Short Sale Basic Training

We're helping a client who is facing a hardship, leading to a probable short sale, so we gathered some basic information. We thought you might benefit from knowing this, too.

Definition: A Short Sale is when a home is sold for less than the amount owed and the lender, after much negotiation, agrees to release the lien and settle for less than the full payment.

Why would a lender accept a Short Sale? A Short Sale is a form of loss mitigation, the lender is presented with a choice between a smaller loss by Short Sale or a larger loss through foreclosure, so accepting the Short Sale mitigates the loss.

The advantage of a Short Sale compared to a foreclosure is that you avoid having a debt discharged due to foreclosure on your credit record. This foreclosure mark can reduce your credit score by over 250 points and keep you from qualifying for a home loan for up to 5 years.

Short sales appear on your credit report as pre-foreclosure in redemption. With a Short Sale you can qualify for a home loan in 24 months.

Qualifications: For a Short Sale to be approved by your lender you must show a hardship. A hardship is defined as a situation that is the result of some extenuating circumstance that forces you into a position where you can no longer afford the mortgage payments. Some examples of a hardship are loss of income, unemployment, divorce, illness and job transfer.

Lenders will also allow a short sale of an investment property. Some examples of hardship include the amount of rent charged does not cover the mortgage payment and related expenses and you cannot afford to pay out-of-pocket to make up the difference. You are unable to rent the property at a price that covers all expenses. You cannot afford to fix damage to the property that keeps you from renting it out.

Timing for your next purchase: Fannie Mae's new policies for manually underwritten loans related to the time period that must elapse before borrowers can demonstrate they have reestablished an acceptable credit history after the occurrence of a short sale or foreclosure.

Short Sale - 2-year time period from completion date.

Additional Requirements: None
Note: No exceptions are permitted to the 2-year time period

Foreclosure - 5-year time period from completion date.

Additional requirements that apply after 5 years up to 7 years following completion date:

• The purchase of a principal residence is permitted with a minimum 10 percent down payment and minimum credit score of 680.
• Purchase of a second home or investment property is not permitted.

Deed-in-Lieu of Foreclosure - 4-year time period from completion date (date deed-in-lieu executed)
Additional requirements that apply after 4 years up to 7 years following completion date:

• Borrower may purchase a property secured by a principal residence, second home, or investment property with the greater of 10 percent minimum down payment or the minimum down payment required for the transaction.

Tax Considerations: On December 20, 2007 President Bush Signed H.R. 3648, The Mortgage Forgiveness Debt Relief Act of 2007.

The law applies to primary residences only and takes effect from January 1, 2007 through December 31, 2012. It provides relief to home owners by shielding them from the additional burden of potential federal income tax on any amount written off or forgiven by their lender in case of foreclosure or short sale. Consultation with an experienced tax professional to see how the law applies in your circumstance is advisable.

If you would like more information click here to be taken to IRS Guidance regarding The Mortgage Forgiveness Debt Relief Act of 2007

Getting Started: The first thing we need to do is evaluate your situation, which includes a conference call with your lender to understand your loan terms and current status. Only after discussions with both you and your lender can we determine if a Short Sale is the best solution.

If a Short Sale is the best solution for you, we will begin the process. A Comparative Market Analysis (CMA) will be done and a marketing strategy will be developed.

Short Sales normally take at least 90 days to complete. Lender approval will take up to 60 days from the time an offer is submitted. Once approved 30-45 days will be necessary to close escrow.

Charges: Real Estate commissions are paid out of the sale proceeds. Your lender has final approval as to the amount of commissions that will be paid. There are no additional costs, fees or charges because the transaction is a Short Sale.