This summary is intended to describe the general structure of a Short Sale, but the process and policies vary from one lender to another. Consult with your lender, attorney, accountant and any other professionals to accommodate your personal situation and work closely with your REALTOR to achieve your goals.

 

Qualifying for Short Sales

 

Decide if a Short Sale is right for you
Short sale is a hot buzz phrase. Some Sellers who decide that their home won't sell at the price they had imagined often start to wonder if they should do a short sale. A short sale doesn't always solve problems, but it most assuredly can create problems. Short sales are not the "saving grace" some home Sellers would like to believe.

 

What is a Short Sale?
A short sale happens when the lender is shorted on a mortgage, meaning the lender accepts less than the total amount that is due. 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.
Sometimes, to avoid going through the costs 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.
A pre-foreclosure stage is one of the three stages of foreclosures.

 

Here are sample steps of a short sale:
Seller signs a listing agreement with a real estate agent subject to selling as a short sale
with third-party approval.
The agent finds a Buyer who makes an offer for 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.
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.

 

The Mortgage is in Default.
A lender will not consider a short sale if the payments are current. As long as the lender
is receiving timely payments, the lender is satisfied.

 

The Seller Has Fallen on Hard Times.
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 stopped making the monthly
payments.
A few examples that do NOT constitute a hardship are:
1. Bad purchase decisions. Blowing your paycheck on a home theater
system with surround sound does not qualify as a hardship.
2. Unhappy with the neighbors. Even if every home on your block has
turned into pot growing houses, that will not qualify as a hardship.
3. Buying another home. The lender will not care if you have decided the
home is no longer suitable for you or your family.
4. Pregnancy. Increasing the size of your family or starting a family is not
considered a hardship.
5. 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.
Examples of hardship are:
1. Unemployment
2. Divorce
3. Medical emergency / sudden illness
4. Bankruptcy
5. Death

 

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.
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. The short sales that get accepted are those where the seller has no money or
assets.
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 has the right to issue you a 1099 for the
shorted difference, due to a provision in the IRS code about debt forgiveness. Some
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
A short sale will show up on your credit report as a pre-foreclosure that has been
redeemed. Short sales affect credit ratings. While the damage to your credit report may
not be as significantly bad as a foreclosure, for example, some creditors may not make
the distinction.