale is dependent upon the seller’s lender(s) consenting to the transaction and agreeing to release the lender’s security interest in exchange for less than what is owed. In some cases however, the lender’s approval of a short sale does not necessarily mean the lender relieves the seller of liability for repayment of the entire debt.
It is possible the seller can sell the home and still owe the unpaid difference, plus interest and penalties, to the lender (the “deficiency”). The lender may then seek a deficiency judgment against the seller for this difference. If the judgment is issued by a court, it could be in effect for up to 20 years if not paid sooner. This is one of the most fundamental issues that sellers must address in considering whether to sell property as a short sale.
Simply “walking away” from the property through foreclosure also does not necessarily relieve a seller of these debts as while Washington State is a “non-deficiency” state that only pertains to the foreclosing party. A homeowner could lose their property to foreclosure generally to the 1st mortgage lien holder and still owe the balance(s) from the 2nd mortgage or other lien holders.
A short sale is a very complex transaction that involves numerous issues as well as legal and financial risks. All sellers are advised to seek the advice of a lawyer and tax professional before proceeding with a short sale.
Before proceeding with a short sale
Understand a lender’s creditors options upon loan default
There are many types of liens and other obligations that are secured by real estate. These may be purchase loans, refinance loans, home equity lines of credit, contractor liens, IRS tax liens, DSHS liens for unpaid child support, or other obligations.
The type of debt and type of property will determine what remedies a lender may have if you fail to make the required payments.
The lender’s policies regarding forgiveness of debt, the tax consequences, your overall current or potential future financial strength, the lender’s willingness and procedure for processing a short sale request, and the number and nature of other recorded encumbrances (second mortgages for example) on the property are some of the many factors a seller should consider in deciding whether to pursue a short sale.
Be aware of predatory rescue scams and short sale fraud
Homeowners worried about foreclosure may be susceptible to predatory “rescue” scams which may cost money with no results, result in the loss of the home entirely, or involve the seller in a fraudulent scheme.
Red flags of fraudulent schemes include:
Guarantees to stop the foreclosure
A promise that you can buy the house back or stay in the house following transfer of title
Upfront fees
Instructions not to contact the lender
Transfer of title or lease of the property
Requests that the homeowner execute a power of attorney
Short sale considerations
First, understand that a short sale may not discharge the debt. You should know whether you will still owe your lender money (a deficiency) after the short sale. You should know this before you close the sale of your home.
Even if a lender agrees to a short sale, the lender and any junior lien holders may not agree to forgive the debt entirely and may require you to pay the difference as a personal obligation. This outstanding personal obligation could result in a subsequent collection action against you.
For example, a lender may accept the short sale purchase price to “release the lien” on the property but still require you to pay the full amount of the original debt. You must be certain of the terms of any short sale before making a decision.
All agreements between you and the lender must be in writing. Consult an attorney regarding whether the lender is entitled to pursue collection of any deficiency. Obtain any debt forgiveness agreements with the lender in writing but be aware that the language used in these agreements can be extremely confusing and even misleading. Seek the advice of legal counsel before accepting the lender’s terms.
Second, under that a short sale may result in a higher tax debt
A short sale in which the debt is forgiven is considered a relief of debt and may be treated as income for tax purposes. The Mortgage Forgiveness Debt Relief Act of 2007 created a limited exemption to allow homeowners to pay no taxes on debt forgiveness; however, only cancelled debt used to buy, build or improve a principal residence or refinance debt incurred for those purposes qualifies for this tax exemption.
For more information on the tax consequences of debt relief, seek professional tax advice and go to www.irs.gov and conduct a search regarding the Tax Relief Act.
If you decide to pursue a short sale, understand that the process will likely take several months or more to complete.
Documentation and eligibility criteria for short sales vary depending on specific lender and investor guidelines. Generally, you must prove that you are financially incapable of paying the loan.
The lender will consider this when determining the costs of accepting the short sale versus foreclosing. You will have to document your financial situation. If you have funds to pay the deficiency, a lender will not necessarily allow a short sale.
However, some lenders will not require you to dip into retirement accounts to fund the deficiency. These issues will have to be negotiated with your lender.
Determine the amount owed on the property
All debt and costs must be factored in before a lender can determine whether a short sale is more economical for them.
The analysis will include the delinquent loan, all other recorded debt (past due homeowner’s association fees, unpaid property taxes), and the costs of a sale (closing costs, brokerage commissions, and necessary repairs). If you have more than one loan on the property, a short sale will require the approval of all lenders.
Determine the estimated Fair Market Value of the property
You must prove to the lender that the home is worth less than the unpaid loan balance plus closing costs. Our real estate professionals will provide you assistance in estimating the value of the property.
Options other than short sale
A short sale may not be your best course of action. Consider all your options before making a decision.
Loan workout
Reinstatement: Paying the total amount owed by a specific date in exchange for the lender agreeing not to foreclose.
Forbearance: An agreement to reduce or suspend payments for a short period of time.
Repayment Plan: An agreement to resume making monthly payments with a portion of the past due payments each month until they are caught up.
Claim Advance/Partial Claim: If the loan is insured, a homeowner may qualify for an interest-free loan from the mortgage guarantor to bring the account current.
Loan modification
The lender may agree to change the terms of the original loan to make the payments more affordable. For example, missed payments can be added to the existing loan balance, the interest rate may be modified or the loan term extended. Lenders may use government program modifications or may use their own criteria.
Loan modifications may be temporary or permanent.
Refinance: The lender may allow a homeowner to “give back” the property. This option may not be available if there are other liens recorded against the property.
Work out sale
The lender may allow a specific amount of time for the home to be sold and the loan to be paid off. The lender may also allow a buyer to assume the loan as a method to purchase the property even if the original loan was non-assumable.
Bankruptcy
If you are considering bankruptcy as an option, consult with an attorney that specializes in bankruptcy law.
Foreclosure
Allowing the lender to foreclose is another option. With a foreclosure, the foreclosing lender may be prohibited from seeking any additional payment from you.
However, other creditors with debt secured by the real property may still be able to claim the amounts owing to them. There are other pros and cons to allowing foreclosure.
To get the process started, call 925-249-2400 to discuss a short sale with our Mortgage representative. Here’s what you can expect:
You provide us with your financial information, explain your situation and why you are unable to make your mortgage payments.
We review your information and determine if your mortgage qualifies for a short sale.
If your mortgage qualifies, we’ll work closely with you and the real estate agent currently helping you (or one who will be helping you) to determine an acceptable sales price and the amount of time you have to list and sell your home.
Together, we’ll work through the details and steps to sell your home at an agreed-upon price so you can avoid a foreclosure sale. Please keep in mind that the buyer of your home may not be anyone you have a close relationship with, including family or friends.
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