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A Short Sale Defined...
Background: Foreclosures and delinquency rates for mortgages are occurring in record numbers, many due to teaser-rate mortgages now adjusting upwards after the housing boom of two to four years ago. Higher taxes and insurance costs are making it increasingly difficult for borrowers to keep up with these payments. This is especially evident on the Emerald Coast of Florida. Now that prices have significantly decreased, these owners are in a predicament. Many have negative equity, i.e. owe the lender more on the mortgage than the property is worth. When this is the case, and the borrower needs to sell, one solution is a "short sale".
Definition: A “Short Sale” is when the lender agrees to a accept a payoff for less than the remaining mortgage balance, and possibly forgive the entire shortfall, as well as pay the seller’s closing costs including the Realtor fee. The loss is either completely written off by the lender, a payment arrangement is made with the borrower (promissory note), or a lump-sum for a potentially lesser amount is agreed to (cash contribution).
Why Would A Lender Accept a Short Sale?
Banks don't want to own real estate. A foreclosure can cost a lender $30,000 to $65,000. They have to maintain the property, market the property, pay for utilities, then spend money on closing costs. They would rather do a Short Sale- where the groundwork has been done for them and generally costs them less than a foreclosure.
Do You Qualify?
Most lenders will consider allowing a Short Sale if there has been a change in circumstance after the loan was initally obtained which prevents the borrower from making payments.
Some of the possible reasons:
Loss of income
Divorce
Job Transfer
Medical Bills
Mortgage Rate Reset
The lender will want a Hardship Letter explaining what happened to cause the inability to keep up with mortgage payments.
The Mortgage Forgiveness Law
Did you know that until recently, mortgage debt on a primary residence that was forgiven from a Short Sale or foreclosure could be counted as taxable income by the IRS?
On December 20, 2007, the Mortgage Forgiveness Debt Relief Act was signed into law. Effective from January 1, 2007 through December 31, 2009, any forgiven or "cancelled" primary mortgage debt from a principle residence, or debt used to improve the residence, will not be taxable. The limits are up to $2,000,000 for married couples filing jointly, or $1,000,000 if filing separately. You can find more information on the IRS online filing form titled Reduction of Tax Attributes Due to Discharge of Indebtedness.
Be aware, however, that second mortgages or home equity lines are not exempt. Second homes and investment properties are still subject to taxation for forgiven debt. There is an exception when the borrower is insolvent, meaning, has liabilities are greater than assets. For a detailed explanation and a worksheet to figure if you have any liability, please visit the IRS website. And of course, consult with your tax account on your particular situation.
The Seller's Steps To A Short Sale with The HD Team
- Sign a Letter of Authorization for Howard “HD” DeRias for permission to speak with your lender on your behalf. The letter should specify the property address and loan number. I will also need the last four digits of your social security number for verification with your lender. You or I will ask the lender if they will consider a short sale before beginning.
- I will place the property on the market for fair market value. Most lenders will only consider offers that are at least 80% of what the property appraises for, based on their independent appraisal.
- When we get an offer, I will ensure that it states it is "contingent on seller's mortgage holders' approval".
- You may counteroffer the buyer at this step, as we don't want to send an offer to the bank that we think will be rejected.
- I will package up the contract with the following documents* and fax or express mail them to your lender:
Buyer's pre-approval letter
BPO - Broker's Price Opinion
Hardship letter which explains why you need to short sale
Financial worksheet itemizing your income and expenses
Last year's tax returns
Most recent pay stubs or quarterly profit and loss if self-employed
Most recent bank statements
Copy the listing agreement
Estimated net sheet
- Expect to wait up to 120 days for a response from the bank. They will be ordering an independent appraisal or Broker Price Opinion on the property to ensure the offer is for fair market value. If the value is higher than the offer amount, they will counter-offer at the appraised price. The buyer may choose to comply, to stay firm, or to come up at this point.
- If there are two lenders involved, or a Private Mortgage Insurance company (PMI), then I will facilitate the negotiations between them focusing on a fully approved sale on your behalf.
- If the lender deems you have sufficient income or savings, they may ask you for a cash contribution or promissory note, usually at favorable terms, to mitigate some of the loss.
- A lot happens behind the scenes, rest assured, I will be following up on a successful sale for you every step of the way.
*Note: Different lenders have different procedures for short sales, thus the required documentation may vary slightly from one lender to another.
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