With many Americans still facing the very real threat of foreclosure, many are looking for ways to avoid it. One option, and a topic that has garnered a lot of industry interest, is a real estate short sale. Short Sales have become an increasingly popular, and common foreclosure avoidance tactic for homeowners but what are they and how can they help?
What is a Short Sale
A short sale in real estate occurs when the outstanding obligations (including all loans, lines of credit, etc.) against a property are greater than what the property can be sold for. Short sales are a way for homeowners to avoid bankruptcy or foreclosure proceeding by convincing the bank to accept a discounted payoff, meaning the lender(s) will release the lien(s) that is (are) secured to the property upon receipt of less money than is actually owed.
Will Your Lender Negotiate a Short Sale
Lenders are in business to make money and by agreeing to accept a ‘short’ pay off, they are agreeing to take a loss on the sale of the property. To qualify for a short sale a bank will want to see a clearly demonstrated “financial hardship“. Acceptable financial hardships include; relocation, loss of a job, payment increase or mortgage adjustment, business failure, reduced income, to much debt, illness or death, divorce, damage to property, incarceration, etc. Furthermore, if your payments are current, there is very little reason for the lender to consider a short sale. If your payments are behind, then a lender may be more agreeable to negotiate with you.
* In a short sale the mortgage lender pays all of the costs associated with the sale including Realtor commissions, title and escrow fees, as well as back taxes, etc. As such there is typically NO OUT-OF-POCKET EXPENSE TO YOU THE SELLER!
In addition, the bank will allow you to stay in the home while the short sale is negotiated and while your agent works on locating a buyer for your home. As such this period offers homeowners a great opportunity to save the money they would typically be paying towards their mortgage and use this to pay down debt, or rebuild their reserves. It should also be mentioned, that the Obama Administration initiated a short sale program called the HAFA Program which provides an incentive up to $3,000 to eligible borrowers who utilize a short sale to avoid foreclosure. Contact us for further details on this program.
Is the Seller’s Credit Affected
Sellers will take a much bigger hit on their credit report if they go through foreclosure or give the lender a deed-in-lieu of foreclosure. The points lost on your FICO score may be as follows:
- Foreclosure or Deed-in-Lieu of Foreclosure
Both of these solutions affect credit the same. A sellers can take a hit of 250 to 280 points. This means if a seller’s FICO score before foreclosure is 680, it could dip as low as 400.
- Short Sale
The damage to a credit report from a short sale is much less drastic and in the range of 80 to 100 points. The hit will be indicated as a “settled account”, or if your real estate agent knows what they are doing and is successful they may even be able to convince the bank to agree report the account as “paid in full”.
Waiting Period Before Buying Another Home
- Foreclosure or Deed-in-Lieu of Foreclosure
A seller who wants to buy a home after foreclosure can expect to have to wait about 36-60 months before being able to get a loan with a reasonable interest rate.
- Short Sale
For a short sale, the seller should be able to buy another home with a reasonable interest rate after about 18-24 months.
Short Sale & Foreclosure Deficiency Judgments
You may have heard that some banks may attempt to pursue the seller for a deficiency judgment for the difference between the loan amount and the amount collected through the short sale or foreclosure, however, one of the requirements of the HAFA Program is that the banks agree to accept the short pay off as payment in full. That said, borrowers who do not qualify for the HAFA Program should be aware that the handling of the deficiency is part of the short sale negotiations and a Realtor experienced in these negotiations will work to ensure the bank agrees to accept the reduced payoff as payment in full, with the agreement not to pursue the owner for the deficiency.
Are There Tax Consequences?
You may have also heard that there are tax consequences to short sales, however, in December of 2007, Congress acted to protect many debtors from income tax liability associated with foreclosure avoidance. The Mortgage Forgiveness Debt Relief Act of 2007 states that homeowners will not be subject to income tax from release from mortgage liability if and to the extent the mortgage proceeds were used to buy or improve their primary residence. The act does not provide income tax shelter from forgiveness of mortgage debts for investment property, vacation homes, or mortgages used for businesses or to pay off credit card balances. The protection originally expired in December 31, 2012 however, Congress has extend this act every year and it is currently valid through 2016. You should speak with an attorney or CPA familiar with the law to see if you qualify for income tax protection.
For those borrowers who do not qualify for protection under this Act there is an insolvency exception to imputed income from the cancellation of mortgage debt. If a borrower is financially insolvent when he surrenders the mortgaged property to the lender voluntarily or through foreclosure there will be no imputed income. For those considering bankruptcy, a borrower who files bankruptcy is presumed to be insolvent, and thus a bankruptcy debtor cannot suffer imputed income tax liability because the bankruptcy discharges personal liability under a mortgage note.
To begin negotiating the short sale with a lender (ie. the short sale process), a seller must have the home listed, and have a buyer present an offer. The lender will request a short sale package, which will include a hardship letter. That letter must describe the unfortunate conditions that caused you to not be able to keep the payments up. Those reasons could include the loss of a job, a serious medical condition, or any of the other fore-mentioned acceptable hardships. The lender simply wants to see their is a legitimate reason why you’re unable to keep up with the payments.
Being a loose spender and having overextended one’s credit may not be considered a hardship by the lender, however, it is possible to negotiate short sales even under these circumstances.
Protecting Your Interest
The lenders do not want to lose money… however, they would much rather make a deal with you in an effort to avoid having to foreclose on the property as this is an expensive and time consuming process and they realize that in most instances they can reduce their losses by agreeing to accept a short sale. But that does not make them a pushover. It is extremely important that you locate a Realtor who specializes in these types of transactions and one who is experienced in the listing and marketing of short sales, and negotiating these types of sales with the bank. While the bank will be responsible for the cost of your agent’s commission, the agent will represent you and fight to protect your interest.
* The agent you select to represent you to assist you with the short sale of your home will be required to sign a listing agreement with you, as such their fiduciary obligation is to you and they are legally required to represent you and your best interests. To put this simply, the agent owes his allegiance to you the homeowner and not the bank.
Seek Help Early
Seek help as soon as your realize you’re having difficulties managing your mortgage payment and your finances. The lender may negotiate a new loan with better terms if approached early enough. Obtain the advice of a tax accountant, and attorney or a real estate agent who is knowledgeable about short sales. The key advantage to a short sale is the ability to negotiate for the release of the deficiency, additional benefits include the ability to reduce the damage to your credit score, while buying yourself more time in the home and assisting the bank in it’s effort to reduce it’s losses.
Foreclosure prevention alternatives are available… Regardless of your financial circumstances or lack of home equity! It is our goal to assist you in resolving your mortgage delinquency BEFORE foreclosure proceedings actually commence, however, if you are well into the foreclosure process already, viable options for avoiding foreclosure are still available and we can help! Now more than ever, lenders are willing to grant you additional time to remedy your mortgage default if you are willing to cooperate and they feel they can avoid foreclosing on your property altogether.
Locating a Short Sale Specialist
The critical success factor in these transactions is finding an agent who is experienced and specializes in these short sale transactions. Thus the first step in the short sale process is to find a Realtor who specializes in these types of sales. While short sales have been a viable strategy for years, many agents never availed themselves of the educational opportunities to ensure that they were well versed in the techniques for arranging, and negotiating a successful short sale. Subsequently there are a lot of agents running around the Columbus Ohio Real Estate Market calling themselves short sale experts who lack the expertise and experience to warrant the title and support these claims. Just because an agent has done a couple of short sales does not make them a specialist! To truly be a specialist agents have to have closed an array of transactions with a myriad of complicating factors, in a slew of different situations. They have to have closed short sales with every lender (as every lender has different guidelines), FHA, Freddie and Fannie, different property types, multiple lien holders, and a whole host of other qualifications. Short sale guidelines and lender protocols are constantly changing, almost daily, and agents who specialize in short sales truly live and breathe them.
So how do you go about locating one of these short sale specialist? Agents who specialize in these types of sales are actually easy to identify as they are those agents who most frequently take these types of listings. If you’re interested in exploring the option of selling you home via short sale here in Columbus you’ll be happy to know that we are the local industry leader and the premier short sale speciality group in Central Ohio, and thus we’d invite you to give us a call. If you’re outside of the Columbus market and would like to locate a specialist you can send us an email and we can direct you to a local specialist in your area.
Agents who specialize in these types of sales will not only have an in-depth knowledge of the short sale process, but they will also have relationships with those individuals at the banks who negotiate these sales and thus a distinct advantage that will help you in achieving your goal of getting your home sold and avoiding foreclosure!
Bank/Lender Specific Short Sale Information
|Bank of America||EverHome Mortgage|
|Countrywide||PNC Mortgage *formerly National City|
|Citi Mortgage / Financial||Wells Fargo Home Mortgage|
If you are a homeowner who feels they might qualify for a loan modification or short sale please give us a call as we’d be happy to assist you in your efforts to understand your options and in determining which option is the best for you! All consultations are COMPLETELY CONFIDENTIAL and ABSOLUTELY FREE.
If you are a buyer, or an investor interested in receiving short sale or foreclosure lists, or purchasing a short sale or bank owned property, please give us a call as we’d be happy to assist you as well!
The Opland Group Specializes in Real Estate Sales, Luxury Home Sales, Short Sales in; Bexley 43209 Columbus 43201 43206 43214 43215 Delaware 43015 Dublin 43016 43017 Gahanna 43219 43230 Grandview Heights 43212 Hilliard 43026 Lewis Center 43035 Marysville 43040 43041 New Albany 43054 Pickerington 43147 Powell 43065 Upper Arlington 43220 43221 Westerville 43081 43082 Worthington 43235