Short Sale FAQs
January 14, 2011 | conovernj
John C. Conover Agency Asset Protection Group
Direct Number: 732.897.1121 Email: Assetgroup@conovernj.com
What is a Short Sale?
In the world of Real Estate, a short sale refers to the sale of real property for an amount less than the amount owed on the property. In the short sale scenario, the bank agrees to accept less than the full balance due on the debt, and usually ‘forgives’ all or a large portion of the difference.
How will the Short Sale affect my credit?
Banks have the option of submitting the short sale to the credit bureau as “Paid in Full” or “Settled for less than full balance”. The way the bank reports the settlement of your loan to the credit agencies will determine the effect on your credit score. It is possible that a short sale will have a negative effect on your credit score.
Who benefits from the Short Sale?
Short sales can be a win-win situation. Lenders and Mortgagees can benefit from a successful short sale. Mortgagors get the majority of their money back, and avoid having to foreclose and sell the property as “Bank-Owned” which often means selling for less than the short sale price. Mortgagees get the relief they need and are able to sell their property and avoid foreclosure.
Why would banks forgive the difference?
To mitigate their losses, banks often accept a settlement of less than what is owed on the property. When faced with the option of getting the property ‘back’ through foreclosure, a short sale often makes a much wiser business decision for the bank.
How much commission does the short sale cost me?
Your lender will pays all broker commissions. This sounds too good to be true!? Not really. Things that are ‘too good to be true’ usually don’t make good economic sense. The short sale makes good common and financial sense for the banks who grant them. The fact of the matter is, Mortgage companies and banks are NOT in the real estate business. They are in the LENDING business. The last thing they want is that property back.
Can FHA, Conventional or VA loans receive a short sale?
What is Negative Equity?
Also known as being “upside down” negative equity is the difference between the value of an asset and the outstanding portion of the loan taken out to pay for the asset, when the latter exceeds the former. For example, if your car is worth $10,000 and you owe $15,000 on it, you would have a negative equity of $5,000. Negative equity can result from a decline in the value of an asset after it is purchased. Some areas decline in value. In other areas, prices may remain flat so that the properties in that area do not appreciate. If a seller wants to sell within 2-3 years of purchasing their property, they may be in a situation where they have negative equity.
What if I owe what my home is worth?
Even if you owe exactly what your home is worth, you may still need to do a short sale in order to pay for the costs of the sale (Realtor fees, Title Policy and other seller closing costs).
Why not just let my lender foreclose?
The first thing banks do when they foreclose on a property is hand it over to a real estate agent to get rid of it! The foreclosure process is a legal process. It involves attorneys and it costs money. Once they get the property back via foreclosure they must often sell it for MUCH LESS than market value and pay broker commissions and all customary closing costs.
What if I’m not behind on my payments?
Short sales work – even if you’ve never missed a payment! Yes, I know… short sales have gotten a stigma of being only available for folks who are in foreclosure. But we have successfully negotiated short sales for folks who have never missed a mortgage payment! They just happen to be in a negative equity position and need the short sale in order to sell their home.
How long does it take?
While some short sales can be completed in as few as 45 days, most will take 60-120 days.
What if my home is already in foreclosure?
Your foreclosure sale will usually be suspended during the short sale process. That’s why it’s imperative that you contact your bank right away.
If I pay mortgage insurance and default on my loan, why wouldn’t that
cover the deficiency amount?
In some cases it will and in some cases it won’t. It depends on the amount of the deficiency. Usually the mortgage insurance only covers a certain amount.
Moreover, the lender will try to collect from you before they file a claim with the mortgage insurance company. The mortgage insurance is not there for your protection, just the lender’s.
Will I still have to pay taxes if I do a short sale?
This is a broad question depending on whether we’re talking about property taxes or federal income taxes. You’ll always have to pay extra income tax if the bank sends you a 1099 for the deficiency. SOMEONE will always have to pay property taxes. Whether its you or the lender depends on their policies and the specific agreement you reach while negotiating the short sale.
I owe more than my home is worth. Am I eligible for short sale or is my
only option foreclosure or bankruptcy?
Always consult your lender as to what your options are. They are usually short sale, deed-in-lieu of foreclosure (basically an accelerated voluntary surrender), and foreclosure. The banks like to prevent foreclosure when at all possible. They’ve even been known to lower people’s rates and payments because of all the new defaults in ’06 and ’07. Either way, your first stop should be to get information from you lender on what options they provide.
Does a good credit score help the seller trying to do the short sale?
Only inasmuch as their credit score will stay high as long as they don’t make any late payments leading up to the short sale. Some lenders may call the deficiency a judgment though, which will hurt the score a bit.
Where can I get information on investing in short sales and foreclosures?
First of all, there is no magic listing place for short sales. If a seller has gone to the trouble of asking their lender if they can do a short sale and the lender has given them a verbal approval, then the short sale will show up much the same as any other property for sale, only it will take you five times as long to close it.
Is a short sale still an option if a foreclosure has taken place?
By definition, no. However, it depends what you mean by “taken place” and whether you are the owner or the buyer. If you are the owner and you haven’t been evicted yet, there is always a dollar amount called “cost-to-cure” that, if received by your lender, will cure you default. If you’re a buyer, it’s all the same to you. All you do is make an offer.
I want to do a short sale and have a 2nd mortgage, does this make me
No. Both of your lenders will need to be satisfied in some way to complete the short sale. If your first lender will be paid off by the sale, then you just negotiate the terms with the second lender.
I am current on my mortgage but feel I’m heading for trouble. Can I
consider a short sale?
The short answer is “yes”. But before you consider a short sale, there are many other options to explore, such as refinancing or modifying your home loan payments that could allow you to stay in your home with affordable mortgage payments. Call your bank to help determine your best course of action.
I have received a foreclosure notice. Can I still do a short sale?
Yes. Depending on your circumstances, it’s possible to do a short sale all the way up until the day of foreclosure.
Will I receive any money from the short sale of my home?
No. Because the bank and other parties are receiving less than the total amount owed to pay off your property, all the proceeds of the sale go to satisfying that debt.