What is a short sale? Here are some common questions and some quick answers below.
1) The definition of a short sale
A short sale is a situation where a distressed seller must sell their house for less money than the mortgage balance. A short sale is needed for sellers whose financial situations require that they sell their interest in their home and who are unable to qualify for other loss mitigation techniques. A simple definition is when the owner must sell and the property value has fallen below the loan amount.
2) Can I be sure my bank will cooperate?
Banks want to avoid foreclosure too. A foreclosure will cost the bank lots more than other options and statistics have shown that when a bank receives a property through foreclosure it is in much worse condition than other solutions because disgruntled mortgage holders don’t leave the property in the best condition. A short sale helps the bank preserve losses and helps the seller protect their credit. When your a suffering a true distressed scenario your bank is more willing to allow a short sale as opposed to foreclosing on your home.
3) I have an FHA loan. Will my bank do a short sale?
Absolutely a bank will do a short sale on an FHA loan. There is actually a new program called PFS Pre-Foreclosure Short Sale Program that will pay you the seller up to $ 1,000 at the closing just for completing the program. This program was designed to help you transition to more reasonable living costs while avoiding a foreclosure.
4) Do I have to be late on my payments to do a short sale?
No you do not need to be late on your loan to complete a successful bank short sale. There are more details below on what is required for short sale but a short sale can be accomplished due to the value of the property dropping below the loan amount or when the home owner has fallen on hard times. Basically you don’t need to be late just in a hardship situation. A short sale will not be approved if you want to move because the house next door lets their dog bark all night or if kids keep throwing baseballs in your yard. A distressed situation is what you must have for short sale approval.
5) Will I have to pay a tax loss if I do a short sale?
New laws have been passed that prevent lenders from sending you a 1099 tax form. in 2007 the Mortgage Debt Relief Act was passed that does away taxes 1099 forms and tax losses on short sales. It was common practice for banks to deliver a 1099 tax form to the seller after the short sale that required the seller to pay a tax on the banks loss. These activities have been temporarily halted due to our current economic state. The Mortgage Debt Relief Act has been extended through 2012. Please consult your tax professional in regard to this matter because not everyone is protected. For example investors selling an investment home through a short sale are not exempt from paying this tax.
6) How much time does a short sale take?
A well thought out short sale plan will get fast results. Many unknowing real estate agents will fumble a short sale out over 6 months to beyond a year and many times fail to ever close the short sale. A good short sale agent will quickly finish the short sale procedure and get your home sold in approximately 60 days from time of contract. Short sales are a highly technical business and it takes realtors with the know how who will finish the process at a quick pace.
Before a short sale you should look at a few other options.
When a seller must sell and there is not enough equity in the property to pay off the mortgage it is call a short sale. A short sale is required for sellers whose financial picture or circumstances requires that they sell their property and they are unable to qualify for other loss mitigation options. A short sale is when the value of the property has dropped below the current mortgage balance that needs to be paid off.
Knowing your options before a short sale is important to know. Often times if you have defaulted on your mortgage it is “curable” and there is a realistic chance that you are capable of replacing lost salary or reduce your expenses.
Special Forbearance – A special forbearance is a payment contract between you and your lender that involves of a plan to reinstate your mortgage after it is non-payment status. Some variations are repayment over a time period, a lessening of your monthly payment for a short time, or a strategy for you to start complete monthly payments but holding off on missed installments. What your bank is doing is letting you get caught up with you payments.
Loan Modification – Modification of your loan is a permanent change to your loan. It also allows your loan to be reinstated and deliver a monthly payment that you can pay for. Modifications give several options such as lowering your rate of interest, or extending the time for you to pay back the loan by re-amortization the amount owed. It’s similar to applying for a new loan but not all will get approved for a modification.
Combining The Above – Sometimes your lender might combine the above to attain a preferred outcome. All bank is a little distinct on how they run these matters. The purpose of mitigation is to keep you owning your house and help you recover from a adjustment in your financial circumstances.
Often the situation has gone too far and there is no chance of you keeping your home. When loss mitigation is not a viable option or cannot work you are presented with a likely foreclosure. Don’t give up too quick because there are still some options that remain.
Deed-in-Lieu – A deed in lieu of foreclosure is an option where you deed your property over to your lender. Basically you hand over your house to your lender. This sounds like an easy out compared to foreclosure but there are some things you need to know.
1) A deed-in-lieu as far as your credit report is concerned is just as bad as a foreclosure.
2) Mortgage companies don’t want your home. It becomes an asset that they have to deal with and selling properties is not what they like to do. Many mortgage companies will not allow a deed-in-lieu and want you do do a short sale instead.
Short Sale – A short sale option lets you sell your home and pay off a large portion of your loan. Most lenders are willing to accept a short sale instead of going through a lengthy and expensive foreclosure. As mentioned this alternative is for property owners whose financial condition demands that they sell their property.
These are some reason a bank will grant a short sale:
A declining home market – This reason does not take into effect your credit or your financial position. This is when you are just upside down in your home and obligated to pay more than it’s worth. Don’t forget a short sale means you must sell your home. This does not apply if you want to move because of crime in your neighborhood.
The Mortgage is in or Near Default Status – This is how a majority of short sales occur. There was a time when lenders would not do a short sale if all the payments were current. Lenders have now realized that in many cases it is logical to do a short sale before the payments are in default.
The Seller has Met With Difficult Times – This is a short sale situation where the owner of the property is in a distressed state of affairs. A hardship letter is required in all short sales explaining the reason you are in need of a bank short sale. Hardship letters can be over done. It’s good to know the guidelines for writing a good hardship letter. Your hardship letter should always state that you seek a short sale so that you won’t have to do a foreclosure. Some examples of a hardship are: (Unemployment, Divorce, Death, and Illness)
Something to keep in mind when doing your short sale is your Assets. Part of the short sale paper work is to fill out a sheet detailing all of your assets. If the bank realizes you have extra cash you are not using they might not grant the short sale because they feel you have the ability to repay the deficient amount. It is still possible for you to be granted a short sale but they might demand that you to pay back the balance by asking you to execute a promissory note. This can still become a win win option for homeowners who need to sell their home and has the ability to pay back a reduced amount of their mortgage loan.
Negative Amortization – Some loans that were put in place ahead of the housing bubble allowed for negative amortization. The amount of payment made every month is not adequate to cover the loan interest. A lender will consider a short sale in these situations.
Aggressive Secondary Financing – Throughout the housing expansion period some lenders were making second mortgages up to and even over %100 LTV. When a seller is in this situation it is often a scenario that will get approved for short sale. These types of loans situations get a bit more difficult but can still be considered as a short sale.
A short sale is not an easy process but a good real estate agent can take away much of the burden. Spend some time interviewing realtors and find the best realtor for your short sale situation. Remember, most agents do not know how to do a short sale.
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