AN OVERVIEW OF THE SHORT SALE This uncertain economy has been especially difficult for homeowners. Plunging home values and upwardly adjusted loan payments have put untold financial pressures on many, leading to unprecedented numbers of mortgage defaults and foreclosures. Without a doubt, losing a home to foreclosure is a grave dilemma that can have far-reaching consequences. That’s why many homeowners in default on their mortgage are turning to the Short Sale alternative to help them stop foreclosure, prevent serious damage to their credit and avert potential tax consequences or bankruptcy. The Short Sale Alternative to Foreclosure If you’re a homeowner who can no longer afford your mortgage payments, and owe more on your loan than your home is currently worth, the Short Sale of your home may be the financial solution you’ve been looking for. Simply put, a Short Sale is the sale of your home for a price that is less than what you owe on your mortgage. It requires prior approval from your lender(s) before proceeding with the sale and involves working with a trained Short Sale broker/agent who has a detailed understanding of the Short Sale process. Once a buyer is found and submits an offer, the lender(s) must approve it before the sale can close. There is no cost to the seller in a Short Sale. The lender pays all broker commissions and fees from the proceeds of the sale. The Benefits of a Short Sale – a Win-Win for All Concerned The Lender: The costs of a Short Sale are about 50% of what a lender would pay for foreclosure. In addition, when the lender agrees to accept a “discounted payoff” for your home, which is written into the listing agreement, the lender also agrees to hold the buyers, sellers and other lenders harmless and free from any liability liens or judgments. The lender also agrees to report “paid in full” to all three credit bureaus. The Seller: The homeowner receives partial credit restoration in about 12 months (missed payments may be the only negative reported to credit bureaus). Generally, sellers can stay in their house for about as long as they would in a foreclosure proceeding and still be able to eventually show their mortgages as “paid in full.” This is not true for a foreclosure. The Realtor: The lender pays commissions for services to the realtor. The amount varies based on negotiations with the lender at the time of Short Sale approval. The Buyer: The new owner has purchased a home they like for under full market value. Is a Short Sale the Solution for You? Pierce Smith has special interest, training, and authority on the Short Sale alternative. His work is focused entirely on personal service to homeowners as their property agent and as an advocate for their best interests in dealing with lenders and potential buyers. His experience with the Short Sale process helps sellers negotiate seamlessly through the special requirements of this type of sale. If you would like to learn more about the Short Sale alternative to foreclosure and how this strategy may be the right solution for you, contact Pierce directly at 415-302-2138 or at Selling@PierceSmith.com for a complimentary consultation. FREQUENTLY ASKED QUESTIONS Q. Why would a lender accept a Short Sale?
A. Mortgage loan defaults tie up a bank’s money to lend at a profit. If a bank under financial pressure becomes subject to Federal overview, the bank’s rating is lowered, thus motivating them to remove bad loans. In addition, banks lose about 40% of the loan value in foreclosure and only 25% of the loan value in a Short Sale. Therefore, a Short Sale is preferable. Q. How does the Short Sale timeline compare to Foreclosure?
A. Once a property has gone into Foreclosure, it usually takes about six to eight months to complete the process. In some circumstances, however, it could take as long as 2 years. For a Short Sale, the timeline is about the same as the foreclosure process – around 6 months. Timing can vary depending on how quickly a qualified buyer appears and how quickly the lender responds to the offer. Q. Will there be any tax consequences to the Short Sale?
A. Federal and State laws (Public Law 110-142) forgive tax consequences up to $2,000,000 (form 1099-C) “Forgiveness of Debt” for the owner’s primary residence. Consult a CPA prior to listing your home as a Short Sale. Q. What will happen to my credit rating with a Short Sale?
A. To consider a Short Sale, you must have received a Notice of Default (NOD) from your lender, which is issued after 3-4+ months of non-payment of your mortgage. At this point, the late payments will already have affected your credit score. However, if you proceed with a Short Sale, your credit will not be further impacted. Average FICO credit score impacts are as follows: - Late payments = minus 70-100 points
- Foreclosure = minus 170–250 points
- Bankruptcy + foreclosure = No credit left
- Short Sale = no effect
As you can see, the Short Sale is a favorable resolution to a NOD of a mortgage loan. Q. Can the lender report to credit bureaus ‘paid less than agreed’?
A. The lender may send a “paid less than agreed report” to the credit bureaus. Keep your 1099-C as proof that the lender agreed to the Short Sale. Contact a real estate attorney for clarification as he can then contact the lender later and fix the oversight. Q. Can the lender seek a “deficiency judgment” for the amount short?
A. Not in California. Both Short Sales and foreclosure sales are exempt from deficiency judgments. Q. How do I find the right agent for a Short Sale?
A. It is important to work with an ethical, financially sound company and an agent who is skilled in negotiation with lenders and knowledgeable about the Short Sale process. Here are some questions to ask a potential agent: - Have you done a Short Sale?
- How many have you closed?
- Which banks have you worked with? (Note: each bank has different needs.)
- How loans have been on the subject property?
- What contact have you had with lenders?
- How did you derive the price?
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