Short Sales

A short sale is when there is not enough equity in a property to payoff the loans that are on the property. As a result of the declining real estate market over the last few years, it is not an uncommon occurrence that a property would be in this situation. As property values have declined, it is becoming more routine for mortgage lenders to accept less money than what is owed on their loan in exchange for the release of the lien on the property.
Everyone’s situation is different, but the short sale lender being asked to accept less than what is currently owed on the loan is going to examine their borrower’s financial situation before approving a short sale. Generally speaking, a borrower must be able to document a reduction of income since they took out their loan, a major change in their lives, or both. Generally speaking, some examples of criteria that qualify homeowners for a short sale are: unemployment, loss or substantial reduction of income, disability, divorce, or death.
Generally speaking the answer is, “Yes”. In Virginia, the District of Columbia, and Maryland, lenders have the right to pursue their borrower for the deficiency on the loan if the borrower defaults. These types of jurisdictions are called “recourse” states. We will attempt to negotiate a settlement with the short sale lender that releases the homeowner from all future liability on the deficiency balance, but many lenders will not give a written release of personal liability as part of the short sale approval.
Most lenders will issue their borrower a 1099-C, Cancellation of Debt, for the tax year in which the short sale was completed. As a starting point, the homeowner is responsible for paying income taxes on this cancellation of debt if it is for more than six hundred dollars ($600). In 2007 the United States Congress passed the Mortgage Debt Relief Act that will generally allow taxpayers to exclude from income debt that was forgiven on their principal residence. For more information on whether you would qualify under the Mortgage Debt Relief Act, you should consult an accountant or tax attorney.
All parties must be aware that many properties trying to be sold through a short sale also have pending foreclosures and there is no guarantee that the lender will stop the foreclosure while the short sale is being processed. As the scheduled foreclosure date approaches We will request that the foreclosure be re-scheduled or be postponed indefinitely and although many lenders will comply with this request there are some lenders that will not stop a foreclosure based on an ongoing short sale negotiation.
Although the mortgage lenders will typically not help you set a price at which to list the property, the mortgage lender will expect that the property be sold at a fair market value and will conduct their own appraisal of the property after they receive the contract. The property should be listed at the price that the listing agent and seller feel is the fair market value of the property. If the property sits on the market for an extended period of time without any interest, then the listing price can be dropped and the listing history of the property can be provided to the lender to explain the reduction. If you receive an offer that is drastically below the market value of the property, it is unlikely that the short sale lender will accept the offer, but will many times present a counteroffer at the price they feel more accurately represents the fair market value of the property.
Most mortgage lenders will generally not begin the short sale process until there is a contract on the property. When a contract is written on this property, a short sale “package” will be submitted to the lender(s) who have liens on the property. Homeowners will need to provide us with most of the documents for this package, including (1) the contract, (2) the listing agreement, (3) a hardship letter explaining your necessity for selling the property in a short sale, (4) at least two month’s recent bank statements, (5) recent paystubs (usually two pay periods), and (5) recent tax returns (usually two years). With this package, We will submit a draft HUD-1.
From the time the contract and complete financial short sale package is submitted to the lender, approval can take anywhere from 30 days to 6 months. The approval process is highly dependent on what lender is servicing the mortgage, whether or not there is an investor that must also approve the transaction, whether there is a mortgage insurance company involved, and whether there are one or two lenders with whom negotiations must be made. Some lenders are unwilling to substitute the approval of one buyer’s contract for another despite contract terms being exactly the same (or even better) so if a buyer backs out midway through the short sale process, the timeframe for the approval process could be lengthened.