Frequently Asked Questions by the Seller
What is a Short Sale?
It is the sale of a property short of what is owed on it. The lender agrees to accept less than what you owe to sell the home.
Why do lenders or banks accept short sales?
Two reasons: 1) in almost every case they will lose less by accepting a short sale then they would by taking the property back through foreclosure and selling it themselves. 2) the sooner they get a non-performing loan off the books the quicker they can loan money to another customer. It all boils down to what makes the most financial sense.
Will every lender or bank allow a short sale?
The answer is no. The majority will, but there are a few that do not.
What is the criteria that must be met for a lender to accept a short sale?
The seller must be in provable financial hardship, behind on their mortgage payments, no available liquid assets, no equity in the property and a lender with a clearly defined short sale process.
How long do I have to be in default before I can start the short sale process?
Depends on the lender. Typically the seller must be behind a minimum of 30 days.
Can the owner of the property being short sale'd also be the listing agent?
Legally yes, but many lenders will not reduce the commission as a condition of the short sale so the owner ends up listing is for free.
What is required to process a short sale?
Each lender has its own requirements and some even have their own proprietary paperwork. In general most lenders require the following: hardship letter, personal financial statement, 2 years Federal tax returns, two recent paycheck stubs, 2 months bank statements for all accounts including retirement, a listing agreement, an offer, and a HUD-1 settlement statement.
What are the steps of the short sale process?
There are 6 main steps. 1) Home is marketed 2) Offer is received 3) Short Sale package is assembled and submitted to the lender 4) Lender orders an appraisal 5) The final price is negotiated with the seller's lender(s) 6) Property is sold
How long does a typical short sale take?
On average it takes 90-120 days from the time the short sale process is started to the time the lenders provide a written acceptance of a short sale. Once the written acceptance is received there is another 30 days for the buyer to close on the property.
Do I need to contact my lender to let them know I'm doing a short sale?
Typically not. There are a handful of lenders that require the seller to call in once the short sale package has been received. We will let you know if that's the case.
What do I tell the lender when they call me?
In most cases when the lender calls it is from the Collections dept. and short sales are done in the Loss Mitigation dept. When they call tell them you are trying to sell your home and working with someone that is helping you with the short sale. They will likely keep calling you and it is up to you if you want to accept the call.
A foreclosure sale date has been scheduled for my property. Can I still do a short sale?
It will depend on the lender, but as long as you are at least 3 weeks our from the sale date we can get something done. It will require you to get all of the required seller documentation to us as quickly as possible.
Will the foreclosure process stop when we submit a short sale package to the lender?
No, the foreclosure clock will continue to click. Postponements can be made if necessary to entertain an offer, but only if the offer meets the investor's requirements and they are certain the buyer will perform.
Do we have to have a purchase offer to get the short sale process started?
Yes. The lender will not begin their due diligence until they have a potential buyer.
Does a short sale damage my credit?
From experience only, we can say the short sale unto itself is not what damages your credit, it's the requirement of being behind on your payments that does. For further information, please contact a credit restoration specialist or a financial advisor.
What's worse, a short sale, foreclosure or bankruptcy?
From experience only, we can say the following: foreclosure is the worst. It will be on your credit report for 7 years and bankruptcy will stay on your credit report for 10 years. A short sale will be reported on your credit report as "paid in full - settled for less than the full amount" or "settled debt" and less harmful to your credit. For further information please contact a credit restoration specialist or financial advisor.
How long after a foreclosure or filing bankruptcy can I buy another house?
You will not have to wait the full length of time that each of these shows on your credit report, but just how long will be determined by the rest of your financial and credit picture. A credit restoration specialist or financial advisor should be contacted. They will be able to provide you with what you can expect in addition to what you can do to shorten the wait time.
How many years after a successful short sale can I buy a house?
There are new loan programs designed to help people who have recently had to do a short sale on their homes. You can apply for a home loan in as little as two years provided you have maintained a good payment history, kept your debt-to-income ratio within lender guidelines and have verifiable income.
Will I be required to make any of the repairs to my home?
No. All short sales are sold As-Is.
Can I rent or lease to own my home from the person that buys my home?
No. The lender will require that by allowing the privilege of a short sale you are required to relinquish all use and benefit associate with the property.
Can I make money on the sale of my property?
A homeowner cannot receive any financial benefit from the sale of their home if the lender accepts a short sale payoff. The only exception to this rule is if the homeowner has an FHA loan. FHA will allow the homeowner to receive $1000 in a short sale.
Will it cost me anything to do a short sale?
In most instances no. A short sale is designed to assist the homeowner by accepting enough of a discount so that all costs of selling the home are covered. Depending on your specific financial information some lenders, albeit very rare, may ask that you bring some money to closing.
How much do we charge for our services to perform the short sale?
We will never ask you for money. We get paid only if we are successful in completing the short sale.
I'm considering bankruptcy, how will that affect the short sale process?
If bankruptcy is a consideration, or you have already filed, notify your agent immediately. The short sale can still be done, but it definitely slow the process down. Depending on the lender it could completely stop the short sale process. When bankruptcy is filed an "automatic stay" is put in place by the courts requiring all creditors to cease their collections efforts and any foreclosure sale will be postponed. For further information, please consult your bankruptcy attorney.
Will filing bankruptcy STOP foreclosure?
Yes, but only temporarily. The lender will eventually be granted a "relief of stay” from the bankruptcy and the foreclosure will proceed from the point at which it was when the bankruptcy was filed. For further information, please consult with your bankruptcy attorney.
What happens if the lender counters the first offer sent to them in the short sale package?
The Buyer will need to either increase their offer to meet that number or your agent will need to find another buyer that meets your lender's requirements.
What do I need to do to help sell the home?
The same things you would normally do when selling your home. Keep it in show-able condition, stay in communication, be available to sign paperwork and keep the utilities on. If you are planning to move out prior to the home being sold you will be asked to sign a Vacating Homeowner Checklist that outlines your responsibilities.
What about the new federal government Bailout plan?
To determine your eligibility, please visit: www.financialstability.gov
Will I need an accountant or attorney to represent me?
We always recommend that everyone in your situation seek the advice of an accountant or other tax professional. Consulting legal counsel is often a wise choice when making these types of decisions and they will tell you whether continued assistance is necessary.
I am behind on my property taxes…
Delinquent property taxes are negotiated in to the offer we present to your lender with the short sale packet. Whether your lender accepts the short sale or forecloses, they will still have to pay the property taxes owed the county and/or city.
I have not paid my HOA dues…
This is handled in the same way as any delinquent property taxes.
Can I rent the property if I’m not living in it?
This is a decision best answered by a real estate attorney. Keep in mind that if you are not paying your mortgage you should not be profiting from rental payments.
The property is vacant. Do I have to leave the utilities on?
This is your decision however, the house will show better if buyers can turn on lights and the house is at a reasonable temperature. If your decision is to turn the utilities off and it is winter time you will need to make sure the house has been winterized or you could be held liable for damage should a water pipe break from freezing.
When should I move out?
Different loan types have requirements regarding occupancy that could affect your eligibility for a short sale. Please notify your agent before making the decision to move.
Can I take anything with me?
Anything you take from the property that is determined by your agent to be a “fixture” needs to be clearly disclosed to any Buyers viewing the property.
What happens if I do nothing?
If you do nothing and are not making your mortgage payments, your lender will foreclose. You will have a foreclosure on your credit report, be liable for any deficiency and/or subject to a taxable event.
Does the fact that this is an investment property, not a primary residence, make any difference?
Yes. Since this is not a primary residence you may not be eligible for an exemption. In addition, most lenders are not as lenient in their short sale acceptance guidelines as they are when it is a primary residence.
Will I receive a 1099 if my lender takes a discount?
Yes, it is an IRS code. The IRS states that a reduction of debt is a taxable event. However, the Government has passed the Mortgage Debt Forgiveness Act and it states that for certain period of time some homeowners with primary loans on primary residences may be exempt from the tax on the amount on the 1099. Contact your local tax professional regarding how this applies to your specific situation.
If I receive a 1099, can I file as “insolvent” and be exempt from the tax normally owed on the 1099?
There are certain tax codes that enable someone in a financial hardship to be exempt from any tax liability outside the exemption already provided by the Mortgage Debt Forgiveness Act. You will need to consult your tax professional for more information.
Will my lender pursue a deficiency judgment for the amount they lost from the short sale?
Your lender can pursue a deficiency judgment, but that does not mean they will. We will always request in negotiations for a full release of lien and that your lender(s) consider the debt “settled” or “satisfied” and paid in full. Another option available to the lender is an unsecured promissory note or ask that you bring some money to closing.
What if my lender requests a promissory note or money at closing?
Your lender can make such requests, but it is up to you as to whether you agree to accept that as a condition of the short sale. In many cases these can be negotiated to a lower amount or for better terms. Keep in mind that any amount requested by your lender will likely be much less than they could potentially pursue from you as a deficiency should the property be foreclosed upon.
Thanks for educating us on this matter. This is indeed very useful.
Posted by: Pension Advice | June 29, 2010 at 08:33 AM
Wells Fargo stated whether or not they pursue the deficiency judgement from our short sale is based upon state law. They'll pursue it if the state allows. Does KS allow them to pursue this deficiency? Thanks.
Posted by: ruth crowell | August 04, 2010 at 12:24 AM
Yes, Kansas is one of those states that will allow this.
Posted by: Ron Henderson | August 04, 2010 at 10:02 AM