What is a Short Sale?
A Short Sale is the sale of a home when sales proceeds do not fully pay off the existing loan(s) and lender(s) accepts a discounted payoff to fully satisfy the loan.

The existing lender typically pays virtually all sales costs, including commissions, escrow and title fees and repair costs. You get your home sold, the loan(s) paid off and you avoid foreclosure.

Is a Short Sale right for me?
Mortgage lenders are increasingly willing to work with borrowers faced with a financial hardship to accept a discounted payoff on a mortgage. If you are faced with a hardship that makes it likely you will be unable to meet your obligation on your mortgage, chances are that your lender would prefer to settle the matter with you as opposed to taking the property through foreclosure.

As you consider the option of pursuing a Short Sale, remember your lender is looking to limit any potential loss on your loan. By completing a Short Sale, your lender has arrived at a solution that is, for them, much better than a foreclosure.  Bottom line, your lender wants to work with you.

If I do a Short Sale, how much will I have to pay to sell my home?
It may be nothing. In most cases borrowers pay no sales costs if the lender approves the Short Sale. All commissions, title and escrow fees, and even most repair expenses may be paid by the lender as part of the Short Sale approval.

"Seller’s agreement to sell is subject to approval by existing lender of a Short Sale at no cost to Seller. Seller shall not be required to deposit funds to close escrow."  Remember, lenders approve Short Sales and accept the resulting loss in an effort to avoid bigger losses through foreclosure.

Can I simply deed my property to someone else and avoid the hassle?
Deeding your property to someone without paying off the loan is a bad idea. In the first place, the lender still considers you primarily responsible for payment on the loan. If loan payments are not timely made, or if the lender ultimately forecloses, your credit may be affected.

Secondly, when you deed your property to someone else, you give up control of the property. Along with the deed goes the ability to control the property.  Do not deed your property to someone without paying off the loan unless you have consulted with an attorney.

What sort of hardship would my lender consider legitimate?
To some extent, that will depend upon the mortgage company considering the Short Sale request. Generally, we found that so long as the hardship is real and the mortgage company believes the loan is likely to become delinquent as a result, the Short Sale request will be processed by the Loss Mitigation Department. A big key to getting Loss Mitigation to accept a hardship is to submit a strong hardship letter. The hardship letter sets the tone for the entire file.

Below is a list of “hardships” that are common and frequently accepted by mortgage lenders.

• Family illness or injury
• Illness or injury in the extended family – particularly if it forces relocation
• Job relocation when the property is equity deficient
• Job loss or significant income loss
• Divorce or split of domestic partners
• Adjustment in mortgage payment or unforeseen increase in living expenses

I am current on my mortgage; will my lender consider a Short Sale?
The answer is, maybe. Some lenders will accept a Short Sale file for approval on loans that are not delinquent. Other lenders will not accept the file until the loan is delinquent. One way to find out whether your lender will accept a short sale file for approval on a loan that is current is by submitting a short sale file to your lender.

Why would a mortgage company agree to accept a Short Sale?
There are actually several reasons why a mortgage company would approve a Short Sale payoff, including the following:

• Legal Concerns – Mortgage lenders have come under legal pressure to work with borrowers to equitably resolve situations where borrowers are unable to meet their mortgage obligation, particularly when the borrower makes an effort to arrive at a compromise solution.
• Wall Street is Watching – Mortgage lenders rely heavily on their ability to package and sell bundles of loans on the secondary mortgage market. They need to sell these bundles of loans in order to put the funds back to work by loaning the money again and collect loan fees along the way. If mortgages perform poorly after they are sold it could impact the lender's ability to sell their loans on the secondary market. A successful Short Sale gets the loan payoff resolved quickly.
• Asset Management Expenses- If a lender acquires a property through foreclosure, the property will be managed until it is repaired and resold. It is expensive to manage real property assets - homes – spread throughout the region, the state and possibly even the nation. Keeping properties maintained, keeping utilities on, making repairs and the administrative costs attached to these activities are all costs the lender would prefer to avoid. A successful Short Sale eliminates most of these costs.
• Reserve Requirement- Delinquent and non-performing loans place another burden on mortgage lenders. For all delinquent and non-performing loans lenders must set aside funds in reserve to deal with potential losses. These funds cannot be put to work generating new loan fees until the bad loans are resolved. A successful Short Sale lets the lender put more money to work.

Do lenders approve all Short Sales?
In a word, no. That is why it is critical to work with someone that has extensive experience at getting Short Sales approved.

From the presentation of the Short Sale package to the lender to working with the lenders Loss Mitigations Department, we know how to keep the file moving towards approval.

I have two loans; can I still do a Short Sale?
We can work with both lenders (many times the same lender holds the 1st and the 2nd loans) to put together a Short Sale transaction. Even if the value of the home is below the balance of the 1st mortgage, we can normally get the two lenders to cooperate.

In the end, neither lender wants to own another home through foreclosure.

My property is in rough shape and needs work; can I still do a Short Sale?
Absolutely. In fact, we found that lenders are more motivated to do a Short Sale on a property that needs work than on a property that doesn’t. The lender knows the risk of loss goes up when they foreclose on a property that needs lots of work.

Aside from expense of completing the work, lenders are simply not set up to get the work done. They are in the loan business, not the fix- it business.

I am concerned about my credit, how will a Short Sale affect my credit?
In the course of getting your short sale approved you may miss your mortgage payments, and these will show on your credit. But once the short sale is approved by your lender, you can avoid foreclosure. By avoiding foreclosure, you will likely be able to resume normal borrowing (car loans, credit cards, consumer goods and such) relatively quickly.

While in both cases, short sale and foreclosure, the delinquent mortgage will negatively affect their credit rating, at least short seller avoid having a “debt discharges due to foreclosure” on their credit reports.  Mortgage and credit experts say that, after bankruptcy, having a foreclosure on your credit report is the worst result and will reduce your credit score by over 250 points. You could also have to wait up to three years to qualify for a mortgage at a reasonable rate.

Short sales show up on a credit report as a “pre-foreclosure in redemption” status and can result in a credit score reduction of 100 points or less.  After the sale, the mortgage may show up as “discharged.”  People who successfully complete a short sale may also qualify for a mortgage at a reasonable interest in as little as 18 months.  So, if buying a home is a future goal, then a short sale is the better option for many families.

What about my Tax consequences and 1099?
If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable.

The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.

Find out more at IRS.GOV.

*Neither CPS nor their agents are qualified to give either legal or tax advice.  Interested parties should seek the advice of appropriate specialists, including, but not limited to: Real Estate Attorney, CPA, and etc.  CPS and/or CPS agents are qualified to give advice on real estate only.