What is a Short Sale?
When a property sells and the bank holding the mortgage agrees to accept less than what they are owed.
Who qualifies for a Short Sale?
Anyone who has experienced a hardship that they can prove or who owes more on their home than it is worth.
Do I have to prove hardship?
Yes! You must send a hardship letter with your package explaining to your lender how your circumstances have changed that will required them to work with you in approving your short sale. It must be convincing and make sense, but it can be almost anything. Some examples of hardship include;
- Adjustment in mortgage payments
- Loss of job
- Reduction in pay
- Spouse is no longer working
- Job transfer
- Medical hardship
- Other financial losses that affect your ability to make payments
- Injury or Illness
- Divorce or separation
- Failed business
- Decrease in home value combined with another hardship
This list is, obviously, not all inclusive because there are many different things that could cause a financial hardship. The point is there is a reason you have stopped making your mortgage payment and want to sell your house. What is it? That needs to be explained in a way that will show the bank that it is in their best interest to work with you.
How long does a short sale take?
This can be a complicated question. Please see the Short Sale Timeline page.
Will I have to pay the bank back the difference?
Since we are in California you almost certainly will not have to pay back the difference if your bank agrees to a short sale of a 1 - 4 unit property which would include your typical single family home, townhome, or condo.
As of January 1st 2011, California implemented Senate Bill 931 which is an act to add Section 580e to the Code of Civil Procedure, relating to mortgages. This law made it such that if a holder of a first deed of trust approves a short sale, they are automatically waiving their right to collect any deficiency after the sale. This includes all first trust deeds or first mortgages for a residential dwelling of 1 - 4 units whether primary residence, second home or vacation property, or a rental property. *Note: In certain circumstances where this will not apply including if there was fraud or waste. Speak to an attorney about your specific situation as I cannot give legal advice.
Governor Brown also recently signed into law SB 458 which is very similar to SB 931 only it applies to second trust deeds such as an equitly loan or line of credit and expands on the borrower's protections.
Will I have to pay taxes on the difference?
This is a common question and since tax laws are always changing, you should confirm the following information with a certified public accountant.
When the bank takes a takes a loss on a property, they deduct their loss for a tax benefit. To do this, they will document their loss and issue the property owner where the loss was incurred a form 1099-C in the full amount of the loss. The homeowner would then have to pay income tax on that amount.
At this point, most people are panicking and swearing at their real estate agent for not telling them this or asking them to consult a CPA.
HERE'S THE GOOD NEWS! The government passed the Mortgage Forgiveness Debt Relief Act of 2007 that states that for short sales, foreclosures, or loan restructurings on a primary residence, there will be no tax due on debt forgiven in calendar years 2007 to 2012.
You still have to file a form 982 with your taxes showing the loss, but you should have to pay $0 in taxes. You can also read more up-to-date info about the “Mortgage Forgiveness Debt Relief Act of 2007” on the IRS’s Web site, www.irs.gov, or just Google it.
Remember, this act only covers your primary residence. You should consult your CPA with your specific situation regarding other solutions such as insolvency or bankruptcy, and for all other types of property such as non-owner etc.. There are other solutions as well for non-owner occupied property. Contact your CPA for information petaining to your specific situation.
How much does a short sale cost?
Our short sale services are paid for like a normal real estate commission out of the proceeds of the sale. Since the property is overleveraged, the bank essentially pays the commission by netting less from the sale. The only way my commission gets paid is if the short sale gets approved and sells, so you can rest assured that I am working hard to ensure that every deal closes!
What is a BPO?
BPO stands for Broker Price Opinion. There are a few types a bank can order, but most often the banks will order a drive-by exterior BPO, or an interior BPO that requires an interior inspection with pictures.
Bankers basically have a list of Realtors™, brokers and appraisers that they will call and pay anywhere from $45 to $100 to inspect their collateral and give them an opinion about what it is worth. Sometimes they may even order two or three on the same house.
But what if I really want to stay In my home?
Staying in the home is important for many people. This can be accomplished if you have documented income and can be approved for a loan modification. Another way this can happen is if the home sells as a short sale to an investor who in turn leases the property back to you. There are only some situations where that can be accomplished.
In most cases, I would advise the homeowner to try to let some of the emotion go and look the transaction from more of a business point of view. In my experience, the home owners who do this are able to make better financial decisions regarding their house.
Which is right for me, a loan modification or a short sale?
It depends. Click here to contact us for an evaluation of your situation.
What if I have an FHA or VA loan, or if I have Private Mortgage Insurance?
FHA, VA and loans with PMI (Private Mortgage Insurance) will require one additional approval and some extra paperwork. (You probably have PMI if you financed more than 80% of the value of your home). You would think that having PMI would be a good thing but the private mortgage insurance companies are harder to get clean approvals with than any bank. A lot of it will depend on who issued the PMI policy. Any time there is PMI on a loan you should most likely expect them to “ask” for a promissory note for the deficiency.
Do I have to be delinquent to do a short sale?
NO! It is sometimes easier to negotiate when you are delinquent, but you do not have to be. There only a few loan services that require it. Even then, the case needs to be presented to the bank in a way that makes them realize that it is in their best interest to accept the short sale now or face a greater future loss. Some banks do prioritize their files by delinquency and auction dates, but other files still can be approved
What paperwork will I need to submit for the Short Sale?
The paperwork submitted to the bank is a critical part of getting your short sale approved. Do everything you can to get paperwork to your Realtor as soon as it is requested in order to avoid delays. Some bank representatives will require that your short sale package be submitted on their paperwork, but most will accept standardized paperwork as long as it has all the information they need and it's organized in the way they want. If your paperwork is not submitted complete with an accurate HUD-1 (settlement statement showing all financial details of the transaction), your file will sit on a desk and go absolutely nowhere!
Here is a basic checklist of what you will need to send:
Cover sheet with contact information
Last 2 months bank statements
Last 2 years tax returns
Last 2 years W-2 or 1099s if not included with taxes
Standardized financial worksheet
Any 401K or retirement account statements
A copy of most recent mortgage statement
A copy of any correspondence the bank has had with you
A letter from state agency if you are receiving unemployment or disability
Contractor bids for home repairs if needed
If you do not have any of these items, you must include in your hardship letter why you do not have them to avoid potential delays.
If you send an incomplete package, you will never get past the hourly gate keeper (with no authority) who goes through dozens of files everyday and makes sure all the paperwork is in place before assigning it to someone a level above them.
If you are working with a real estate agent, he or she will also have a list of items he/she will need to send, including:
An offer from a bona fide buyer with all required addendums (“as is”, short sale etc.)
Copy of a HUD-1 showing payoffs the way the bank wants (a few tricks here)
Comparables supporting the value of the offer
Contractor bids for repairs if necessary
How do we personally handle our short sale files?
Every homeowner who I work with gets our full attention on every detail through the entire process. We'll set realistic expectations up front about the process and timeframe so you can begin to move on with your life. We'll make sure all the paperwork submitted to your lender is complete and prepared exactly the way the bank needs to see it. We'll communicate regularly with all parties, keeping everyone informed of the status of the sale and negotiation. We'll negotiate with the bank regularly to meet your objectives. We can make the sale as public or private as you would like. With any issues that may arise, you can rest easy knowing that you have hired someone competent to handle and resolve problems for you. We will never take on too many clients because it's critical we give your situation the optimal attention. This will ensure a smooth and complete process.
We understand there is a lot of information here, and it probably seems overwhelming. That is why were here; so you don't have to worry about any of it!