Frequently Asked Short Sale Questions
How does a short sale versus a foreclosure affect the deficiency judgment?
If your short sale is handled successfully, the lender may give up the right to pursue a deficiency judgment against you. If the lender does pursue a deficiency judgment against you after a successful short sale, the amount will be considerably lower because your home was sold at a price closer to market value than that of an REO (Real Estate-Owned) sale. In all foreclosures, with the exception of those states without deficiency, the bank has the right to file a deficiency judgment against you. Since your foreclosed home will have to go through the REO process if not sold at auction for a lower sales price, this results in a higher deficiency judgment against you.
Does it affect my employment opportunities?
A short sale does not appear on a credit report and will not challenge your current employment status. In comparison, if you have a foreclosure on your credit report, some employers consider it a reason for termination or reassignment since many run credit checks on employees for certain positions. A foreclosure can be extremely harmful to your chance of being selected for a new job if your credit report is taken into consideration.
What will be the effects on my future loans?
For most mortgage lenders you will not be asked to declare or be questioned regarding a short sale on any standard loan application (1003). In regards to foreclosure, you will be asked on any future standard loan application (1003) if you have had a property foreclosed in the last seven years, therefore affecting your rate. Fannie Mae backed mortgages will be available to you following a short sale after two years. Fannie Mae backed mortgages will not be available to you for at least five years if you have lost your home due to a foreclosure.
How long will I have to wait to buy another home?
After a foreclosure, you may end up waiting another 24 to 72 months before a mortgage lender will offer you an interest rate that is acceptable. Most mortgage lenders report that for homeowners who have undergone a previous short sale they may get a reasonable interest rate in less than two years. Fannie Mae guidelines allow a short seller to apply for a new loan immediately if payments were kept current and had no 60-day late payments on their record.
Who decides if my home should undergo a foreclosure or a short sale?
In both short sales and foreclosure, the decision is made by your mortgage lender. The most important aspects to getting a lender to agree to a short sale, and saving you the more damaging credit implications of a foreclosure, is to prove that you have no other way to pay the mortgage and that the amount received from a short sale is the fair price of the market. Lenders who believe they can receive more by taking possession of the home in a foreclosure and selling it themselves will not agree to a short sale.
What are the implications to my credit history?
A short sale is usually reported as paid in full and is not reported on your credit history. A foreclosure will remain on your credit history for 10 years or more and will remain as public record.
What are the implications to my credit score?
Following a successful short sale your mortgage will be reported on your credit score as either paid or negotiated, lowering your score as little as 50 points and affecting you for only 12 to 18 months. After a foreclosure, however, your credit score can lower as much as 300 and usually at a minimum of 250 points and affects your score for over three years.
How Do I Get Started?
Call us today for a free, no-obligation consultation at (703) 212-3344 or fill out the form below and we’ll contact you within 24 hours.
What Qualities Do I Look For In My Short Sale Realtor?
In addition to honesty, integrity, and professionalism, qualities that every real estate agent must possess, your short sale realtor should have the knowledge and proven experience to handle the transaction. Although everyone can read a book or take a class, most of the knowledge in handling short sales comes with real life experience in handling actual short sales.
All homeowners who are considering asking a realtor for short sale help, must ask for performance results and for references from previous short sale clients. There is simply too much on the line to entrust your financial well-being to someone without concrete short sale experience.
What is a BPO?
BPO stands for Brokerâ€™s Price Opinion and is synonymous with appraisal of the property in question. Lenders that are being shorted rely on BPOs to determine market value of their collateral asset to make sure that it is being sold for a fair price rather than given away to a buyer.
Usually, the lender will request a BPO from a third party provider who then will assign a local realtor to provide a current market analysis for the home along with pictures and commentary. Increasingly, lenders started requiring full appraisals to be completed by licensed appraisals in order to make sure that they have the most precise valuation of a distressed property.
Appraisal, as compared to a BPO, goes into more detail on the features and condition of the property and requires more time to complete. BPO serves as one of the more important points of a short sale process. Unfortunately, many real estate agents who list short sales do not view it as such. Contrary to popular belief, a BPO is fairly subjective and can make or break a short sale transaction.
What is a Deficiency Judgment Associated with a Short Sale?
After both, foreclosure or a short sale, the shorted lender(s) may proceed through the court system to recover the amount lost during the transaction from the borrowers. When someone goes through a foreclosure, there is no opportunity to discuss with the lenders what will happen to the deficiency amount and it is very likely that the lenders will pursue the deficiencies especially against those individuals who pursue strategic default rather than a short sale.
The lender can attain a judgment and go after a borrower by placing liens on property and garnishing bank accounts and wages. Needless to say that it is not something that anyone wants.
By electing to go through short sale process rather than simply walking away from the home, the borrower has an opportunity to control and negotiate the actual deficiency. Furthermore, the actual shortage is always lower in a short sale due to the fact that the property is sold with the assistance of a short sale realtor and for market value rather than significantly below as in the case of foreclosed home.
When evaluating your options, you need to have guidance from an experienced short sale professional..
What Is a Deficiency?
A deficiency is the difference between the net proceeds from a sale and the outstanding loan obligations. It is the â€œshortâ€ in short sale. For example, if the seller owes $200,000 to the bank and the approved short sale yields only $125,000 as net proceeds, then the deficiency is $75,000. There may be tax implications stemming from this shortage and potentially subsequent deficiency judgments.
Are There Any Income Tax Implications Stemming From a Short Sale?
Contrary to popular belief, the deficiencies associated with both short sales and foreclosures are treated as debt foregiveness by the lenders and, more importantly, by the IRS. Debt forgiveness is essentially a form of income that may result in additional tax liability unless the borrowers are exempt under Mortgage Forgiveness Debt Relief Act of 2007. Click here for more information about debt foregiveness from IRS.
If youâ€™re a homeowner in distress, you should consult a trusted tax advisor in regards to potential debt forgiveness and short sale tax implications. Please do keep in mind that a short sale, in most cases, yields a significantly lower deficiency than a foreclosure.
What Are Common Mistakes in Handling a Short Sale?
- Selecting the wrong short sale realtor to handle your transaction
- Overpricing or under pricing the property
- Submitting an incomplete short sale package to lender(s)
- Accepting an offer from an unqualified buyer
- Submitting multiple offers to the lender(s)
- Having unrealistic expectations
Who Pays Real Estate Commissions in a Short Sale?
Real estate commissions are a part of settlement expenses paid by lenders.
Can I Do a Short Sale On My Own?
Although there is no law preventing homeowner from doing a short sale on their own, it is a common practice to seek the assistance and guidance of a qualified realtor when embarking on such a complex transaction. There is simply too much at stake for an average person to handle it on his own.
Why Do Lenders Accept Short Sales?
It is more beneficial for lenders to do a short sale rather than go through foreclosure. In most cases, the loss the bank takes is significantly lower in a short sale. Foreclosure proceedings are expensive for lenders and take much longer than the short sale approval process. Banks are not in the real estate business. They are in the lending business. Their goal is to recover as much money as possible and as quickly as possible. Contrary to popular belief, the banks do not want your home.
How Do I Write a Hardship Letter?
A hardship letter is an important part of the short sale package and is required by most lenders before considering your short sale request. The hardship letter must relay your current situation in a factual and concise manner and can be typed or hand-written. You must state what your hardship is and how youâ€™ve dealt with it. All borrowers on the loan must sign and date the letter.
What is an Acceptable Hardship?
Amongst others: loss of job; business failure; death in the family; severe illness; divorce; job relocation; medical bills; military service; payment increase or mortgage adjustment; insurance or property tax increase; reduced income; separation; and incarceration.
How Do I Qualify For a Short Sale?
In order to qualify for a short sale, the homeowner must have the following:
- Financial hardship
- Monthly income shortfall
What Is a Short Sale?
A short sale occurs when the proceeds from a sale are BELOW the outstanding loan obligations on a home. A short sale must be approved by your lender(s) and potentially other lien holders.