Short Sale Frequently Asked Questions
What is a Short Sale?
In a short sale, the lender agrees to settle the debt owed on the property for less than the full amount. “Settled” means that the lender is writing off the debt (which is why you get a 1099 after a short sale for the amount of debt forgiven) and that they are not going to go after you for the money they lost by filing a deficiency judgment in the future.
How will I know if I will qualify for a short sale?
Call our office and we can tell you over the phone whether you will likely qualify. We have former underwriters from major national lenders who work in our office on our short sale team. The overwhelming majority of our clients are approved for a short sale because 1) we know how to submit the short sale package in such a way that the lenders will approve them and 2) we have a tremendous amount of experience with short sales and negotiating with the lenders.
Do I need to have a major hardship to do a short sale?
This is another common misconception. At the Battiata Real Estate Group., we have done 100's of short sales for borrowers with absolutely no financial hardship to speak of. There are many reasons that lenders will agree to a short sale aside from a financial hardship. To find out about your particular situation, call our office. It is very, very rare for one of our short sales to be denied due to a lack of hardship.
How much will a short sale cost me?
A short sale costs the seller nothing – the lender pays all closing costs, escrow fees, commissions etc. The lender may also pay any outstanding property taxes.
I am months behind in my payments and the bank is threatening to foreclose. Is it too late to do a short sale?
No. In most cases we can still do the short sale, but we need to move quickly. We can usually get the bank to postpone the foreclosure sale date as long as we can show them that we are actively pursuing a short sale. In most cases they want to see a full short sale package submitted as well as an offer. We have successfully closed hundreds of short sales on properties that were about to go to auction at the courthouse steps. Contact us immediately.
How will a short sale affect my credit?
This is a great question as there is a lot of misinformation on the internet about this topic. A short sale is recorded on your credit report as “debt settled for less than the amount owed”. This will have absolutely no impact on a borrower's credit score. 100% of the impact of a short sale on a borrower's credit score comes from missed payments.
The reason you often hear and read that a short sale will drop your credit 100 points or more, is that, many people, when they do a short sale, stop making their mortgage payments. If you stop making your mortgage payments for 4 months, regardless of whether you do a short sale or not, 4 months of missed mortgage payments will have a significant negative impact on your credit. In other words, it is the missed mortgage payments that have the big impact on your credit, not the short sale itself.
With this said, if you are already behind on your payments, you have already incurred the majority of the hit that a short sale will have on your credit. Doing a successful short sale at this point will insure that your debt is settled with your lender.
If you are current on your payments and can stay current throughout the short sale process, you will dramatically minimize the impact on your credit.
Finally, if you do stop making your mortgage payments, there are various credit repair agencies that can repair your credit by removing late payments from your credit report after a short sale.
How long will my property need to be on the market?
Again, this will vary from market to market and property to property, but typically we only need the property to be on the market for about 30-45 days, because in that time we are able to generate multiple offers. The seller picks the best offer, we try to get a backup or two, and then the house goes off the market and is changed to “contingent” status on the MLS which means an offer has been submitted to the bank. So the inconvenience to the seller of having the house on the market is relatively brief.
Can I get any money out of the short sale?
Typically the seller does not receive any proceeds from the short sale as there is no equity, however there are some scenarios where the seller can get money out of a short sale at close of escrow, either through the government HAFA short sale program ($3,000), a relocation credit from the lender ($3,000-$5,000) or even a cash incentive through a lender outreach program (up to $35,000).
Do I need to have a sign in front of my house that says "short sale"?
No. In fact, you don’t even need to have a sign if you don’t want one. If you do elect to have a sign, it will be a regular “for sale” sign.
Can I live in the property while the short sale is going on?
You can live in the property for the entire duration of the short sale or you can move out whenever you wish. You do not need to stay in the property during the short sale, although most people do.
What is the HAFA program?
HAFA stands for Home Affordability Foreclosure Alternative and it is a government sponsored short sale program designed to streamline the short sale process. In reality, many lenders however do not have enough trained HAFA negotiators, so HAFA short sales typically take longer than regular short sales. The HAFA program also provides a $3,000 cash credit to the seller at close of escrow. Most homeowners are potentially eligible for HAFA although participation is voluntary for lenders and investors and some do not participate. Other guideline are that the property be the borrower's principal residence, that the mortgage loan is a first lien mortgage originated on or before January 1, 2009, that the mortgage is delinquent or default is reasonably foreseeable and that the current unpaid principal balance is equal to or less than $729,750.
What about the cash incentives I have heard about lenders offering to sellers for short sales - as much as $35,000?
There are currently only a few banks offering these incentives, most notably Bank of America, Chase and Wells Fargo. With that said, it is not a program you can apply for. These programs are referred to as “outreach” programs for a reason: if you qualify, the bank will reach out to you and offer you the incentive. Further, they will not share their guidelines or how often they offer out incentives. With that said, we have been very successful at negotiating cash payments for moving expenses for our sellers at close of escrow.
How soon after a short sale can I buy another home?
There is a 24-month “seasoning” period after completing a short sale before you can qualify for a government insured loan, in other words Fannie Mae, Freddie Mac, FHA or VA. For a non-government insured loan, there is no specific waiting period – it varies from lender to lender. With that said, the FHA has revised its lending guidelines to allow borrowers, subject to certain circumstances, to buy a home immediately after a short sale as long as they remained current on their payments. I anticipate that as the real estate market stabilizes, bottoms out and starts to recover, you will see more and more lenders broadening their qualifying guidelines in order to allow more and more borrowers who have done short sales to buy again.
Where will I live after the short sale? Will anyone be willing to rent to me?
This is a question we get asked by practically every client who decides to do a short sale. Most homeowners have not rented in years and are concerned that they will not be able to qualify to rent a home due to the short sale on their credit report. This could not be further from the truth. The reality is that most homeowners who have done a short sale have excellent credit aside from their short sale. This is readily apparent to a prospective landlord when they read your credit report. I always tell my clients to simply explain their situation to the owner of the property they are interested in renting. Keep in mind that these days, many of their rental applicants are people who either went through a short sale or a foreclosure.
Will I have to pay federal taxes on the money my lender writes off in the short sale?
There are several different scenarios with regard to whether or not you will owe federal income taxes on the loss the lender takes in a short sale.
When you do a short sale, your lender is agreeing to settle the debt on the property for less than the amount they are owed. The IRS therefore allows them to write off this loss, which is why your lender will send you a 1099-C after the short sale.
The IRS considers “debt relief” to be income for tax purposes. In other words, if your lender writes off $50,000 on your short sale, they will send you a 1099-C for that amount, and you would include that when you file your income taxes. The “C” stands for “Cancellation of Debt” and the law says cancelled debt is taxable as income.
There are however a few exceptions that most people who do a short sale qualify for that exclude them from having to pay taxes on their short sale.
Thanks to the Mortgage Tax Debt Forgiveness Relief Act that George W. Bush signed into law in January of 2008, most homeowners who do a short sale on their primary residence pay no taxes on the loss that their lender incurs in a short sale.
Homeowners who have pulled out cash from their home but have put that money back into their home to improve their home, also are excluded from taxes on the short sale.
All other short sale scenarios – if you pulled cash out on your primary residence but spent it something other than upgrading your home or if you are doing a short sale on a second home or investment property – result in a taxable event unless you qualify for the “Insolvency” exclusion.
The IRS does not require you to pay taxes on the loss the lender takes in a short sale if, at the time of the short sale, you are insolvent. Insolvency means your debts (including your mortgage) exceed the value of all your assets. In other words, if, at the time of the short sale, you have more debt than you do money or assets, you are considered insolvent.
Many people who find themselves facing a short sale are in exactly this situation and are thus excluded from paying taxes on a short sale. We recommend you check with your CPA or accountant or go to the IRS website and look up IRS Form 982, which is the IRS form for debt relief and short sales. The IRS gives an explanation of “Insolvency” on this form.
Finally, the time period for The Mortgage Tax Debt Relief Act was originally only slated to go until the end of 2008, however it has now been extended to the end of 2012. Assuming this law is not extended, short sales that close escrow after 2012 will be subject to taxes on the debt forgiveness.
Will I have to pay CA state taxes on the money my lender writes off in the short sale?
As of April 12, 2010, California has passed its own version of the federal Mortgage Tax Debt Relief Act. It is Senate Bill 401, The Conformity Act of 2010, which conforms to the federal law described in detail above, but applies to California state income taxes on a short sale. It allows taxpayers who had all or part of the loan balance on their principal residence forgiven by their lender to exclude the forgiven debt from California gross income taxes.
We recommend you review your specific tax scenario with your CPA or accountant and have them answer any tax questions that you have. We are not tax advisors and do not dispense tax advice.
Can my lender go after me for the money it loses in the short sale?
No. With the passage of CA SB 931 & CA SB 458, lenders cannot pursue any deficiency judgement after a short sale. All debts are considered settled "Full & Final" after a short sale in California.
What if I have a first and a second loan on my property with 2 different lenders (or the same lender)?
Most people that we do short sales for have a first and a second loan, often with 2 different lenders. For the short sale to reach a successful close of escrow, both lenders have to approve the short sale and agree to settle the debt.
It is important to note that both lenders have a vested interest in doing this. The lender with the first loan does not want to foreclose, and therefore is willing to give a little money to the second in order to get them to agree to the short sale.
The second lender will get nothing if the first forecloses, so with the attitude that something is better than nothing, they will agree to take a fraction of what they are owed in order to avoid getting absolutely nothing.
What is the difference between a recourse and a non recourse loan?
A purchase money loan is considered to be a “non recourse” loan, while a loan that has been refinanced is considered to be a “recourse” loan.
In the event of a foreclosure, the lender can pursue a deficiency judgement (pursue the seller for the money they lost in the foreclosure) on a 2nd lien that is a recourse loan (has been refinanced).
In a short sale, thanks to CA SB 458, lenders cannot pursue any deficiency after close of escrow regardless of whether the loan is recourse or not. In a short sale, all debt is "settled."
How will I know that I am being released from the debt?
Prior to the passage of CA Senate Bill 931 & CA Senate Bill 458, lenders could pursue deficiencies on recourse loans in California after a short sale, assuming the seller's agent did not negotiate a "Full & Final Satisfaction of the Debt." SB 931 applies to first liens, SB 458 applies to second or junior liens.
Now, as of July 2011, with the passage of CA SB 458, lenders can no longer pursue a deficiency on first or second loans after a short sale in California. In other words, they must take whatever they get in the short sale and call it a day.
What are the advantages of a short sale vs. letting my home go to foreclosure?
The primary advantage to doing a short sale vs. walking away and letting your home go to foreclosure is that in a short sale the debt is settled and you no longer owe the bank any money. If your home goes to foreclosure, you may still be liable for the deficiency in the event that the bank files a judicial foreclosure.
A secondary (but still very important) advantage is that in a short sale, your credit takes much less of a hit compared to a foreclosure. The impact on your credit will vary depending on how established your credit is at the time of the short sale or foreclosure.
Finally, Fannie Mae & Freddie Mac revised their guidelines in August of 2008 with regard to how they view borrowers who have filed bankruptcy, gone through foreclosure or done a short sale. Through these new guidelines, they are in effect severely penalizing those who go the route of foreclosure or bankruptcy, and rewarding or encouraging those who do short sales, which they view as the borrower doing the responsible thing in light of the circumstances.
Per recent Fannie Mae / Freddie Mac guidelines, borrowers who file bankruptcy or go through foreclosure have to wait up to 7 years to buy another home.
By contrast, the new guidelines stipulate only a 24 month waiting period after a short sale, so borrowers who do a short sale can buy again in just 2 years.
Are there any advantages to letting my home go to foreclosure vs. doing a short sale?
I have yet to hear a coherent argument for letting your home go to foreclosure vs. doing a successful short sale. Depending on whether you have a recourse or non-recourse loan, when you let your home go to foreclosure you either run the risk of being liable for the deficiency amount or liable for the income taxes on that loss.
Secondly, your credit will drop up to 400 points and you will not be able to buy a home or get any decent credit for up to 7 years.
Compare this with a short sale, in which the lender agrees to SETTLE the debt for less than the amount owed. If you have recourse loan, you may be liable for income taxes on the lender’s loss (just as in a foreclosure) but you will not be liable for the deficiency (and if you qualify for the “Insolvency” exclusion, you will avoid the income taxes as well).
Further, the loss that the lender takes in a short sale will be MUCH LESS than the loss the lender takes at the end of the foreclosure process. The foreclosure process takes months & months, at the end of which the lender has to process the property through its overwhelmed system (another 3 -5 months) and then put the property back on the market, all while the market continues to drop.
Finally, the impact on your credit from a short sale will be significantly less than with a foreclosure and you will be able to buy again within 2 years, compared to up to a 7 year waiting period to buy a home after a foreclosure.
How long will a short sale take?
The short sale process typically takes about 4 months, start to finish. It can take longer depending on how backlogged the lender is. You can live in the property for the entire duration of the short sale or you can move out whenever you wish.
What is the timeline to close a successful short sale?
The short sale process is as follows: the property goes on the market as a regular home for sale, typically at what I would call low market value. In other words, a competitive price that the bank will be willing to accept but that is low enough to stimulate offers quickly. Once the seller receives an offer they are willing to accept, the offer is submitted to the lender with the seller’s financial information, which consists of 2 years of tax returns, 2 months of bank statements, a financial worksheet and a letter explaining why the seller wants to do a short sale (typically called a “hardship letter” although most banks do not really require a true hardship anymore). The lender will review the offer and the seller’s short sale application, figure out what the property is worth so they can make sure they are getting market value, and then either accept the offer or counter it. Once an offer is submitted to the lender, approval typically takes from 30-60 days, depending on the lender. If there is a 2nd lender, that can add another 30-60 days to the process. If the buyer cancels at any point in the process, that can also add another 60 days to the process. While it does vary from lender to lender and property to property, as of the spring of 2012, short sales with most lenders take 4-6 months when negotiated with an experienced short sale agent.
Do I need to be behind on my payments to do a short sale?
No. This is a common misconception. You do not need to be behind on your payments or have been late on a payment to do a short sale although in some cases the lender may be more motivated to do the short sale if you are not making payments.
Do I need to continue to make my HOA payments when I do a short sale? How about my property taxes?
Re HOA payments, if possible, you should keep up to date on your HOA as lenders will not pay this and all HOA liens must be paid prior to close of escrow. if you cannot afford to pay this, we will do our best to get the buyer to pay this through escrow.
Re property taxes, if you cannot afford to pay them, we can typically get the lender to pay delinquent property taxes through escrow.
Who will be negotiating my short sale with the bank? Do you do this in your office or do you sub it out to an outside company?
Our short sale team consists of nine professional staff members here in our San Diego office. You are welcome to come in and meet with us in our office, meet our team and get a first hand look at our systems. Among our staff are 3 former underwriters from major national lenders. We have negotiated 100’s of successful short sales and handle every aspect of the short sale process ourselves. We do not farm any part of the negotiations out to an outside company and recommend you be extremely skeptical of any agent or attorney who uses an outside company to handle their short sale negotiations.
Real estate agents & bankruptcy attorneys are solicited on a daily basis by the many “short sale negotiation” companies that have sprung up on the web over the past couple of years. For the agents or attorneys that use these companies, it’s a very attractive set up: they just take the listing and refer the file out to the negotiation company, and wait to see what happens.
The agent has invested almost no time or effort into the deal, so if it closes, great, they pay a referral fee to the negotiator and keep the rest of the commission. If the negotiator tells them they couldn’t get an approval, or that the bank wants an unreasonable amount of money for the property, or the bank wants the seller to sign a promissory note, well, the agent has invested almost no time or money into the deal, so…who’s next?
Should I file bankruptcy? Will it allow me to keep my home? I’ve heard the lender cannot foreclose if I file bankruptcy.
There are 2 types of bankruptcy commonly used by individuals – Chapter 7 (“Fresh Start”) and Chapter 13 (“Wage Earner”). Chapter 7 can enable individual filers to wipe away debts such as credit card and medical bills so they can continue to make their mortgage payments. Chapter 13 involves setting up a 3-5 year repayment plan to repay your debts. Chapter 13 requires that you are earning a steady income, as you will be repaying all of your debt. Both have a very negative impact on your credit and remain on your credit report for 10 years. Because of the new 2005 bankruptcy law, which raised the bar for people to qualify for Chapter 7 "fresh start" bankruptcy proceedings, fewer and fewer people pass the “means” test to qualify for Chapter 7 and for this reason can only qualify for Chapter 13 bankruptcy (a 3-5 year repayment plan). While both Chapter 7 and Chapter 13 can temporarily delay foreclosure proceedings, neither will allow you to keep your home unless you can bring your mortgage current..
Chapter 13 Bankruptcy allows the filer to reorganize their debt and set up a payment plan based on their income through the bankruptcy trustee.
This is typically the type of bankruptcy that homeowners use to save their home from foreclosure, assuming they can afford their home based on their income through their new repayment plan.
In some cases, on an upside down property with a 1st and 2nd mortgage where the value of the home has dropped below the value of the 1st mortgage, a Chapter 13 Bankruptcy allows the bankruptcy to rule the 2nd mortgage as an unsecured note, which means the court can modify it the same way they would any other type of unsecured debt, such as a credit card. They can even reduce it down to a $0.00 balance. This is called “lien stripping.”
If you would like more information on whether a bankruptcy is right for you, we recommend you consult a competent bankruptcy attorney, as we are not attorneys and do not dispense legal advice.
Can any agent do a short sale?
Absolutely not. Many agents have no interest in doing short sales because they require a tremendous amount of time and expertise, and if you do not know what you are doing, they often go to foreclosure and then the agent does not get paid. If an agent is not extremely experienced at doing short sales – in other words they have done at least 100 of them in the current downturn – then I would not use them.
This site gets visitors from all over the country. In every market, there are agents who specialize in short sales and have a team of staff members assembled to work on them, and then there are agents who are inexperienced at short sales and just recently started trying to do them, learning as they go, because they’ve realized they have no choice due to the state of current market.
You get one shot at doing a short sale – if your agent does not know what they are doing and has not learned the many tricks to the trade, you will likely find yourself being asked to make a cash contribution, sign a promissory note for the balance or worse, be denied by your lender or lenders and go to foreclosure.
In other words, let the inexperienced agents and/or attorneys learn the short sale process on someone else’s property – as the saying goes, don’t allow yourself to be one of the surgeon’s first patients.
Do I need to hire an attorney to do a short sale?
Answer: It is our belief that you will be best represented in a short sale by a competent, experienced real estate agent who works every day in the real estate business, will market your property aggressively in order to attract buyers, and who is experienced at doing short sales and negotiating with lenders. In our view, an “experienced short sale agent” is one who has done at least 200 successful short sales in this downturn cycle (i.e. since 2006).
If you have questions about the tax implications of a short sale, we recommend you seek the advice of a qualified CPA or tax accountant.
If you want to explore filing bankruptcy, we recommend you seek the advice of a competent bankruptcy attorney. Call our office - we can recommend several.
Why should I use the Battiata Real Estate Group?
You should use the Battiata Real Estate Group because we will do the most effective job at marketing your property (remember, we have to generate offers from qualified buyers & sell your property) and because we are the most experienced and the most effective short sale negotiators in Southern California.
Our team consists of former underwriters from major national lenders, as well as a staff of experienced, dedicated, professional employees who negotiate and close short sales every day. We have done successful short sales with every lender that loans money in the state of California. We know how to negotiate short sales so that our clients do not sign promissory notes, are given a full release from the lender and walk away with an approval that states that the debt is satisfied and settled.
Matt Battiata consults with each and every one of our sellers, prices & monitors each listing and is involved in the negotiation of every offer. Matt Battiata has sold more homes over the past several years than any other agent in Southern California, and has negotiated several hundred short sales in just the past few years alone.
You get one shot at doing a short sale - the Battiata Real Estate Group gives you a documented 97% chance of not just closing your short sale successfully, but settling the debt so you walk away owing nothing, a track record which is unparalleled in the real estate industry.