Short Sales

What is a short sale?

A short sale is a transaction where the proceeds of the sale are insufficient to cover the amount owed to the lender and the total of all liens and closing costs.  Depending on the number of liens on the property, at least one lien holder will be asked to satisfy its lien for less than the amount owed.  A short sale permits the lender and the distressed property owner to avoid foreclosure by selling the property at a loss.

Short sales are more complicated and time consuming than an ordinary real estate sale. The lender is not obligated to accept less than full payment or to effectuate a short sale.  A reply from the lender, if received at all, usually takes weeks.  There is generally no quick resolution of a short sale.  At times, lenders will not consider a short sale unless the borrower is in default on the loan.  If a borrower defaults on the loan, but is current on all other debts, this may also influence how the lender responds to the short sale request.  In sum, short sale approval from a lender is not guaranteed.

Request for a short sale usually includes submission of a closing package for the lender to review. The documents commonly required by the lender include a hardship letter to explain the circumstances as to why the borrower is unable to pay; proof of the borrower’s income for at least the last thirty days; two most recent tax returns; and bank statements for the last two months.

What are the consequences of a short sale?

A borrower who is considering a short sale must understand the following consequences:

(1) The borrower’s credit rating and ability to buy another house will be seriously affected;

(2) Even if the lender agrees to satisfy the mortgage with less than full payment, the remaining balance on the note might not be satisfied, which means the lender may retain its right to collect the remaining balance;

(3) The borrower will not be allowed to receive any proceeds from a short sale;

(4) The property will probably sell for less than its full value;

(5) An interested party or family member cannot be the purchaser and the borrower cannot remain in the home after closing;

(6) A request for a short sale does not slow down or prevent foreclosure of the borrower’s property unless the lender agrees to do so; and

(7) Bankruptcy might cause a delay but probably will not avoid foreclosure.

What are the tax consequences?

The difference between the amount actually owed to the lender and the lesser amount that the lender accepts is called “forgiven debt”.  All borrowers on the loan will receive a 1099 from the lender reporting the forgiven debt amount to the IRS.  Whether or not a borrower receives a 1099 from the lender, all borrowers must report the forgiven debt as income.  This may generate a tax obligation.  The borrower must seek advice from a tax professional regarding borrower’s IRS filing and reporting obligations and any tax consequences of a short sale transaction.  Please be advised that this office does not offer tax advice.

Does a short sale benefit the borrower?

The successful completion of a short sale will usually benefit the borrower even if the lender does not waive the remaining balance.  Some benefits may include: substantial portion of the debt being repaid; less damage to the borrower’s financial well-being and credit standing; shorter credit recovery time than through foreclosure; and freedom from a stressful and burdensome situation.

Are there other options?

Other options to consider are modification of the loan, a deed-in-lieu of foreclosure and refinancing the loan. Modification of the existing loan will depend upon the lender’s cooperation, whether the borrower qualifies under one of the available programs, and whether the terms of a modification loan are acceptable (and financially feasible) to the borrower. A deed-in-lieu of foreclosure will depend on many factors however will almost certainly be denied if there are junior lien holders.  In such a case, the lender would prefer foreclosure to clear title to the property rather accept a deed-in-lieu and expose itself to liability from the junior lien holders. Typically, refinancing on new terms may not be helpful or practical because of the property’s current market value and/or the borrower’s financial predicament.

If you would like more information about short sales or if you would like our office to assist you in handling your short sale, please contact us immediately to schedule a consultation.  

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