1. What is a short sale? A short sale is a purchase transaction where the home is sold for less than the existing loan balance. The mortgagee (or the current owner’s lender) would accept less than the loan amount in order to avoid a foreclosure proceeding. This is why you will always see short sale listings as “subject to lender approval” - ultimately it will be the lender who will decide whether to accept or reject a purchase offer. 2. Will a lender allow a short sale when there is some equity in the home? A property is usually put on short sale when it is over encumbered. If there is some equity on the property, the lender may choose to continue with a traditional foreclosure proceeding, and later sell it at market price. 3. How late in the pre-foreclosure process can you put a property on short sale? A short sale needs to be completed before a foreclosure sale or trustee sale is executed. In California, a trustee sale normally takes place at a public auction. If there is no successful bidder, the property reverts back to the lender and is now what is called “bank owned” or an REO. A short sale request can be presented to the lender even when a trustee sale has already been scheduled. If the lender finds a solid and reasonable purchase offer, they may postpone the trustee sale date in order to allow the prospective buyer to proceed with the purchase transaction. The trustee sale is automatically cancelled upon completion of the purchase transaction. 4. Will a lender allow the seller to make a profit on a short sale? No. 5. What is the impact of a short sale on one’s credit rating? Typically, the lender will report the loan as “paid” or “settled for less” on the owner’s credit report. Without a doubt, this will negatively impact credit scores. However, a short sale has a far less damaging effect on one’s credit report than a foreclosure. Down the road, “seasoning” of short sales is much shorter than foreclosures. [“Seasoning” is the length of time lenders will usually be hesitant to offer a loan at a sensible rate.] 6. What documents are required by the lender in a short sale? Typical documents required are: 1) hardship letter; 2) signed purchase contract with a buyer pre-approval letter; 3) preliminary HUD-1 showing the estimated proceeds to lender; 4) financial worksheet showing detailed monthly expenses and income; 5) income documents such as paystubs and/or income tax returns for previous year. 7. Is an appraisal required on a home in short sale? The lender will need a formal assessment of the property’s value to help them decide whether to accept or reject a purchase offer. A BPO or brokers price opinion is usually ordered by the lender in lieu of a full appraisal. In general, lenders are known to accept purchase offers that are within 5%-10% of the market value of the property. 8. What are the tax implications in a short sale? A short sale represents a loss for the lender, and the amount of the loss is reported as debt forgiveness to the seller through tax form 1099-C. Traditionally, the IRS has treated this amount as fully taxable income. The 2007 Mortgage Forgiveness Relief Act, however, amended the tax laws to allow sellers in a short sale to avoid having to declare this debt as income. There are only certain situations that this law applies; for example, only on primary residences, and excludes cash out refinances. It is important to consult with a professional tax accountant when contemplating on a short sale. If you need help with a short sale, call us. We can help. Main 510-791-7644 · Toll-Free 800-474-0341 · Fax 866-511-7224 |
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