Short Sale – FAQs

Relieved Couple

What is a Short Sale?

A Short Sale involves the sale of real property (real estate) whereby the sales proceeds do not fully satisfy the existing mortgage debt. The lender accepts a discounted payoff to satisfy the existing loan and minimize future financial loss.

In the case of a Short Sale, the mortgage lender typically pays most of the seller’s costs, including sales commissions, escrow and title fees and repair costs. The seller gets their home sold, satisfies their existing mortgage obligations and avoids the burden of the mortgage debt, pending foreclosure or the need to file bankruptcy.

Is a Short Sale right for me?

Mortgage lenders are increasingly willing to work with borrowers faced with long-term financial hardships to accept a discounted payoff on a mortgage. If you are faced with a hardship that makes it likely you will be unable to meet your future mortgage obligation, your lender would prefer to settle the matter with you as opposed to taking the property through foreclosure.

As you consider the option of pursuing a Short Sale, remember your lender is looking to limit any potential losses on your mortgage loan. By accepting a Short Sale of your property, your lender has arrived at a solution that is preferable to a foreclosure.

The bottom line is your lender wants to work with you and your qualified REALTOR® on a Short Sale of your property.

Is the debt forgiven by a Short Sale transaction considered taxable income?

In the majority of cases, No! In fact, most Short Sales transactions no longer carry federal tax consequences for home owners.

The Mortgage Forgiveness Debt Relief Act 2007,(H.R. 3648), recently signed into law by President Bush, now excludes discharges of indebtedness on a tax payer’s principal residences for the purpose of calculating the individual’s annual taxable income.

Cancellation of indebtedness income tax, or phantom tax as some critics have called it, remained an obstacle for innumerable home owners experiencing financial hardships and considering a Short Sale of their home as an alternative to foreclosure. Many homeowners simply could not afford the additional tax burden assumed by proceeding with a Short Sale.  At least that was the case before this new legislation was passed.

Prior the new legislation, however, there were two existing exceptions to the federal tax code relating to the cancellation of mortgage debt. The first exception said that if a home owner is insolvent at the time their debt is canceled, then no additional federal income tax is owed.

What does insolvent mean? It means if the homeowner adds up all their assets, such as cash reserves and the value of other property owned, but excluding many retirement funds, and subtracts all other liabilities and ends up with a negative number, they are technically insolvent.  Simply put, if the home owner owes more than they have in assets, they are insolvent.

The second exception involves non-recourse loans. In many states such as California, loans used to purchase a primary residence are typically considered non-recourse, and once again carry no added federal tax liability when sold as a Short Sale or through foreclosure.

With the passage of The Mortgage Forgiveness Debt Relief Act 2007 the old insolvency tests are no longer the ONLY criteria that decides whether or not a homeowner will have cancellation of debt income tax liability.

Now, homeowners are assured they will not have a cancellation of debt income tax liability when completing a Short Sale (or foreclosure), so long as the property qualifies as their principal residence and the total amount of canceled debt does not exceed $2 million.

For real estate “investors”, the insolvency exceptions continue to be critical in a challenging real estate market because these individuals may own numerous properties, aside from their primary residence, at risk of foreclosure.

Because in many instances the investor is insolvent, they avoid federal tax liability for cancellation of indebtedness.

As with ANY important financial or legal matter, always consult a licensed attorney and qualified financial professional before making any decisions with regards to a short sale.

Review IRS Website Review of Mortgage Forgiveness Debt Relief Act of 2007.

How much will I have to pay to Short Sale my home?

In most cases, you will pay literally no sales costs if your lender approves the Short Sale. All commissions, title and escrow fees, and even most repair expenses are paid by the lender as part of the Short Sale approval.

Liberty One Realty includes the following clause in every contract when listing a property as a Short Sale, “Seller agreement to sell is subject to approval by existing lender of a Short Sale at no cost to Seller. Seller shall not be required to deposit funds to close escrow.”

Remember, your lender(s) approve Short Sales and accept the resulting loss in an effort to avoid bigger losses through taking the property to foreclosure.

How do I get started on a Short Sale?

There is no cost to you or upfront fees for getting started with a Short Sale. It is as simple as contacting our staff of licensed professionals.  We will get to work on your addressing your questions and needs immediately. If you later decide not to proceed with a Short Sale of your property, you may cancel your listing agreement with Liberty One Realty, with no cost or fees owed.

Remember, our commissions are paid directly by the lender, not the home owner! And we are paid only when your home is successfully sold!

Can I deed, give, my house to someone else and avoid the hassle?

Deeding your property to someone without paying off the loan may not be the best financial decision. Firstly, your lender still considers the original borrower(s) responsible for payment on the loan. If  your mortgage payments are not paid and your lender ultimately forecloses on the property this will be reflected on your credit report.

Second, when you deed your property to someone else, you essentially give up control of your property. Along with the deed goes your ability to control your property.

Liberty One Realty encourages our clients not to deed their property to private individuals or investors, without first paying off the existing mortgages in full.  As with any complex financial transaction, we also recommend our clients seek the counsel of a qualified attorney and CPA in advance of making any decisions.  We are happy to refer you to a qualified attorney or CPA.

What sort of hardship would my lender consider legitimate?

To some extent that depends upon your mortgage lender considering the Short Sale offer. Generally, as long as your financial hardship is genuine and documented and your mortgage lender believes your loan is likely to become further delinquent as a result, your Short Sale request will be processed by the lender’s Loss Mitigation Department.

One important step in getting your lender’s Loss Mitigation Department to accept a Short Sale offer is to submit a strong hardship letter. Your hardship letter sets the tone for the entire short sale request and helps clarify why it is in your lender’s best interest to approve your Short Sale.

Liberty One Realty is pleased to provide our clients with numerous examples of financial hardship letters that mortgage lenders will consider in evaluating your Short Sale request.

A few examples of specific financial hardships a lender may consider when considering a Short Sale are:

  • Family illness or injury
  • Illness or injury in your extended family – resulting in relocation
  • Job relocation – property is equity deficient
  • Job loss or significant income loss
  • Divorce or split of domestic partners
  • Adjustment in mortgage payment
  • Unforeseen increase in living expenses

I am current on my mortgage, will my lender consider a Short Sale?

Simply put, maybe. Some lenders will accept a Short Sale request on mortgage loans that are not delinquent. Other lenders will not accept a Short Sale request until after a loan becomes delinquent. After you initially contact our office and complete a Short Sale Pre-Qualification-qualification, Liberty One Realty will promptly request Short Sale documents (package) from your lender, assist you with completing the paperwork and submit it directly to your lender for approval.

Why would my lender consider a short sale?

  • Legal Requirements – Dependent on your specific loan and mortgage lenders are increasingly under scrutiny, if not required, to work with borrowers unable to meet their mortgage obligations, particularly when the borrower and their REALTOR makes a voluntary effort to arrive at a compromise solution. This does not assure approval of your Short Sale.  However, we have found that lenders are increasingly more willing to work with borrowers requesting Short Sales.
  • Wall Street is Watching – Many mortgage lenders rely heavily on their ability to package and sell bundles of loans on the secondary mortgage market.  Lenders sell their loans in order to free up funds more originating additional loans to other borrowers, loaning money again and again, collecting loan fees and generating profits along the way. If mortgages perform poorly once they are sold it impacts the lender’s ability to sell future loans on the secondary market. A successful Short Sale gets the loan payoff resolved quickly and benefits the lender.
  • Asset Management & Expenses – When a lender acquires a property through foreclosure the property is managed until it is repaired and resold. This results in a considerable expense to the lender given the cost of managing real estate assets – homes – spread throughout a specific region, state and nationwide. Keeping properties maintained including utilities, making needed repairs and the administrative costs attached to these activities are all costs the lender would prefer to avoid. A successful Short Sale eliminates many of these costs.
  • Reserve Requirements – Delinquent and non-performing loans, which are foreclosed on, place another burden on mortgage lenders. By federal law, for any delinquent or non-performing loan a lender must set aside funds in reserve to mitigate potential losses. These funds cannot be used for generating new loans until the delinquent loans are resolved and sold off. A successful Short Sale eliminates the need for a lender to set aside reserves and frees up those funds to be loaned out to new borrowers.

Do lenders approve all Short Sales?

In a word, no. That is why it is critical to work with a qualified REALTOR® specializing in Short Sales and qualified in moving the process along and Short Sale approved.

From providing a home owner with a Short Sale Pre-Qualification-qualification-qualification, to submitting a Short Sale package with your lender, to negotiating with the lender’s Loss Mitigation Department, Liberty One Realty specializes in keeping your Short Sale file moving forward and gaining your lender’s final approval.

The first step is to get pre-qualified for a Short Sale. Please contact our staff today!  There is no charge and our consultation is completely confidential.  It’s quick and easy.

I have two loans, – a first mortgage and a second mortgage – can I still do a Short Sale?

Yes. We can work with both of your lenders.  In fact, many times the same lender owns or services both the 1st and the 2nd mortgages (loans).  Even if the current market value of your home is less than the balance owed on your mortgage, we are specialists in encouraging your lender to cooperate with the process, ensuring your Short Sale the best chance of being approved.

My property is in rough shape and needs work, can I still do a Short Sale?

Yes. In fact, some lenders are more motivated to approve a Short Sale request on a property that needs considerable work or repairs than on a property that does not. Your lender understands the risk and costs associated with foreclosing on a property that needs lots of work.

Aside from the added expense of completing the needed repair work, lenders are simply not set up to oversee the needed repairs are completed.  Simply put, lenders are in the business of loaning money to borrowers, not the the home repair business.

I am concerned about my credit, how will a Short Sale affect my credit?

The key is to avoid foreclosure at all costs. By nearly any measure, a foreclosure is the most damaging event your credit status can encounter, worse than bankruptcy. In the course of getting your Short Sale request approved you may fail to pay your mortgage payment on the regularly scheduled due dates.  These late payments will appear on your credit reports. However, these blemishes are far less damaging to your credit, long term, than a foreclosure or bankruptcy filing.

By avoiding foreclosure, you will likely be able to resume normal borrowing (car loans, credit cards, consumer lines of credit) in a relatively short period of time following the successful Short Sale of your property.

My income problem was temporary. Do I need to sell my home?

You may be able to keep your home. However, you will need to convince your mortgage lender of your hardship was temporary and is now resolved.

If your hardship is truly short-term in nature, the licensed staff at Liberty One Realty can assist you in documenting these requirements with your existing lender. If your hardship is long-term, requesting a Short Sale from your mortgage lender may prove the best alternative.

What is a Forbearance Agreement?

A Forbearance Agreement is a written agreement with your mortgage company in which you arrange to keep your home. The agreement will normally include two primary elements.  The first element will be your promise to remain current on the mortgage going forward. Second, the mortgage company and you will agree on a  payment schedule for making up the delinquent mortgage balances owed, including interest and other charges if the lender.

Your mortgage payment during the time period where the Forbearance Agreement is in place will be higher than your normal mortgage payment. The mortgage lender could just move the delinquent payments, penalties, and fees to the balance of your loan and adjust either your payment for remainder of your mortgage term or your repayment schedule (extend your loan payback period).