By Elizabeth Weintraub. Home Buying/Selling Expert
Elizabeth Weintraub has an extensive background in real estate spanning more than 30 years, including experience in related industries such as title and escrow. She is a full-time broker-associate at Lyon Real Estate's midtown Sacramento office and is recognized as a top producer. She is also a Life Member of the Master's Club, an honor bestowed by the Sacramento Board of REALTORS®, and ranks in the top 1% of all the agents at Lyon Real Estate.
CA BRE License #00697006
What is a Short Sale?
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If your mortgage is $100,000, but your home is worth, say, $90,000, you are $10,000 short, not including costs to close the sale such as real estate commissions. recording fees or title and escrow charges. It is possible to have a short sale if your mortgage balance matches the sales price because there are still closing costs that will throw the sale into "short" territory.
Sometimes, to avoid going through the cost of foreclosure. a lender will sanction a short sale by letting a buyer purchase the home for less than the mortgage balance while the home is in pre-foreclosure stage.
- Seller signs a listing agreement with a real estate agent subject to selling as a short sale with third-party (the bank) approval.
- The agent finds a buyer who makes an offer based on market value. which is often less than the amount of the mortgage.
- Seller accepts the buyer's purchase offer .
- Seller's lender accepts the buyer's purchase offer .
- Transaction closes when the buyer delivers the funds, the lender releases the lien and the seller delivers the deed.
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In fairy-tale land, everybody lives happily ever after. Except the seller. There are consequences.
Qualifications for a Short Sale
Before you eagerly climb aboard the short sale bandwagon, consider the following to determine whether you may qualify for a short sale. If you cannot answer yes to all four requirements, you may not qualify for a short sale.
- The Home's Market Value Has Dropped.
Hard comparable sales must substantiate that the home is worth less than the unpaid balance due the lender. This unpaid balance may include a prepayment penalty .
It used to be that lenders would not consider a short sale if the payments were current, but that is no longer the case. Realizing that other factors contribute to a potential default, many lenders are eager to head off future problems at the pass. It is not always necessary to be in default.
The seller must submit a letter of hardship that explains why the seller can not pay the difference due upon sale, including why the seller has or will stop making the monthly payments.
A few examples that do NOT constitute a hardship are:
- Bad purchase decisions. Blowing your paycheck on a home theater system with surround sound does not qualify as a hardship.
- Unhappy with the neighbors. Even if every home on your block has turned into pot growing houses. that will not qualify as a hardship.
- Buying another home. The lender will not care if you have decided the home is no
longer suitable for you or your family and, in fact, if you have bought another home, you might not qualify at all for a short sale.
- Pregnancy. Increasing the size of your family or starting a family is not considered a hardship.
- Moving into an apartment. If you decide to move out of your home, that is a lifestyle decision and not a very good reason to abandon your home.
- Medical emergency / sudden illness
- The Seller Has No Assets
The lender will probably want to see a copy of the seller's tax returns and / or a financial statement. If the lender discovers assets, the lender may not grant the short sale because the lender will feel that the seller has the ability to pay the shorted difference. Sellers with assets may still be granted a short sale but could be required to pay back the shortfall.
For example, if the seller has cash in a savings account. owns other real estate, stocks, bonds or even IRA accounts, the lender will most likely determine that the seller has assets. However, the lender might discount the amount the seller is required to pay back.
Many entities profit from short sales, but there is no seller short sale profit .
Short Sale Consequences
A short sale is dependent on a buyer making an offer to purchase. If you do not receive an offer, you will not qualify for a short sale. So even if you meet all the other criteria, it is possible that no one will buy the short sale. It is also dependent on the lender accepting the buyer's offer. If the lender rejects the offer. a short sale will not take place.
- Tax Consequences
If the lender agrees to the short sale, the lender may possess the right to issue you a 1099 for the shorted difference, due to a provision in the IRS code about debt forgiveness. Many situations are exempt from debt forgiveness, according to the Mortgage Forgiveness Debt Relief Act of 2007 .
You should speak to a real estate lawyer and a tax accountant to determine the amount of short sale tax consequences. and whether you can afford to pay those taxes, if any.
- Blemished Credit Report
While a short sale will not show up on your credit report, the loan status will. For those in default, it's a pre-foreclosure that has been redeemed, which is often reported as Paid in Full for Less Than Agreed. Short sales affect credit ratings. While the damage to your credit report may not seem as significantly bad as a foreclosure to you, creditors may not make the distinction.
Having said all of this, there are always exceptions to qualifying for a short sale. There are some types of short sales, depending on lender guidelines, that have no qualifications whatsoever.
Always seek legal counsel before attempting to pursue a short sale. A real estate agent cannot give you legal advice.
At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.
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