All About Short Sales and Short Sale Assistance
Welcome to your complete Short Sale resource center. This site includes everything you need to know about short sales, including the new "Short Sale Information and Advisory " containing the latest details from the California Association of Realtors for home Sellers and home Buyers to be aware of about short sales. Plus, learn the benefits of a short sale versus a foreclosure, tips on how buy a short sale, learn about taxation of short sales, understand the foreclosure timeline, and read about the brand new short sale law removing all short sale lien holders' deficiency rights. If you need short sale assistance or have any further questions regarding short sales, contact Cheri Elliott, your short sale specialist.
- TAXATION on Short Sales and Foreclosures
- DEFICIENCY LIABILITY on Short Sales
- FORECLOSURE Timeline
- TIPS on HOW TO BUY a SHORT SALE
What is a Short Sale?
A short sale can be an excellent solution for homeowners who need to sell, and who owe more on their homes than they are worth. In the past, it was rare for a bank or lender to accept a short sale. Today, however, due to overwhelming market changes, banks and lenders have become much more negotiable when it comes to these transactions. Recent changes in corporate policy and the government have also improved the chances of getting a short sale approved.
A homeowner is 'short' when the amount owed on his/her property is higher than current market value. A short sale occurs when a negotiation is entered into with the homeowner's mortgage company (or companies) to accept less than the full balance of the loan at closing. A buyer closes on the property, and the property is then 'sold short' of the total value of the mortgage. For homeowners to qualify for a short sale, they must fall into all of the following circumstances:
- Financial Hardship – There is a situation causing you to have trouble affording your mortgage.
- Monthly Income Shortfall – In other words: "You have more month than money." A lender will want to see that you cannot afford, or soon will not be able to afford your mortgage.
- Insolvency – The lender will want to see that you do not have significant liquid assets that would allow you to pay down your mortgage.
This seems simple enough; however, it is a complicated process that takes the expertise of experienced professionals. Cheri Elliott is a Certified Distressed Property Expert (CDPE) specializing in El Dorado Hills, Serrano, Folsom, Cameron Park and surrounding Tri-County areas. You can contact her directly HERE. Together you can identify all possible options and, when possible, assist you in the quick execution of a short sale transaction.
Helping Families Avoid Foreclosure - Cheri Elliott
Many families are under water and are facing potential foreclosure. When you need short sale assistance, Cheri Elliott is a Certified Distressed Property Expert (CDPE) specializing in short sales and has closed many successful short sale transactions over the past decade as both a Listing Agent and a Buyer’s Agent. Feel free to contact Cheri anytime to discuss your specific situation. This is a no-obligation consultation. Cheri is very personable and will always keep your information confidential.
Short Sale vs. Foreclosure
There are many advantages to completing a successful short sale versus allowing a property to foreclose. These advantages range from qualifying sooner to purchase a new home, repairing credit sooner, job opportunities not lost, avoiding the loss of security clearance if your line of work includes a position with such privileges, and more. Here are some excellent comparisons straight from the CDPE “Short Sale vs. Foreclosure” guide:
Future Fannie Mae Loan
- Foreclosure: A homeowner who loses a home to foreclosure is ineligible for a Fannie Mae-backed mortgage for a period of up to 7 years.
- Short Sale: A homeowner who successfully negotiates and closes a short sale will be eligible for a Fannie Mae-backed mortgage within 2 years.
Future Loan with Any Mortgage Company
- Foreclosure: On any future 1003 application, a prospective borrower will have to answer YES to question C in Section VIII of the standard 1003 that asks “Have you had property foreclosed upon or given title or deed in lieu thereof in the last 7 years?” This will affect future rates.
- Short Sale: There is no similar declaration or question regarding a short sale. FHA – if current at the close of short sale, a homeowner may apply for an FHA loan immediately. If homeowner is late before close of short sale closing, will be eligible for FHA loan after 3 years.
- Foreclosure: Score may be lowered anywhere from 250 to over 300 points. Typically will affect score for over 3 years.
- Short Sale: Only late payments on mortgage will show, and after sale, mortgage is normally reported as “paid as agreed,” “paid as negotiated,” or “settled.” This can lower the score as little as 50 points if all other payments are being made. A short sale’s effect can be as brief as 12 to 18 months.
- Foreclosure: Foreclosure will remain as a public record on a person’s credit history for 7 years or more.
- Short Sale: A short sale is not reported on a person’s credit history. There is no specific reporting item for “short sale.” In most cases a loan is typically reported “paid in full, settled” or “paid as negotiated.”
- Foreclosure: Foreclosure is the most challenging issue against a security clearance outside of a conviction of a serious misdemeanor or felony. If a client has a foreclosure and is a police or society officer, in the military, in the CIA, or any other position that requires a security clearance in almost all cases clearance will be revoked and position will be terminated.
- Short Sale: On its own, a short sale does not challenge most security clearances. Short Sales are currently not explicitly reported on a credit report.
- Foreclosure: Employers have the right and are actively checking the credit regularly of all employees who are in sensitive positions. A foreclosure in many cases is ground for immediate reassignment or termination.
- Short Sale: A short sale is not reported on a credit report and is therefore not a challenge to employment. Short Sales are currently not explicitly reported on a credit report.
- Foreclosure: Many employers are requiring credit checks on all job applicants. A foreclosure is one of the most detrimental credit items an applicant can have and in most cases will challenge employment.
- Short Sale: A short sale is not reported on a credit report and is therefore not a challenge to employment. Short Sales are currently not explicitly reported on a credit report.
Deficiency Judgment Amount
- Foreclosure: In a foreclosure the home will have to go through an REO process if it does not sell at auction. In most cases, this will result in a lower sales price. This will then result in a higher possible deficiency judgment.
- Short Sale: In a property managed short sale the home is sold at a price that should be close to market value and in almost all cases will be better than an REO sale price. This means the deficiency judgment more times than not will be lower with a short sale than if a property forecloses.
These are many of the main reasons why a short sale is much more advantageous to a homeowner than foreclosure. In addition to the above, closing a successful short sale also has a better sense of “pride” to a home owner and family. Short Sales are a proactive stance, and any family can hold their head high for attempting a short sale, no matter the outcome.
Homeowners should consult with their own professional adviser for legal, tax, credit and personal advise with regards to the above information on Foreclosure Vs Short Sale. This information is strictly informational and not to be used as legal advise. Real estate brokers will not provide such advise.
“SHORT SALE INFORMATION AND ADVISORY"
This Short Sale Information and Advisory is intended to give general information regarding short sales, their potential impact, and the rights and responsibilities of the parties involved. It is not intended as legal advice for any particular property owner or buyer. Seller and Buyer should consult with their own professional advisers for legal, tax, credit and personal advice. Real estate brokers will not provide such advice.
1. WHAT IS A SHORT SALE: A short sale is the name used to describe a real estate transaction where the seller’s lender(s) agree to allow the property owner to sell the property for less than the amount of the loan(s) secured by the property. The consent of the seller’s lender(s) is necessary because without it there would not be enough money from the sale to pay off the lender(s) in full and to pay other costs of the sale. As a result, the lender’s lien(s) would remain on title, and the seller would be unable to transfer title to the buyer free of monetary liens. (Properties that are worth less than the amount owed to the secured lender(s) are often referred to as being “underwater” or distressed properties).
2. ALTERNATIVES TO A SHORT SALE: Owners of distressed or underwater properties are faced with difficult choices that could have financial and emotional consequences. Any of the following or other alternatives potentially have negative tax or credit consequences, or both, for the owner:
- A loan modification is an arrangement between a borrower and a lender. It can involve a reduction in the interest rate on the loan, a deferment in payments on the loan, an extension of time to pay back the loan, a reduction in principal of the loan, a combination of these possibilities, or other changes to the repayment plan. A loan modification requires the consent of both lender and borrower.
- A foreclosure is a legal process through which the lender acquires title to the property from a borrower who has stopped making payments on a loan. The lender can foreclose whether or not the borrower consents.
- A deed in lieu of foreclosure occurs when the borrower offers to transfer the property to the lender, in lieu of the lender having to go through the foreclosure process, and the lender agrees to accept title to the property from the borrower and forgives the debt. A deed in lieu of foreclosure requires the consent of both lender and borrower.
- Bankruptcy is a legal action typically filed by a borrower to have debt(s) discharged. An automatic stay occurs as soon as a borrower files bankruptcy, staying all actions against the borrower. While a petition for bankruptcy can have the effect of delaying a foreclosure, it does not necessarily prevent a foreclosure from eventually occurring. No lender consent is required for a borrower to file bankruptcy.
3. LENDER AGREEMENT TO SHORT SALE: In order for a short sale to be completed, the lender(s), at a minimum, must agree to release the property from the lender(s) lien(s) to allow the sale. The lender(s) may or may not agree to reduce the amount owed to satisfy the debt. If not, the lender(s) may continue to pursue the borrower for payment of the balance of the debt. Prior to granting approval of the sale, the lender(s) may require the borrower to disclose all of the borrower’s assets. They may require that the borrower liquidate other assets. They may require that the borrower sign an agreement to repay some or all of the debt at some later time. They may require that the borrower secure the unpaid debt with other assets owned by the borrower. Additionally, they will generally require that the transaction be arm’s length, and that all terms of any benefit conferred on the seller be fully disclosed and that the Seller cannot stay in the Property following the Sale. Finally, many first lien holders will limit the amount they will allow to be paid to a second lien holder, further complicating negotiations for the short sale. The lender will usually submit a “term sheet” to the borrower indicating the terms to which lender(s) will agree. If the Seller and Buyer do not modify their contract to comply with the lender(s) terms, the lender(s) may not permit the short sale to proceed. Seller is strongly advised to seek legal and tax advice regarding review of the term sheet. Brokers cannot and will not give legal or tax advice on the lender’s term sheet or its effect on the Buyer and Seller’s agreement or on the consequences to Buyers and Sellers should they proceed to close. There is no assurance that once the lender(s) have begun short sale negotiations, they will discontinue the foreclosure process.
4. SELLER’S CONTINUING LIABILITY ON THE DEBT: Many borrowers who attempt a short sale are concerned with whether the borrower is released from any further liability to the lender(s) or whether the lender can pursue the borrower for any unpaid balance of the debt. Some refer to continuing liability as a deficiency judgement. Generally speaking, a deficiency judgement is the right of a lender to pursue the borrower for the difference between the amount the lender receives and the amount the borrower owes on the debt. Deficiency judgements in California are prohibited in certain circumstances.
1.) While deficiency judgement laws in California apply to foreclosure proceedings, these restrictions do not necessarily apply to lender(s) ability to pursue a borrower for unpaid balance on a loan following a short sale. A foreclosure is an involuntary legal proceeding resulting in loss of property by the borrower. A short sale, on the other hand, is a consensual agreement between borrower and lender(s). As a result, some lenders in negotiating a short sale will want the owner to sign a note for the balance of the unpaid principal. Other lenders will release the lien only but not forgive the underlying debt. Some lenders will “reserve their rights.” One of the reasons for the seemingly inconsistent lender terms is that the lenders fund loans in many states throughout the country and many states do not have the same anti-deficiency rules as California. Thus, whether lender retains the right to pursue a deficiency following a short sale becomes a negotiable term for each sale.
2.) Beginning January 1, 2011, a lender who approves a short sale is not permitted to seek a deficiency against the borrower if the loan is secured by a first Trust Deed on residential property containing 1-4 units. The January 1, 2011 law does not apply to (i) short sale approvals by junior lien holders or (ii) senior lien holders on other types of property or (iii) a Borrower who has committed fraud or waste.
- Purchase Money Loans: Loans given by lenders to purchase 1-4 unit properties, one of which will be occupied by the borrower, and seller-financed purchases are subject to “purchase money” anti-deficiency protection rules. Generally, this means that the lender cannot pursue the borrower for any deficiency after the property is foreclosed upon by the seller or lender, whether the seller or lender uses a non-judicial trustee sale or a judicial foreclosure. Refinancing a purchase money loan causes it to lose any purchase money protection it might have.
- Trustee Sales: If a lender forecloses by non-judicial trustee sale instead of by judicial foreclosure, that lender is barred from seeking any deficiency from the borrower after the trustee sale, even if the loan was not purchase money.
- Refinanced Liens: The anti-deficiency protections become much less clear for loans that are refinanced. Generally, loans that are refinanced lose their “purchase money” protection. Lenders extending refinances may be able to pursue a deficiency judgment against the borrower directly following a judicial foreclosure.
- Junior Liens: The anti-deficiency protections for Junior Liens are also somewhat unclear. Junior liens used to purchase the residence (such as 90/10 first and second) would have “purchase money” protection generally. However, junior liens that are refinanced or junior liens that are used to take out equity do not have “purchase money” protection. Such “non purchase money” junior lien holders may be able to pursue a deficiency judgement against the borrower directly after a Trustee sale by a senior lien holder or after a judicial foreclosure by the junior lien holder. Although the law is not entirely clear, home equity loans (HELOCs) may fall into this category. ATTENTION: See NEW LAW information regarding junior lien holders no longer having any deficiency rights after a short sale.
5. CREDIT AND TAX CONSEQUENCES:
Credit: All of the owner’s options discussed above will most likely have a negative impact on the owner’s credit and on the owner’s ability to finance or purchase property for some time. The credit impact and length of time the owner would have difficulty in obtaining a loan to purchase property again, or to be approved for any other credit transactions such as obtaining a credit card, leasing an apartment, or even to gain employment varies. Lenders may view short sales and alternatives differently depending on their own underwriting guidelines and those established by governmental or quasi-governmental bodies. To find out more information about the impact to your credit score, go to www.myfico.com.
Tax: With some exceptions, a reduction or discharge of a debt obligation by a lender results in income to the borrower. The income might not be taxable if the debt was being used to purchase, build, or substantially improve a borrower’s principal residence. Another exception exists if the forgiveness of debt results from a situation where the lender is barred by law from collecting the debt, as in a foreclosure of purchase money debt. Insolvency and bankruptcy rules can also shield a borrower from forgiveness of debt income. Generally, when any debt is forgiven by a lender, they are required to provide the borrower a 1099 and it will be up to the borrower to make the proper claim on their tax return to avoid debt forgiveness income. Some of these rules are temporary, and state laws and federal laws differ. Broker has advised Seller that if Lender agrees to accept less than full payment, the difference may result in taxable income to Seller even though Seller does not receive any cash proceeds from the sale. Seller may also be taxed on the gain in value of the Property from the date of Seller’s purchase to the date of sale, regardless of the amount of any existing Loans/Liens.
Professional Advice: Seller advised to discuss with an attorney, CPA or other professional of Seller’s choosing before (i) accepting any offer to present to lender or (ii) agreeing to any changes requested by lender to an already accepted contract.
6. POTENTIAL IMPROPRIETIES: It is an unfortunate reality that many persons, including real estate licensees, mortgage lenders, and attorneys, among others, have taken advantage of owners of underwater or distressed properties. Some of the schemes present themselves as “rescues” of the homeowner, promising to let them stay in the property, to protect their credit, or to provide payments to them after closing, and usually outside of the escrow. Both the California Department of Real Estate (DRE) (http://www.dre.ca.gov ) and the California Attorney General (http://www.ag.ca.gov )have issued written warnings of potential red flags in short sales and other rescue schemes. Some of these red flags are:
- No license: The DRE believes that a real estate license is generally required to negotiate any short sale.
- Up-front fees: No real estate licensee can collect any up-front or advance fee without having first obtained a “no objection” letter from the DRE and no up-front fees may be taken for arranging a loan modification.
- Surcharges: Charges by third parties that are not disclosed to the short sale lender and usually paid outside of escrow.
- Straw buyers and house flipping: Buyers misrepresent the value of the property to the short sale lender and flip the property to another buyer already in place.
- Other: Other potential red flags include: guarantees to stop the foreclosure; instructions not to contact the lender; transfer of title prior to close (often to a trust) as a condition of negotiating with the lender; the buyer is an LLC; the buyer wants a power of attorney from the seller; and the buyer hires the third party negotiator or wants to negotiate directly with the lender.
While most of the activities on the above list on their face are not fraudulent, they serve as warning signs that the owner and the real estate agents involved should proceed with caution.
7. BUYER CONSIDERATIONS: Short sales are often difficult transactions taking considerably longer than a typical real estate transaction to complete. There is no guarantee that the lender or lenders will agree to the terms of the purchase offer or that they will respond in any timely fashion or even respond at all. There is no guarantee that the seller will agree to any terms proposed by the lender as a condition of releasing the lien or the debt on the property. Buyers may expend money on inspections, loan applications, escrow fees and other costs that they will not be able to recover from anyone if the lender does not approve the transaction. Buyers may also have difficulty obtaining the return of their deposit in escrow, if the seller becomes non communicative during the short sale process. Generally, sellers also have the right to continue to give offers to their lender(s) even if they have a contract with an existing buyer. Brokers cannot give any assurances as to what will happen. Buyers are strongly cautioned that any undisclosed and unapproved payments to junior lien holders or to seller or to outside third party negotiators may be a form of lender fraud. Buyers are also strongly cautioned that writing offers on more than one short sale property with the intent to purchase only one such property could be a misrepresentation giving rise to legal claims by the seller including a claim for the buyer’s deposit.
8. BROKER ROLE: A real estate broker cannot give legal or tax advice in connection with any of the options available to the borrower nor can the broker suggest what is the best course of action for the owner. Unfortunately, the owner is faced with extremely difficult choices having a lasting impact on the owner. Owners are strongly cautioned that they must seek legal and tax advice in what is not only a choice impacting taxes and credit, but also personal issues affecting the owner and often the owner’s family. The broker’s role is to assist the owner with the actual sale of the property in a short sale transaction, not to provide legal or tax advice or to guarantee the best possible outcome for the parties, or to assure the buyer that any particular transaction will be completed. Brokers do not, and cannot, assure that either the Seller or the Buyer will perform on their agreement or that the lender(s) will agree to any of the terms presented. Brokers are not a party to the contract between Buyer and Seller.
9. BROKER AUTHORITY: Seller authorizes Broker to: (1) market the Property for sale, (2) contact lenders concerning lender’s approval of a Short Sale (C.A.R. Form ARC) and Seller agrees to give Broker any necessary information to negotiate with lender, and (3) advertise in the MLS and other advertising medium that the Property transfer, sales price and payment of commissions are subject to Lenders approval. If lenders will not cooperate, Broker may cancel the listing agreement.
(End of Short Sale Information and Advisory, California Association of Realtors Form SSIA)