What is a Short Sale? And is Your Best Option?

What is a Short Sale?
A short sale occurs when the net proceeds from the sale of a home are not enought to cover the seller's mortgage obligations and closing costs, such as property taxes, transfer taxes, and the real estate commission, and the seller is unable to cover the difference.

When can a Short Sale be used?
When the owner of the house is behind in payments and the bank has started the foreclosure process. The foreclosure process usually starts when the owner’s house payment is at least three payments behind. A short sale can often be your best option if you cannot qualify for Loan Modification through the Making Home Affordable Plan or you do not desire to stay in your home.

Why would I as a Homeowner agree to a Short Sale?
Since you are behind on payments, it is likely your house has become a financial burden and possibly an emotional burden. You are probably looking for relief from the debt, and relief from the financial and emotional distress. One of the best reasons is that the short sale prevents you from getting a foreclosure on your credit report.

Why would the Bank (Primary Lien Holder) Agree to a Short Sale?
Foreclosure is an expensive process for the bank. Most of the time, the short sale can actually save the bank money. Also, when a bank holds a foreclosed property, it limits the amount of other loans they can make. It looks unfavorable for a bank to have too many real estate owned (REO) homes on their books at one time.

Can I as the Owner Make a Profit from the Short Sale?
No. Since the bank is agreeing to lose money by taking an amount less than the loan payoff, they have a rule that the owner cannot make any profit either.

Does the Short Sale Cost me Anything?
No, typically there are no costs to you.

Can the Bank Sue me for the Difference Between the Loan Payoff and the Amount of the Short Sale?
Since the bank must be in FULL AGREEMENT with the amount of the short sale payoff, it is typical for the bank to forgive the remaining indebtedness. However, it is advisable to have the final lender short sale approval reviewed by legal and/or tax professionals to ensure that the lender releases the lien and forgives the remaining indebtedness.

Are there Tax Consequences to me on a Short Sale?
Prior to the Mortgage Debt Relief and Emergency Economic Stabilization Act of 2008 being put into effect, money forgiven by a lender in a short sale was considered taxable income. In many circumstances, the new law no longer requires taxpayers to pay federal income tax on the forgiven debt, provided the property is their principal residence only.  Taxpayers may exclude debt forgiven on their principal residence if the loan balance was less than $2 million. The limit is $1 million for a married person filing a separate return. The law applies to debt forgiven in 2007, 2008, and 2009, and the Economic Stabilization Act of 2008 has extended this forgiveness through 2012. It includes debt reduced through mortgage restructuring, refinancing, home equity lines of credit, short sales as well as mortgage debt forgiven in connection with foreclosures. As a reminder, this is debt that was used to buy, build, or improve a principal residence ONLY.

How Long Does the Short Sale Process Take?
It depends on how easy or difficult the bank is to deal with, and how quickly they respond once we contact them. The entire process could take 7 days, 30 days, 90 days, or longer. Again, it just depends.

How Do we get the Short Sale Process Started?
If you'd like to explore whether you might be a candidate for a short sale, please contact me and I will be happy to help you through the process.