Jennifer Sanchez Team

FAQ's

The following is a condensed version of the most popular questions a seller may have on short sales. As a REALTOR®, we are not licensed as a lawyer or a CPA and cannot advise on all matters of the short sale process. Please obtain advice from a competent real estate lawyer on legal issues and discuss with your accountant on the tax ramifications that may be unique to your specific situation. 

What information will the bank need to decide whether to accept a short sale? 
The sellers’ submission package should include W-2 forms from employers (or a letter explaining the seller is unemployed), bank statements, two years of tax returns, and other financial documents outlining income and debt obligations. The bank will also need comps or a broker’s price opinion showing your estimate of value. 

In addition, the sellers should submit a “hardship letter,” explaining the circumstances that make it impossible for them to pay the full amount of the loan. The seller needs to be able to show true financial hardship. Someone with the assets or the income to pay is unlikely to be considered.

Who pays commissions, closing cost?
We understand that there is a financial hardship for the homeowners of a short sale. Our ultimate goal is for our sellers to incur no out of pocket expense. We negotiate a “net” settlement with the bank in order for them to release the lien on the property. This net pay off is after all fees associated with a traditional real estate transaction: real estate commissions, title fees, escrow fees, buyer closing cost, home warranties, termite treatment, etc.  In many cases, however the lender will not pay HOA fees, past dues, fines transfer and disclosures. This can sometimes be in excess of hundreds of dollars, therefore we do ask you to try very hard to keep the HOA dues current. As far as the disclosure and transfer fees we make every attempt to negotiate this for to be paid for by the buyer. 

What are the options besides a short sale? 
Thanks to programs such as those proposed by Fannie Mae and Freddie Mac to assist sub-prime borrowers, many lenders are more willing to offer loan modification options. This option can extend the term of the loan, add on delinquent payments to the loan principal, and/or reduce the interest rate to make the loan more manageable for the home owner. Another option is a repayment plan that requires home owners to increase their monthly payments until the loan is current, says Loni Parmelly, a real estate practitioner and consultant who specializes in short sales. Another option is a “Lease to Own.” Buyer makes an agreement to make “rental type payments” to the owner over a 12 month period (example) and then obtains financing at the end of the buyer/seller lease agreement. Most often a larger down payment is given to the seller at the start of such agreement, which in case of buyer default, the seller retains down payment amount.

What if I file Bankruptcy? 
A Bankruptcy MAY stop the progress of your Short Sale. Please discuss with your bankruptcy attorney whether you are able to Short Sale while in Bankruptcy or not. In some cases depending on your situation the trustee will allow it and remove the property from the bankruptcy. If we are in the Short Sale process and you file BK the Loss Mitigator will cancel the file and move it to their legal department. The Short Sale at this point will come to a halt. Please let us know if you are considering this process.

Loan Resolution (Loss Mitigation) Options:

Repayment Plan:

Distributes the owner’s delinquent payments over a period of time, usually no more than 10 months. The monthly amount is added to the usual mortgage payment. Brings the account up-to-date within a specified time-frame. With a goal in sight, the owner can move forward knowing that the home is secure.

Forbearance Plan:

An agreement to temporarily allow a homeowner to pay less that the actual amount due on their mortgage or it will suspend payments entirely the forbearance period. More commonly associated with Fannie Mae, Freddie Mac, FHA, and VA. Each has various requirements a homeowner must meet, it is very situation specific so the homeowner should contact the lender directly to see if forbearance is an option. The goal is to put the homeowner back on track to resume full regular payments.

Loan Modification:

Applies any past-due interest and escrow amounts to the unpaid principal balance, which is then re-amortized over a new term. Changes over a new term. Changes to mortgage note itself, giving the owner a fresh start on managing their loan. Brings the account up-to-date immediately. There are many requirements; the homeowner must contact the servicing lender for details of their individual circumstances.

Partial Claim (only for FHA loans):

The Department of Housing and Urban Development (HUD) advances a loan to repay the past-due interest and escrow amounts. HUD loan is interest-free. Brings the account up-to-date immediately.

Short Sale:

Allows the owner to sell the home and use the proceeds to pay off the mortgage if they are unable to maintain payments, even if the home’s market value is less than the total amount owed. Avoids the lengthy legal process involved in foreclosure. Generally less damaging to the credit rating than foreclosure.

FHA Pre-Foreclosure/Short Sale Requirements:

The property is owner-occupied or reasonable circumstances exist if it is not. The loan is at least 2 months delinquent. The house can sell within 3 to 5 months. A new appraisal (obtained by your lender) shows that the value of your home meets HUD program guidelines. It has been reported that FHA does not allow for short sales, which is inaccurate, FHA does allow them.

Deed In Lieu of Foreclosure:

Allow the owner to transfer the property voluntarily to the servicing bank if the seller is unable to maintain payments and cannot sell the home at market value. Avoids the lengthy legal process involved in foreclosure. May be less damaging to the credit rating than foreclosure (this option is a foreclosure and will be reported as such).

How should the property be priced in a short sale? 
In general, most short sale experts say to price the property at or near fair market value, although a few will begin with the total payoff amount owned by the seller. How frequently prices are dropped will depend in part on whether the property is in pre-foreclosure. Most banks have a formula for what percentage under market value they will accept, say interviewees. Figures cited vary from 8 percent under to almost 20 percent under. 

How long does it take to complete a short sale? 
Although response times vary from lender to lender, it can take two weeks or as long as 60 days to receive an approval of a short sale from a lender. That’s why it’s critical that buyers and their representative understand and accept that time frame before they make an offer.

What can the seller and I do to make a short sale more attractive to a lender? 

Getting a lender to approve a short sale is primarily a question of economics. You have to provide hard numbers to show that the amount of money a bank will realize on the short sale is better than the amount it may recoup from foreclosing on the property and selling the property.

A 2002 study by Craig Focardi of the Tower Group estimated that the entire cost of a foreclosure was $58,759 and took 18 months. Other factors that can influence a bank’s decision include the liability risk it assumes by owning the property after foreclosures, the money tied up during the holding period for a foreclosure and REO resale, additional costs associated with an REO such as attorneys’ fees, and the additional reserves it will need if REO’s rise in the bank’s portfolio.

What are the seller’s options if a short sale is rejected by the lender? 
There are a variety of reasons a bank will reject a short sale — from too low a price to too many files on the loss mitigation’s desk. You can look for another buyer or even try resubmitting the same contract. Banks don’t want to take properties back in foreclosure, so they are going to do everything they can to make it work. Keep in mind that throughout the process there’s the possibility of foreclosure.

What tax liabilities will a seller have as a result of a short sale? 
Again, one often overlooked aspect of short sales is that a seller must count any amount forgiven by the lender as income and pay taxes on that income, even if no actual money was received. The IRS requires lenders to submit a Form 1099 stating the forgiven amount. Sellers who meet the Internal Revenue Service definition of insolvency (either in bankruptcy or with debts exceeding assets w/o bankruptcy) will not have to pay taxes on the forgiven amount. See IRS Form 982 for this exclusion. Ask your CPA for all details.

Credit Reporting;

Credit scores are obviously going to suffer: there is no way around that. There are just way too many variables going into the credit score to know the actual effect of a short sale. The loan may show on the credit report as “Paid a Agreed,” however, in most cases it will also note, “Settled for less than amount owed.” Depending on how far behind on payments a borrower gets, it may also reflect as “Pre-foreclosure” on the credit report. Many lenders consider 90 day past due to be a foreclosure whether or not the property was formally sold by the bank. It would be a good idea to ask for the lenders policy on reporting short sales to the credit bureaus.