Frequently Asked Questions and Answers about Short Sales
As attorneys, our law firm has answered a lot of questions over the years for clients. And here in Tampa, our experience with foreclosure defense solutions has led many people to ask us plenty of questions along the way.
To help you better understand the short sale process, we've put together some of the most frequently asked questions along with some general answers.
Q: First and foremost, what is a short sale?
A: Any sale of real estate that generates proceeds that are less than the amount owed on the property. A real estate short sale occurs when the lender and borrower decide that selling the property and absorbing a moderate loss is preferable to having the borrower default on the loan. It is therefore an alternative to foreclosure.
Q: What requirements must I meet to become eligible for a short sale?
A: Requirements will vary between lenders. Typically, the following will need to apply:
1. There are delinquent payments, or payments are about to become delinquent. Many lenders will refuse to work with home owners if payments have been made successfully or are continually made. In some cases, a short sale may be permitted when there is no delinquency.
2. There must also typically be some sort of financial hardship. This could be due to medical conditions, divorce, loss of job, severe injury, and etc.
3. You can't have any large assets, bank accounts, or investments. Retirement funds won't be considered unless they are a sizable asset.
Q: Do I need to be delinquent on payments to qualify for a short sale?
A: Not necessarily. Some lenders may permit a short sale with no delinquency, however, in most cases lenders will be less willing to settle if the loan is current. Lender requirements vary, your attorney will help you determine what they are. Exceptions may be considered if there is a cash contribution or promissory note in the equation.
Q: What makes a bank willing to do a short sale?
A: Typically it is much more cost effective fro a bank to do a short sale rather than foreclose on a home. Although the bank will still take a loss on a short sale, foreclosing on a home will typically cost them 10%-20% more.
Q: When should I begin the short sale process?
A: As soon as you realize you will have difficulty making the monthly mortgage payments, you should take action immediately and begin consulting with an attorney to help you achieve the best possible outcome. If you can't qualify for a loan modification, a short sale is your next best option to avoid foreclosure.
Q: Can I try a short sale and still get a loan modification?
A: No, this is not recommended. If you are interested in trying to see if you qualify for a loan modification, you should seek that remedy before a short sale - as a loan modification will halt a short sale in progress.
Q: Can I file for bankruptcy if I am in the middle of a short sale negotiation?
A: The answer is yes, but if you do, you will interrupt the short sale process and potentially negate any chances of closing with a potential buyer. Most attorneys will recommend doing the short sale prior to filing bankruptcy. And even if bankruptcy is chosen first, you are only settling the issue of the debt, not the ownership, and therefore a short sale or foreclosure will still need to occur. If you are currently in bankruptcy, we can still talk to you, however, the bankruptcy would need to conclude before we could begin the short sale process.
Q: Do all short sales get approved?
A: No. Not every short sale will close, and if a firm or attorney is making those claims or promises, then your are likely being misled. There are many factors that can prevent a short sale from occurring. Because there are multiple parties involved with a short sale - typically 3 at minimum, which include the mortgage servicer, the investor and mortgage insurance company, as well as the buyer and seller - any of them can dictate terms or disagree with a pending sale agreement.
Q: What factors can prevent a short sale from occurring?
A: Unreasonable cash settlement demands from the banks upon the borrower or disagreements regarding the market value of the property may prevent a short sale from occurring. Some banks refuse to halt pending trustee or foreclosure sales once initiated. This typically occurs when the homeowner fails to act quickly enough.
Q: How do I begin the short sale process?
A: If you're considering a short sale, you should make sure you have obtained an attorney with experience in short sales and foreclosure defense. Your attorney will help determine whether or not you are eligible for a short sale, and if not, they should have options such as loan modifications or other foreclosure defense remedies ready for you to consider.
If you do qualify and choose to go with a short sale, you will need to fill out various paperwork and provide certain financial information and documentation regarding your hardship and etc. Your attorney will handle all of the rest of the negotiations.
Q: How does a short sale work?
Here at Fernandez Law Group, we make the short sale process extremely easy. First, we start with a Free Consultation. This gives you the opportunity to come in risk free and under no obligation. After you provide us some information about your situation, we then help you determine whether or not you qualify for a short sale.
* If you do not qualify for a short sale, relax - there are other foreclosure defense alternatives or you may qualify for a loan modification - and we will help you determine the best course of action.
Once it is determined that you qualify or are eligible for a short sale, then we will work with a real estate agent to help market and sell your home.
* The majority of short sale transactions with banks require the use of a real estate agent, therefore, putting the home up "for sale by owner" is typically not permitted.
The mortgage company will also be working closely with us along with the real estate agent during the process.
* When you choose a law firm to help with the short sale process, you can rest easy knowing that your best interests are being served as we work with the bank and the real estate agents for you - and in most cases, you will receive a better outcome when hiring an experienced foreclosure law firm.
Q: How long will it take to complete a short sale?
A: The process will vary depending on lender and resources, however, it seems to be improving. Generally, on average a short sale will take around 3-4 months to complete here in Tampa, down from 7-8 months. In recent months, the process has gotten better and we have seen occasional responses within weeks.
Q: How is a short sale different from a traditional sale?
A: A regular sale typically occurs as a contract between a buyer and a seller. However, with a short sale, third party approval is required from the bank, lender or mortgage holder and this can make the process take a little longer. A seller can accept the offer of a buyer, however, closing will not occur unless the deal is accepted by the lender or bank.
Q: Why is a short sale a better alternative to foreclosure?
A: Short sales often give a homeowner the opportunity to allow the property to be sold for less than the current value with the intent of the loss being less than what they would face with foreclosure. Because the owner is usually behind on their payments, they're also underwater or upside-down on the property. With a short sale, the value of the property is less than what is currently owed. The seller is unable to profit from a short sale, and cannot sell to a family member. And a short sale does not affect your credit rating as long as a foreclosure would.
Foreclosures give the owner an opportunity to bring their payments current. However, if they are unable to meet the requirements, they will lose all legal and equitable interest in the property. When this occurs, the property is then turned over to the bank.
Q: Will a short sale impact my credit less than foreclosure?
A: In most cases, the answer is yes, a short sale will have less of a negative impact on your credit rating than a foreclosure would. A short sale is would likely reduce a FICO Score 100 to 200 points, whereas a foreclosure or deed-in-lieu of foreclosure will tarnish a seller's credit score from 200 to 300 points , according to David Steep, Division Manager at Vitek Mortgage.
Q: Is a short sale a better choice than foreclosure?
A: In many cases, the answer is yes, for a number of reasons. With a short sale, you are minimizing or eliminating the potential of a deficiency judgment and also taking less of a hit on your credit score. And recently, Fannie Mae and Freddie Mac announced new guidelines which make it possible to obtain a conventional loan within 2 years of a short sale, or up to 5 years after a foreclosure.
Q: What is a deficiency judgment?
A: The difference between the amount owed to a lender and the fair market value of the property at time of foreclosure sale.
Q: Can a short sale help me avoid a deficiency judgment?
A: Yes! Not only is a short sale less damaging to your credit, you can avoid the potential of receiving a deficiency judgment.
Q: Can I receive any funds at closing?
A: Legally, a seller is entitled to sell their personal property left behind to a buyer and will typically receive a separate check outside of closing for things such as boats, lawn equipment, tools, sheds, furnishings, and etc. In some cases, however, a lender may require an affidavit to be signed at closing stating there aren't any other outstanding agreements between the parties. This can be avoided by selling the property to a spouse, son or daughter to the buyer who is not a party to the sales agreement.
Q: Can I short sale my home to a relative or family member?
A: No. Most lenders will require an affidavit to be signed by all parties stating that the parties cannot be a family member, business associate, or share any business interests together, in order to prevent potential fraud. This is typically called an Affidavit of Arm's Length Transaction.
Q: Will I be responsible to pay realtor commissions from the short sale?
A: No. With a short sale, you are not responsible for any realtor commissions or closing costs. The bank will take care of both.
Q: What about closing costs? Who pays those if I do a short sale?
A: The bank will cover closing costs, as well as realtor commissions.
Q: What about HOA fees, will I have to pay those?
A: Although HOA fees are the owner's personal obligation, we strongly recommend you pay them in order to avoid credit damage, debt collection efforts and potential lawsuits. Very few lenders will pay for unpaid HOA fees on a short sale and this can hinder the closing process unless one of the parties has agreed to and has shown they can pay the debt at close.
Q: How do cash sales in the housing market put me at risk when doing a short sale?
Cash sales are one of many reasons why it is important to hire a skilled foreclosure defense attorney to represent you throughout the entire short sale process. While cash sales are enticing for the lender for a quick settlement, cash sales are often offered by investors with expectation of a substantial discount.
Q: How does a short sale affect my taxes?
A: After the completion of a short sale you will receive a 1099-C. This means the debt has been cancelled. Thanks to the Mortgage Debt Relief Act of 2007, taxpayers were allowed to exclude from income the discharge of debt on their principal residence for their original mortgage amount. Debt forgiven through a short sale qualifies for this relief, and applies to debt forgiven from 2007 through 2012 and was extended for debt forgiven through 2013.
More information, including detailed examples can be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. Also see IRS news release IR-2008-17.
Q: If I haven't filed taxes last year, can I still do a short sale?
A: Yes. However, in order to increase the likelihood that the short sale will be approved, it is recommended that your taxes are filed and up to date. If you are missing this documentation, we do have waivers which can be submitted in place of the required paperwork.
Q: Now that the Mortgage Debt Relief Act of 2007 has expired on 12/31/2013 - how do I avoid paying income tax on my forgiven debt if if I do a short sale in 2014?
A: The IRS has what is known as an "insolvency clause" which states that a seller is exempt from paying tax on any forgiven debt to the extent that they are insolvent. What that means is if the seller's debts and liabilities exceed their assets by more than the amount of the debt forgiven, they will not have to pay taxes on the forgiven debt.
Q: What are common mistakes homeowners make that negatively impact their chances for a short sale?
A: Many homeowners wait too long to begin the process. This is by far the most common and potentially damaging mistake anyone can make when faced with a legal situation. We work very hard with our clients to ensure mistakes such as failing to provide all information don't happen. And we also work with you from the very beginning to determine whether or not there are better foreclosure defense options available to you such as bankruptcy or loan modifications before we begin a short sale process.
Q: How does Fernandez Law Group protect my interests during a short sale?
- We conduct a detailed evaluation of your particular situation during the application process, and assist you in gathering all information required for your case.
- We perform a comparative market analysis to determine the approximate fair market value of your property in the current market and determine what, if any amount of deficiency would remain upon completion of the short sale.
- We contract a realtor in your area and submit your property for listing immediately.
- We manage offers between the homeowner, real estate agent, and lender.
- We handle all negotiations and documentation with your lender(s) to obtain approval for the short sale and options for minimizing residual deficiency liability.
- We provide title insurance for your short sale and conduct closing.
Call or Text us today at 813-489-3222 for a FREE consultation.
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Content authored by Gaston Fernandez
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