Short Sales

A short sale is a transaction where the proceeds of the sale are not sufficient to cover the amount owed to the lender (the total of all liens and closing costs). One or more of the lien holders will be asked to satisfy its lien for less than the amount owed. A short sale allows both the lender and the distressed property owner to avoid final foreclosure by selling the property at a loss.

Short sales are more complicated and time consuming than the usual real estate sale. The lender is not obligated to accept less than a full payment or to effectuate a short sale. Every reply from the lender, if a reply is given at all, will usually take time.  Many times, a lender will not consider a short sale unless the borrower is in default on the loan. If a borrower defaults on the loan, but is current on all other debts; this may also affect how the lender responds to the short sale request.

Request for a short sale usually includes submission of a "short sale package" for the lender to review.  It is never known whether the lender will accept anything less than the full amount due.  It is very important to have an absolutely complete package for the lender because anything short of same will delay the process indefinitely as the lender will most likely not even respond to an incomplete short sale package.  One of the most important documents submitted with the short sale package is the borrower's hardship letter which explains why the borrower is unable to pay.  Other documents include:  proof of income/paystubs for the last 30 days, 2 most recent tax returns; and the borrowers last 2 months of bank statements.

What are the consequences of a short sale?

A borrower considering a short sale should understand the following:
1) Borrower’s credit rating and ability to buy another house will be affected for approximately 2 years;
 2) There will remain a balance on the note (called a deficiency) which will not be satisfied and the lender will retain its right to collect the remaining balance (unless your attorney or negotiator negotiates a waiver of the deficiency);
3) The borrower and any other non-borrower seller in a short sale will not benefit with sale proceeds of any amount;
4) The transaction must be "arms-length" meaning an interested party or family member may not be the purchaser and the borrower may not remain in the home after closing;
5) A request for short sale will not slow down nor prevent, nor have any effect on the foreclosure of the borrower’s property unless the lender consents to same;
7) Bankruptcy might cause a delay but most likely will not avoid foreclosure.

What are the tax implications of a short sale?

The difference between the amount actually owed to the lender and the lesser amount that the lender accepts in full payoff is called “forgiven debt”. All borrowers on the loan will receive a 1099 from the lender reporting the forgiven debt amount to the IRS. Whether or not a borrower receives a 1099 from the lender, all borrowers must report the forgiven debt as income. This may generate a tax obligation. The borrower must seek advice from a tax professional regarding borrower’s IRS filing and reporting obligations and any tax consequences of a short sale transaction.

What are the benefits of a short sale?

After the borrower has considered all options available and has determined that a short sale is the best option for the borrower, is there any benefit to the borrower?

The successful completion of a short sale will usually benefit the borrower even if the lender does not waive the remaining balance. Some benefits may include: substantial portion of the debt being repaid; less damage to the borrower’s financial well-being and credit standing and freedom from a stressful and unhealthy situation.

Loan Modification and Refinancing (including the HARP 2 Program)

A borrower may also consider the following options:
-modification of the loan
-deed-in-lieu of foreclosure
-refinance

In the past, a new loan on new terms was not a valid option because of the property’s current market value being less than the principal amount of the loan.  HOWEVER, today you may be able to refinance in the HARP 2 Refi Plus program.   A borrower may be "upside down" in his/her property (ie: owe more that the property is worth) as long as the following criteria are met:
1.  Borrower must have a Fannie Mae or Freddie Mac loan (loan must have been delivered to FNMA or Freddie Mac prior to June 1, 2009)
2.  There is no maximum LTV on Fixed Rate Loans
3.  The maximum LTV or ARMs is 105%
4.  Maximum of $250 cash out to borrower
5.  All occupancy types and property types are eligible
6.  There is no minimum credit score (this does not mean that the lender will not look at the credit report for late payments
7. Loans that have already been modified are ineligible
8.  Borrowers with short sales, loan modifications, bankruptcies or foreclosures in last 2 years are ineligible
9.  Borrowers with disputed tradelines on their credit report are ineligible until the disputes have been removed
10.  Maximum of 8 financed properties
11.  Escrows may not be waived
12.  Loans with existing MI are eligible

Modification of an existing loan will depend upon lender’s cooperation and whether the borrower qualifies under one of the lender's available programs.

Deed-in-lieu of foreclosure as an option will depend on many factors and will usually be denied if there are any junior lien holders.

Disclaimer:  The information contained on this website may contain statements, links, articles and other content about the type and quality of services offered by Jaclyn G. Muskat, P.A.  This information has not been reviewed by the Florida Bar.  Any and all legal information presented should not be construed as formal legal advice, or the formation of a lawyer or attorney client relationship. Any results portrayed here were dependent on the facts of that case, and results will differ if based on different facts.