Short Sale- Frequently Asked Questions

In a previous posts, we talked about What is a Short Sale?, A Strong Dose of Patience is Needed for the Short Sale Procedure, and Helping Avoid Foreclosures with Short Sales. For your reference, here are a few of our most Frequently Asked Questions (FAQs) regarding Short Sales. Please give us a call at 810-229-7000 for more information or to speak with someone regarding a Short Sale today.

What is a Short Sale?
A Short Sale is a negotiated settlement. This is when the Lender agrees to accept less than the amount owed as a payoff on a loan.

Why should I consider a Short Sale?
Evaluate your own budget in detail and determine if you can afford your monthly payments including your mortgage payment. If you determine that you can no longer afford to make your monthly mortgage payment, contact us immediately. Do not wait until it is too late for a short sale option. The earlier you start the higher our likelihood of success.

Why would my Lender want a Short Sale versus Foreclosure?
No lender wants to foreclose on anyone, it is a lot of work and nobody wins. A Short Sale is a better return on an investment for the Lender rather than a foreclosure. The cost for a Bank to foreclose on a property is $60,000 or more. Not only does a Short Sale save the Bank money they get their money from the sale approximately six months sooner than on a foreclosed property.

Why would a lender accept less than the outstanding debt?
A Lender will have the property appraised to determine if it is valued at less than your mortgage pay off balance. The lender will then make a business decision based on the value, estimated legal expenses and all information supplied by you in your completed short sale packet to foreclose or to accept a short sale.

How long does it take to complete a Short Sale?
Once the completed Short Sale packet and a signed purchase agreement have been sent to the Lender, it can take between thirty (30) and ninety (90) to get the bank to agree to a Short Sale (this process is lengthened if there is more than one mortgage company involved). If your Lender has started the Foreclosure process and a Foreclosure sales date has been posted, we will make every effort to have this accepted and completed even sooner.

How do Foreclosure and a Short Sale affect my credit?
Foreclosures show up as a Foreclosure and stay on your credit record for seven (7) years. Anytime you apply for a new loan or have your credit checked, the foreclosure will show up and may be required to be disclosed on job applications as well. A Short Sale is listed as Settled Debt and is much less harmful to your credit. Please consult a mortgage representative or credit company for more information.

What is a Deed in Lieu of Foreclosure?
To voluntarily give the property back to the Lender to prevent the lender from bringing foreclosure proceedings.

What is a Deed?
A legal document conveying title to real property.

What is Loss Mitigation?
A process to avoid foreclosure; the Lender tries to help a borrower who is in danger of defaulting on their loan.

What is Loan Modification?
A loss mitigation option that allows a borrower to refinance and/or extend the term of the mortgage loan to reduce their monthly payment amount.

What is a Forbearance Plan?
A loss mitigation option where the Lender prepares a revised repayment plan for the borrower that may include a temporary reduction or suspension of monthly loan payments.

What is the difference between a Satisfaction of Lien versus a Release of Lien?
A satisfaction is a total release for the debt owed. A release is when a lender releases the lien to allow the property to be sold but the borrower may still be required to repay the balance of the debt.

What liability do I have when doing a Short Sale?
The Lender has three possible ways to handle the Deficiency Balance, which is the portion of the mortgage debt not covered by the sale of your property:
· The lender can attempt to collect the deficiency balance from the Seller/Borrower after the property closes
· The lender may require the Seller/Borrower to sign an unsecured promissory note for the deficiency balance as a condition of agreeing to the short sale.
· The lender may agree to cancel the entire deficiency balance. The amount of debt forgiven may be reported on a 1099 to you as income.

We strongly urge you to seek the advice of a qualified tax professional.

In late December 2007 President George Bush signed the Mortgage Forgiveness Debt Relief Act of 2007 into law. This new legislation is to help homeowners avoid foreclosure by allowing them to refinance without any tax consequences or have their lender agree to a short sale on their home. The Mortgage Forgiveness Relief Act allows for the homeowner to reduce the basis in their house (as reported by the mortgage company on a 1099C) and not reporting this forgiven debt as a capital gain or taxable income, therefore not creating any additional taxes due for the homeowner.To get a summary of this bill go to http://www.govtrack.us/congress/bill.xpd?bill=h110-3648 .

What is a deficiency Judgment?
A deficiency judgment can arise if the Lender agrees to sell the property for less than the mortgaged amount. The Lender holds the borrower/seller responsible for the unpaid portion of the loan.

Is the Deficiency Balance Negotiable?
Yes.

Although there are no guarantees, a successful Short Sale should eliminate a deficiency judgment, minimize your tax liability and keep Foreclosure off your credit report.

-Emily Trenkle, Closing Coordinator, The Buckley Jolley Real Estate Team