A short sale is not a newly invented term. It was the recession that made the term more popular among homeowners. This article answers some of the common and frequently asked questions about this topic.
1. What is a Short Sale?
In a short sale transaction, the lender or the lien holders agree to sell the house at a loss. In other words, you convince the lender to accept less than the owed amount on the house. The sales value reflects the market value of the property. If the current value of your home is $295,000, but the mortgage value is $375,000, then you have no option other than negotiating a short sale.
2. Short Sale Vs. Foreclosure: Which One is Worse?
Both foreclosure and short sale stay on your credit report for seven years. The credit report will show this history for seven years, but there is a difference between how these acts are reported to the IRS. A short sale with extenuating circumstances is less damaging to your credit score than a strategic default.
A foreclosure with financial conditions that are out of your control will affect similar to a short sale with extenuating circumstances.
Credit Score Effect of Foreclosure and Short Sale
Credit Score Point Penalty:
It is a general overview. The major credit bureaus use independent algorithms to calculate the credit score.
|Late Payment Penalty||50-100 Points|
|Late Payment Penalty After 90 Days||70-150 Points|
|Short Sale, Foreclosure & Deed in lieu of Foreclosure||85-160 Points|
3. What is a Deficiency Judgment In a Short Sale Case?
Even after a short sale is complete, a lender can ask you to pay the due balance. A short sale allows you to negotiate your terms with the lender. The terms and conditions of the short sale will be recorded before a short sale is approved. The approval letter must explicitly state that the lender is waiving his right to obtain a deficiency balance from you.
4. Which Documents are Required from Homeowners?
Banks want to see the evidence of financial hardships. Most lenders will not approve a short sale if they believe that you can pay back the money. You will need to submit following documents to the bank:
- A Hardship Letter
- Pay Stubs for Past 2 Months
- Last 2 Tax Returns
- Bank Statements of Past 3 Months
- A price comparison report or property appraisal. It is not a required file, but you can send it along with other documents.
5. Do I Pay Tax on Forgiven Debt?
Since the value of your house has declined, there is no issue of Capital Gains Tax. However, you may have to pay tax on the forgiven debt. The lender will report this amount through the 1099-C (cancellation of debt) form.
Mortgage Forgiveness Debt Relief Act was introduced to help homeowners struggling to pay taxes after a short sale or foreclosure. Initially launched in 2007, the program was extended through 2017. The Congress may extend the deadline to help taxpayers in 2018.
Please, contact a competent tax attorney for more information.
6. Who Pays the Closing Costs and Commissions?
You are not responsible for paying realtor commission, closing expenses, and any other associated costs. However, the lender must approve these expenses in the short sale approval letter. All involved parties must agree to this agreement.
7. How Long Does It Take to Complete a Short Sale?
The sales process is not clear. It can take several months to complete a short sale transaction which could be frustrating for both sellers and buyers, to the point where buyers could give up on waiting and sometimes make the decision to look elsewhere. Unlike a conventional sale, a short sale approval requires detailed inspection, verified appraisals and expert review of the house. Most lenders will offer a “Mortgage Modification” program before accepting less than the owed amount on the mortgage.
8. How to Make an Offer on a Short Sale Property?
You will need to submit a traditional offer. Along with the proposal, you must submit supporting documents such as photos and appraisal reports indicating the required repairs and the approximate cost of those repairs. In some instances, the buyer has access and relations with contractors that could prepare this estimates for them. On the other hand when they don’t, getting this estimates prepared could be more challenging. You may also have to include a recent sales analysis to support your offering price. It is essential to include necessary information in the initial offer. Otherwise, the bank can reject the offer, or it will take weeks to hear back from them.
9. What is a Short Sale Appraisal?
Just like a traditional transaction, an independent appraiser is hired to evaluate the market value of the property. In a short sale case, a simple appraisal is not enough, and the lender may use Broker Price Opinions and expert review to get a price estimate of the property.
In some cases, an outside appraiser is invited to compute the value of the house. Outside appraisers can often give misleading figures because they are not local market experts.
If you are considering a short sale, you have the choice to go the traditional route and put your property for sale with a realtor who could find you a buyer that is willing to wait and hopefully don’t change their mind along the way or sell your property to a cash buyer. A reputable cash buyer can wait for as long as needed and have the resources to give the bank all required paperwork and estimates that they demand, in most occasions, speeding up the approval process and almost always resulting in an approved short sale offer and closing.
If you are looking for a reputable cash buyer, give us a call. We will be delighted to discuss with you, your situation and see if we can help.