Short sales make up a proportionally large percentage of the real estate market, but are often misunderstood by homeowners and real estate agents. These are the answers to the main questions sellers ask us before venturing down this dangerous path.
1. What is a short sale? It is simply selling your house for less than what you owe.
2. Who benefits? This is one of those rare moments where it seems to benefit all parties involved. The seller who can’t make the mortgage payments benefits from getting rid of their property before foreclosure, the buyer gets a property at a great price, and the bank saves the additional expense of foreclosure proceedings.
3. How late can the pre-foreclosure process start? The time from receiving a Notice of Default to foreclosure is around 3-6 months. Therefore, it is best to start working with a broker to list your home as soon as possible, giving you time to find a buyer and negotiate with the bank.
4. What documents do you need for a short sale? Prior to approval, banks will typically require a hardship letter, tax returns, pay stubs, bank statements, personal financial statements, monthly budget assessment, and any other documents deemed necessary to determine your financial status. The sales document would include a sales contract and a HUD-1 settlement statement that includes a preliminary estimate of income for the lender.
5. How will a short sale affect the seller’s credit rating? Regardless of the lender, this type of transaction will likely have a negative impact on your credit score. However, it is generally accepted that a reference such as “paid off for less than originally owed” will be better than a “foreclosure” reference on your credit report.
6. Can a seller make a profit? By the nature of the transaction alone, a seller will not make a profit. You are selling a home “below” what you owe.
7. What if I am already bankrupt? You cannot proceed with a short sale if you are bankrupt, as all income is determined by the courts.
8. Will an appraisal be required? The lender usually requires one or more BPOs (brokers’ price opinions) for a short sale. However, the buyer’s lender will usually do an appraisal.
9. What are the tax implications for the seller? Tax situations vary from seller to seller. However, short sales represent a loss to the lender and they will report the amount of the loss as debt forgiveness to the seller. The seller will be responsible for paying taxes on the amount of this forgiveness.
10. How do I know if shorting is right for me? If you can’t afford your mortgage payment, especially if you’re upside down in the value of your home and a loan modification isn’t working for you, then it’s time to consider a short sale as a solution to your problem.
