Short Sales: Common Homeowner Questions and Answers
What is a short sale? In the world of real estate, a short sale refers to the sale of real property for an amount less than the amount owed on the property. In the short sale scenario, the bank agrees to accept less than the full balance due on the debt, and usually “forgives” all or a large portion of the difference.
How will the short sale affect my credit? Short sales are still a relatively new concept. Banks have the option of submitting the short sale to the credit bureau as “Paid in Full” or “Settled for less than full balance”. As far as your credit score is concerned, it is universally agreed that a short sale does not have the negative impact that a foreclosure has. Some have the idea that this is like a bankruptcy or a foreclosure but that’s far from the truth. In a short sale, the lender is simply allowing you to pay less than you owe.
If you are currently behind on your mortgage or facing foreclosure, the short sale will actually help your credit. How? Because once you are approved for the short sale, all collection activity will stop and you will avoid foreclosure.
Who benefits from the short sale? Short sales are a win-win situation. Lenders, sellers and buyers benefit from the successful short sale. Mortgagors get the majority of their money back. Sellers get the relief they need and are able to sell their property and avoid foreclosure and buyers can typically buy the home at or under the current market value.
Why would banks forgive the difference? To mitigate their losses, banks often accept a settlement of less than what is owed on the property. When faced with the option of getting the property “back” through foreclosure, a short sale often makes a much wiser business decision for the bank.
What is “negative equity”? Also known as being “upside down” negative equity is the difference between the value of an asset and the outstanding portion of the loan taken out to pay for the asset, when the latter exceeds the former. For example, if your car is worth $10,000 and you owe $15,000 on it, you would have a negative equity of $5,000. Negative equity can result from a decline in the value of an asset after it is purchased.
Some areas decline in value. In other areas, prices may remain flat so that the properties in that area do not appreciate.If a seller wants to sell within 2-3 years of purchasing their property, they may be in a situation where they have negative equity.
Why does my property have “negative equity”? A a few common reasons:
- Person bought at the height of the market and the market has now declined or paid more than the property was worth.
- The area has become less desirable for any number of reasons, so property values have declined.
- Person purchased the home with little or no money down and wants to sell within a few years of purchase… and the property value has not increased during that time. Therefore, costs associated with selling the property may create a balance due at closing,
- Person refinanced the home (with a high appraisal value) and now has little or no equity.
- Person bought in a brand new subdivision or recently developed area that has not been fully developed or has not appreciated (or has depreciated) in value.
- The market is soft because there is too much builder (new home) inventory or too many existing homes on the market (buyer’s market).
What if I owe what my home is worth? Even if you owe exactly what your home is worth, you may still need to do a short sale in order to pay for the costs of the sale (agent fees, title policy, and other seller closing costs.)
Why not just let my lender foreclose? Not the best idea. What is the first thing banks do when they foreclose on a property? Hand it over to a real estate agent to get rid of it quickly. The foreclosure process is a legal process. It involves attorneys and it costs money. Once they get the property back via foreclosure they must often sell it for much less than market value and pay agent commissions and all customary closing costs. It makes more sense for the bank to take at or a little below fair market value before foreclosing.
How long does it take? Short sale approval can take 30-90 days.
What if my home is already in foreclosure? Your foreclosure sale will usually be suspended during the short sale process.
Will my lender send me a 1099 on the debt forgiven? In 2007 the U.S. Congress passed the Mortgage Debt Forgiveness Relief Act and it is in effect until 2012. As a result of that act, borrowers no longer pay taxes on the debt forgiven on their primary residence. So if the property is your primary residence, then no, you should not receive a 1099 for the debt forgiven or have to pay any taxes on the forgiven debt.
How much will the short sale cost me? We strive to complete the entire short sale process without asking the seller bring any money to closing. In late 2007, some lenders changed their policies and there are certain expenses that the lender might not pay, such as unpaid Home Owners Association dues, certain escrow fees, and some minor closing costs. In most cases, these items total no more than $300 to $800. We will not know exactly how much they will be, if any, until we are closer to closing. It is a good idea to set aside $500 to $1000 for these incidental expenses.
Contact us today if you have any questions about buying or selling your dream home.
