Note: If you are considering short selling your home, please consult with your CPA and/or a qualified Real Estate Attorney, who can explain any consequences that may happen. Below is general information for sellers and buyers that just skims the surface of the information covering short sales.
What is a short sale?
A short sale, is often times initiated prior to the foreclosure of your home, is when a lender agrees to settle a payoff of your current home mortgage balance for less than what is owed to them. Currently, about ¼ of the short sales submitted are approved by the lender in lieu of a more costly and time consuming foreclosure. Each mortgage company has their own set of parameters to decide whether or not they will accept a short sale. And each lender has its own set of requirements to get a short sale approval. Often times, a third party mediator, such as your real estate agent, have a distinct advantage in successfully negotiating the short sale of your home with your mortgage company.
What is the HAFA program?
HAFA is defined as the Home Affordable Foreclosure Alternative (HAFA) Program. When your mortgage payment becomes unaffordable, you may be eligible for a short sale or deed-in-lieu of foreclosure. The benefit of the HAFA short sale is that you are no longer responsible for the difference between what you owe on your mortgage and the amount that your home sells for. HAFA is only available for mortgages owned or guaranteed by Freddie Mac or Fannie Mae, or serviced by over 100 HAMP participating servicers (found at: makinghomeaffordable.gov). You may be eligible to apply if you meet the following criteria:
1. Currently live in your home or have lived there in the last 12 months
2. Have documented financial hardship
3. Have not purchased a new home in the last 12 months
4. The first mortgage is less than $729,750
5. You obtained your mortgage on or before January 1st, 2009
6. And you must not have been convicted within the last 10 years of felony larceny, theft, fraud or forgery, money laundering or tax evasion, in connection with a mortgage or real estate transaction.
Am I guaranteed a short sale approval?
No. With a short sale, you are asking the lender, and sometimes second lien holder, to accept a loss on their investment. A lender is not obligated to cooperate with you in accepting a loss. However, with my education, experience and success in the short sales process, we will do everything we can to make the short sale happen. With the many dynamics facing short sale approval, no one can guarantee they can satisfy every lenders requirement. The HAFA program, with the assistance of a qualified real estate agent, is another tool to help homeowners in successfully obtaining short sale permission.
Why then would a lender consider approving a short sale?
Ultimately, it’s about their investment. By granting a loan modification or a short sale, a lender can minimize their loss by cooperating now rather than moving forward with a more costly and time consuming process of foreclosing on the home that can sometimes last for years. A vacant home in the foreclosure process will burden the lender with carrying the costs of insuring the home, taxes, repairs, upkeep, damage and liability.
How long does is take to complete the short sale process?
Depending on the lender, the thoroughness of the short sale package submitted, and so on, obtaining lender approval varies tremendously. Bringing your home to the market in a condition desirable to buyers is very important. A home in a marketable condition will prevent the home from sitting without every seeing and offer vs. quickly receiving an acceptable and serious offer to submit to the lender for consideration. Once we submit a ratified contract to the lender for consideration, and upon meeting the required guidelines and documentation as specified by that lender, we can obtain a short sale approval in as little as two weeks, and up to as long as six weeks. Once a lender agrees to the short sale, we will receive a letter confirming the approval of the short sale and an acceptable payoff amount to complete the sell.
Why shouldn’t I just let my home go to foreclosure?
This is a personal choice; however, the consequence of your decision will adversely affect your credit for years. A mortgage is the most important form of debt, and it gauges very high on the credit scoring scale. It is going to cost you a lot of time, money, and aggravation. On the other hand, a short sale is listed on your credit report as “settled debt”. You are taking responsibility for your debt regardless of the circumstance. Your credit will be less damaged with a short sale versus a foreclosure. It is always better to maximize your options with a short sale.
Are there any risks to a borrower when negotiating a short sale?
Yes. If the borrower is not completely honest when submitting a short sale approval package: Providing inaccurate stated income figures, doctored tax returns or inaccurate paycheck stubs, etc., the borrower could be at risk of potential liability for their dishonesty.
What are some of the liabilities to a borrower when pursuing a short sale?
A short sale is treated like any other sales transaction depending on the type of property being sold. In addition to mandated short sale documents, you will be required to complete the same paperwork and disclosures as if you were selling the home in a normal transaction. That means you will be required to honestly complete the Transfer Disclosure Statement (TDS).
Additionally, you could be subject to two potential liabilities with any foreclosure or short sale; 1) deficiency judgment, or 2) forgiveness of debt.
A Deficiency Judgment is a judgment obtained by the lender in court against the borrower for the difference between the unpaid balance of the secured debt and the amount produced by sale or the fair market value of the security, whichever is greater, in a judicial foreclosure. (Cal. Code Civ. Proc. § 726 (b).). A lender may obtain a deficiency judgment only with a judicial foreclosure. With a trustee’s sale foreclosure, the lender cannot go after a deficiency judgment.
With a short sale, except under certain circumstances, the lender may demand the balance still owed on the note that the sales transaction did not cover (e.g., short sale of the property pays the lender $120,589.23 but the full amount owed on the note is $250,000). This difference may be referred to as a “deficiency balance.” It is not really a “deficiency judgment” since no court has issued such a judgment as part of a judicial foreclosure.
With Forgiveness of Debt – Any debt that is forgiven in a short sale, regardless of whether the loan is a recourse or nonrecourse loan, is taxed as ordinary income. There are, however, some exceptions to this rule that may benefit a taxpayer involved in a short sale. In 2007, the president worked with the IRS to relax this ruling for a given period of time. Consult your own professional tax consultant to determine how your own personal situation may be impacted by this issue.
Are there other options to pursuing a short sale?
Yes. Depending on the situation, a lender may consider one of the following:
Loan Modification: Basically, a loan modification is any resolution of a problem loan between the lender and borrower that modifies the original loan agreement. Some of these options include forbearance (e.g. forgiving a portion of the debt or late charges); deferment; renegotiating interest rate, monthly payment amount, principal amount, maturity date; or the enforcement an acceleration clause in the loan.
Deed in Lieu of Foreclosure: After the borrower is in default, the borrower voluntarily delivers title to the lender for consideration and the lender accepts the conveyance of the property in full satisfaction of the mortgage debt. Using this method, the lender saves the costs of foreclosure and the borrower avoids having a notice of default on his/her records. (Hamud v. Hawthorne, 52 Cal.2d 78 (1959).)
Short Payoff*: With a short payoff, the lender accepts less than the remaining mortgage amount as full payment of the loan. The property need not be sold.
*Note: Some lenders do not differentiate between a short sale and a short payoff.
What documentation will a lender require when submitting for a short sale approval? Lenders will typically require a distressed borrower to furnish a variety of documents, which could include the following:
- Written explanation (and proof) of the hardship the borrower is experiencing;
- Copy of the purchase contract signed by both the buyer and seller (borrower);
- Copy of the Transfer Disclosure Statement;
- Proof of the buyer’s ability to purchase the property, i.e., a completed loan application, pre-approval by another lender, or evidence of cash on hand (bank statement);
- Copy of the certified escrow instructions;
- Preliminary title report;
- Estimated net/closing statement certified by an escrow officer acceptable to the lender;
- Completed and signed IRS Form 4506, “Request for Copy of Tax Form;”
- Completed and signed personal financial worksheet;
- Previous two years tax returns;
- Employment paycheck stubs for the past two months;
- Profit and loss statement (if the borrower is self-employed);
- Past three months bank statements.
Short sales are treated like any other sales transaction depending on the type of property being sold. In addition to the mandated short sale documents, you will be required to complete the same paperwork and disclosures as you would with any other regular sale of a home.
For more detailed information about short sales and the HAFA program, please visit the California Association of Realtors website by clicking on the links below:
HAFA Program Information: