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What is a short sale?

by The Applegate Team

Short sales is a hot new buzz word in Real Estate lingo. What happens is that a Seller finds that thier home will not sale for the price they would like, and then they start to wonder if they should do a short sale. It is not a guaranteed out and it does not always solve the problem.

A short sale happens when the lender is shorted on a mortgage, meaning the lender accepts less than the total amount that is due. If your mortgage is $100,000, but your home is worth, say, $90,000, you are $10,000 short, not including costs to close the sale such as real estate commissions, recording fees or title and escrow charges.

Sometimes, to avoid going through the costs of foreclosure,  a lender will sanction a short sale by letting a buyer purchase the home for less than the mortgage balance while the home is in pre-foreclosure stage.

What this means to you is that you must have a ready willing and able buyer.

A pre-foreclosure stage is one of the three stages of foreclosures.

Here are sample steps of a short sale:


  • Seller signs a listing agreement with a real estate agent subject to selling as a short sale with third-party approval.


  • The agent finds a buyer who makes an offer for less than the amount of the mortgage.


  • Seller accepts the buyer's purchase offer.


  • Seller's lender accepts the buyer's purchase offer.


  • Transaction closes when the buyer delivers the funds, the lender releases the lien and the seller delivers the deed.

In fairy-tale land, everybody lives happily ever after. Except the seller. There are consequences.



Qualifications for a Short Sale

Before you eagerly climb aboard the short sale bandwagon, consider the following to determine whether you may qualify for a short sale. If you cannot answer yes to all four requirements, you may not qualify for a short sale.


  • The Home's Market Value Has Dropped.

    Hard comparable sales must substantiate that the home is worth less than the unpaid balance due the lender. This unpaid balance may include a prepayment penalty.


  • The Mortgage is in or Near Default Status.

    It used to be that lenders would not consider a short sale if the payments were current, but that is no longer the case. Realizing that other factors contribute to a potential default, many lenders are eager to head off future problems at the pass.


  • The Seller Has Fallen on Hard Times.

    The seller must submit a letter of hardship that explains why the seller can not pay the difference due upon sale, including why the seller has or will stop making the monthly payments.

    A few examples that do NOT constitute a hardship are:


      1. Bad purchase decisions. Blowing your paycheck on a home theater system with surround sound does not qualify as a hardship.
      2. Unhappy with the neighbors. Even if every home on your block has turned into pot growing houses, that will not qualify as a hardship.
      3. Buying another home. The lender will not care if you have decided the home is no longer suitable for you or your family.
      4. Pregnancy. Increasing the size of your family or starting a family is not considered a hardship.
      5. Moving into an apartment. If you decide to move out of your home, that is a lifestyle decision and not a very good reason to abandon your home.


      Examples of hardship are:


      1. Unemployment
      2. Divorce
      3. Medical emergency / sudden illness
      4. Bankruptcy
      5. Death


  • The Seller Has No Assets

    The lender will probably want to see a copy of the seller's tax returns and / or a financial statement. If the lender discovers assets, the lender may not grant the short sale because the lender will feel that the seller has the ability to pay the shorted difference. Sellers with assets may still be granted a short sale but could be required to pay back the shortfall.

    For example, if the seller has cash in a savings account, owns other real estate, stocks, bonds or even IRA accounts, the lender will most likely determine that the seller has assets. However, the lender might discount the amount the seller is required to pay back.

    Many entities profit from short sales, but there is no seller short sale profit.



Short Sale Consequences

A short sale is dependent on a buyer making an offer to purchase. If you do not receive an offer, you will not qualify for a short sale. So even if you meet all the other criteria, it is possible that no one will buy the short sale. It is also dependent on the lender accepting the buyer's offer. If the lender rejects the offer, a short sale will not take place.


  • Tax Consequences

    If the lender agrees to the short sale, the lender may possess the right to issue you a 1099 for the shorted difference, due to a provision in the IRS code about debt forgiveness. Many situations are exempt from debt forgiveness, according to the Mortgage Forgiveness Debt Relief Act of 2007.

    You should speak to a real estate lawyer and a tax accountant to determine the amount of short sale tax consequences, and whether you can afford to pay those taxes, if any.


  • Blemished Credit Report

    A short sale will show up on your credit report. It's a pre-foreclosure that has been redeemed. Short sales affect credit ratings. While the damage to your credit report may not seem as significantly bad as a foreclosure to you, creditors may not make the distinction. Experts say the drop in your FICO score is identical to a foreclosure reporting.

Always seek legal counsel before attempting to pursue a short sale. A real estate agent cannot give you legal advice.

Most of this article is attributed to:

Elizabeth Weintraub

INSIDE ADVICE: Owners facing squeeze encounter few attractive options

by The Applegate Team

Published on: 03/23/08

Today, some recent home buyers are finding themselves squeezed between an unusually slow resale market and little, if any, appreciation in the past couple of years. In fact, in some areas, homes have actually declined in value, based on ability to resell in today's market. To make matters worse, you may have accepted an adjustable rate loan when you bought, hoping that you could sell for a fast profit before your loan payments increased to unaffordable levels.

Now you can't afford to make the new, higher payments. And you can't sell for enough to cover the high-balance mortgage that covers your property. You are literally stuck in an untenable situation.

What are your options?

> Call your lender and ask for help. Many lenders are smart enough to know that taking the house back after a foreclosure is a losing proposition for them as well as you. They will likely have to sell the house for less than the amount owed on the loan, and your credit will be severely damaged for several years to come.

What you may not know is that your lender might be able to restructure the loan in such a way that you can afford the monthly payments. The lender can offer to recast the loan, a process in which the loan is re-amortized based on a longer period of repayment in order to lower your monthly payments. Recasting is most effective if you have paid on the current loan for 10 years or longer and becomes less helpful for newer loans.

The lender can also agree to replace the loan with another loan, perhaps with graduated annual payments, so that you could continue to live in the house and continue to make payments on a timely basis. If the proposed monthly principal and interest payments are less than the currently accruing interest payments, you may be looking at a negative amortization loan in which the principal loan balance actually increases each month that the payment fails to cover the interest charge. As a result, your loan balance goes up instead of down on a monthly basis. If the home is not increasing in value, such a loan simply postpones your original problem by digging your debt hole deeper month after month. The only time I might recommend a negative amortization loan is when you are certain you will have an improved financial condition on a future date, such as an inheritance or a large bonus payment at year-end. Even then, it's rarely a good idea to enter into a plan to go deeper into debt on a continuing basis. If your lender is open to negotiating a replacement loan, try to avoid any negative amortization. Unfortunately, your options get less attractive from here:

> Next, you might ask if the lender would be willing to accept a "deed in lieu of foreclosure" with a release of liability. In this scenario, you agree to transfer ownership of the house to the lender along with the keys on a certain date. In exchange, the lender agrees to accept the house as payment in full, and to release you from any further liability in connection with the loan.

Unfortunately, few lenders find this option to be in their best interest. They may agree to take back the house to avoid the foreclosure process but will sell the house for whatever they can get and then seek payment from you for any deficiency. In these negotiations, it may be helpful to have an attorney talk to the lender's representatives on your behalf.

> Finally, if all else fails and the lender is planning on selling your house at a foreclosure auction, there is still one course of action you might consider. You may wish to seek protection from your creditors under a petition for bankruptcy.

The filing of a bankruptcy petition acts as an automatic stay on the process of nonjudicial foreclosure, and the lender is prevented from taking any further collection action until the bankruptcy court has reviewed the circumstances surrounding your case.

However, filing a petition of bankruptcy is not an action you should consider lightly, as it can have devastating consequences for your credit and your ability to purchase a home in the future. I strongly recommend that you talk with an attorney who can answer all your questions before taking this step.

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