What is a short sale?
A short sale is a foreclosure alternative, allowing owners with upside down mortgages to sell their house for less than what is owed on the loan. The lender must agree to accept a discounted price and allow the house to sell at the current market value, as opposed to the initial loan amount provided to the home owner. In the event of a short sale, the lender pays for the closing costs, commissions and sometimes fixes up the properties. The home owner does not pay these fees.
Why do lenders often accept short sales?
The lender doesn't want to lose any more money than they already have in a declining market. There are several costs that accumilate while waiting for a house to foreclose, such as lawyer fees, ongoing missed payments, and a real estate market that gradually depreciates. Time is another reason a lender may accept a short sale. If the lender is forced to wait for the property to be returned to them in a foreclosure, they have to start the selling process right from the beginning, whereas if they agree to a short sale, the house can be sold beforehand.
How long will it be until I can buy a new home?
Fannie Mae has implemented a new policy in favor of those who short sale, rather than foreclose. Owners who short sale are able to purchase a new home after only 2 years. However, if the home owner forecloses, their indebtedness will not be dismissed for 5 years. That is a difference of 3 years waiting time to purchase a new home. Nobody can foresee what housing prices will be like in the next 2-5 years, but there is a much greater chance prices will be lower in 2 years, rather than 5. The short sale makes much more sense than letting a house foreclose.
What are the requirements to qualify for a short sale?
Some of the common hardships for a short sale are: loss of a job, divorce or splitting of domestic partnerships, death of a spouse, personal injury, injury of a family member in need of care, job transfer to another area during a depressed market, change to a lower paying job, job loss, personal medical illness, etc. All situations are different. Contact a real estate agent and request a free consultation to decide what the best real estate decision would be.
How much would it cost me to do a short sale?
Nothing. Lenders realize there is no way home owners can afford to pay closing costs when the original loan is already deficient. In order to resolve the financial burden, the lenders pay for the closing costs, commissions and so forth. The only thing that the home owner should be concnerned about is whatever taxes will be incurred when going through a foreclosure or a short sale.
What are the tax fallouts for doing a short sale?
Whether a home owner does a short sale or foreclosure, taxes are a big concern. The government wants their money. The lender is already losing the difference between what is owed and what the house will sell for. If the lender does not want to be responsible for the taxes on the amount that was dismissed, they have to provide proof of their loss to the government, who will then expect the ex-owner to pay those taxes. The government sees the taxes for the deficiency as a "discount" the ex-owner received. For example: If you received a loan for $300,000 to buy a house, but foreclosed or short saled for $250,000, you got an extra $50,000 from the lender, but never had to pay it back. The government expects to receive the taxes on the so called "discount". Sound ridiculous? It does to most people. The best thing for you to do is to take the necessary steps to prove that you have suffered a hardship and cannot pay it. When you file your taxes in California, look into filing a Form 982 with your tax return to prove solvency at the time of your short sale. It's a reduction in taxes from a discharge of indebtedness, with section 1082 Basis Adjustment. It is always a better idea to do a short sale before filing these forms because you have proof that you suffered a hardship. As a real estate agent, it is important to me to point you in the right direction, however my specialty is not taxes and it is suggested that you speak with your tax representative for a complete and educated tax debt resolution.
Will a short sale stop a foreclosure?
Yes, it definitely can, but the house must sell before the lender completes the foreclosure process. With a good real estate agent who knows how to negotiate with the lender and price the house competatively, there is no reason why it shouldn't sell. There are some agents who don't know how to do the process correctly, so choosing an agent who has successfully worked short sales is very important. It is crucial for home owners to contact a real estate agent as soon as they realize they will not be able to continue making payments on their property.
Is there a such thing as short sale scams?
Never underestimate the opportunistic creativity of shady people. One of my previous clients, who's wife recently passed away, had a bad habit of responding to letters he received in the mail offering to solve all his problems. His first agent wasn't an agent at all, but claimed to be one so she could win his trust and take his house. Then, a lender mailed him an offer to give him a small second loan to help him get caught up. They got him to sign the paperwork showing proof of the agreement and that they'd provided funds. However, the lender never profided funds and by the time I met the client and was informed of the complete story, the shady lender was days away from a complete foreclosure. My client was left with no money, no place to call home and had to leave the state to move in with family. In the end, my client refused to press charges on any one of these scam artists. Some offer to do short sales and have no intention of doing them right from the start. A big giveaway that something might be amiss is when they say, "we also buy houses." They have simply figured out a way to capitalize on defaulting mortgages. Never give a "buyer" the right to negotiate with the bank on your behalf. It is a conflict of interest. Instead, use a real estate agent who has a fiduciary responsibility to represent you and who will do what is right for you throughout the entire short sale process.
What if the payments are behind, but my house is still worth the amount on the loan?
You may be able to do a regular sale on the property. In a situation such as this, time is really of the essence. You should contact an agent as soon as possible. There are different types of financing that may be offered to get the house sold without foreclosing or short saling. If payments are behind and the mortgage is upside down, a regular sale would not be a viable option.