Defaulting on mortgage payments can be a difficult situation.
Many people find themselves falling into default, or are already in
default, and don't realize that there are options available before
the bank takes the house away. A short sale is an excellent way to
avoid foreclosure, the credit damage of foreclosure and can offer
time and protection, as long as it is done properly by a qualified
A Short Sale or Short Pay is when the lender(s)
agrees to accept a sales price of fair market value for your
property despite the loan or loans totaling more than what the
property is worth.
In this scenario, when negotiated
properly with BOTH an attorney and experienced realtor involved,
the lender takes a loss on the property and writes off the
difference between what was owed on the property and the final real
estate short sales price. In most cases, the lender takes less than
what is owed on the property to fully satisfy the loan, but this is
part of the negotiation.
We attempt to negotiate for no deficiency judgments, no
promissory notes, nothing owed and no liability.
What is a short sale?
A short sale occurs when the property is sold for less than the
loan amount with the cooperation of the lender. It permits more
owner control over the process and less credit consequences than a
foreclosure. Not all lenders will accept short sales and not all
owners or all properties qualify for short sales.
What are the qualifications for a short sale?
Both your property and you have to qualify for short sale
How does the property have to qualify for a short sale?
Comparable sales must substantiate that your home is worth less
than the unpaid balance of your loan. These comparables are
identified in a document called a BPO, a Broker Price Opinion
How do I qualify for a short sale?
1. Typically you must prove a hardship that makes it impossible
to continue making loan payments. A hardship is the result of a
circumstance beyond your control that forced you into a position
where you can no longer afford loan payments. Some examples of
a. Unemployment or loss of a primary
b. Inability to work due to health crisis
Mounting medical expenses
d. Employment relocation
g. Death of spouse or
h. Divorce or separation
i. You must move
from your home
What if I am not experiencing a personal financial
It’s really my loan and the value of my home that creates the
For many people these days, their loans have adjusted up so
rapidly that it doesn’t makes sense to pay such high loan payments
for a property that has declined so much in value. For some lenders,
these factors alone spell sufficient hardship to qualify for a short
sale, especially if you are in default on your loan. The bottom line
they look at is will we lose less if we short sale than if we
What if I have assets?
Many lenders do not consider your asset-based status. They
generally just look at your debt to income ratio. If they do
consider your assets, they will probably approve the sale but may
require some payment from you.
Must my loan be in default?
Some lenders no longer require you to be in default on payments
to consider a short sale. However, they must be convinced by your
short sale negotiator that you intend to default if they do not
agree to a short sale. It can be challenging to convince your lender
that you will default tomorrow if you have not defaulted in the
past. However, ceasing to pay your mortgage puts you on the
track to foreclosure.
What is the objective of a short sale?
There are two objectives of a short sale. The first is for a
buyer to make an offer to purchase your property as soon as possible
for an amount in line with the market bottom for properties
comparable to yours. This is the job of the real estate agent. The
second is overseeing the short sale to insure it will be approved,
presentation of a multi-part package to the lender resulting in
approval of your sale, forgiveness of the loan amount shorted, and
mitigation of the resulting liabilities to you. This is the job of
The Real Estate
Working with Real Estate Agents/Brokers: Many people are
using real estate agents/brokers these days to negotiate their short
sales, and this is great as many of them are excellent at what they
do. However, we do recommend using an attorney in the process.
Either to assist with the negotiations for an approval if needed, or
to review the contracts and approvals sent by the lender to make
sure your legal interests are adequately protected. Real estate
agents are not attorneys and are also subject to liability for
guiding their clients in the wrong direction or not informing them
of any legal liability they may be facing. So utilizing an attorney
helps all involved, real estate agent and homeowner.
For our full service short sale negotiations we include
deficiency judgment, 1099 issuance and credit report negotiations
for every one of our short sale or deed in lieu of foreclosures. We
also offer these services on an ala carte basis. We work with
attorneys all the time and can readily recommend one.
How will a short sale impact my credit?
A short sale, or deed in lieu according to credit experts are
equally as damaging to your credit, although it depends on how many
months (if any) you were required to be late on payments, or if you
were already late on your payments. They come under a category
called ‘customer did not pay as agreed’. However, it is believed
that legislation may soon be enacted significantly minimizing credit
damage for short sellers. For now, there is one credit advantage a
short sale confers.
Currently, you will be able to obtain a home loan in two years,
whereas you will have to wait about 5 years for a foreclosure.
Please check with your lenders guidelines about obtaining a mortgage
as these are subject to change.
Will I have liability for the difference between my
lender pay off on short sale and the loan amount?
There are two types of resulting liability. The first is a
deficiency judgment which is a civil judgment in favor of the lender
for the difference between the amount paid the lender and the amount
of the loan. The other is tax liability. These liabilities are
Will I still owe the lender for the difference between my
lender pay off on short sale and the loan amount?
This is commonly called debt relief which is considered taxable
income. If your lender gets a deficiency judgment against you, there
will be no tax liability because you are not relieved of the rest of
the debt. If the lender does not pursue a deficiency judgment,
they may issue a 1099-C to you for which you will incur a tax
liability. This amount must be reported by you as income. However,
the recently enacted Debt Foregiveness Act of 2007 exempts principal
residence homeowners from payment of debt relief tax. You may still
have to report debt relief on your state return, however. Talk
to your accountant.
What are the benefits of a short sale as opposed to a
The primary benefits of a short sale are to limit and control
damage in these ways:
1. The highest possible sale price
is important to you since you may have tax liability for the
difference between the loan and the short sale proceeds or owe this
amount back to the lender in the form of a deficiency judgment. In a
short sale, you take proactive steps to receive the highest possible
price on the open market. In a foreclosure, the price will always be
less, which increases your liability.
2. If you take
action so the lender does not have to foreclose, the lender will be
more inclined to legally forgive the amount they are shorted instead
of obtaining a deficiency judgment against you (if you fall in that
category; see deficiency judgment, above).
credit will be negatively impacted for 3 to 5 years depending, but
this is much less than a foreclosure and showed that you tried to
mitigate your circumstances instead of walking away and doing
4. To be proactive and in control of your
life. In a short sale, you are in charge. You hire your negotiator
and the agent to list your property for sale. You decide what the
list price should be and you respond to the offers that are
received. You are involved when we negotiate acceptance of the offer
by the lender. We work with you and the lender to minimize any
resulting liability to you. You know when the time is right to move
on to another home. You feel far more empowered because you are in
control and have taken the best steps to minimize and control your
When Should I begin the Short Sale process?
As soon as you understand that you will have difficulty making
your payments. You do not have to be in default on payments. The
sooner we can begin the negotiations with your lender, the greater
the chances of a successful resolution at the highest possible sale
What does the short sale process consist of?
The short sale is a multi-step process consisting of the
1. Pre-qualification of your home and you.
2. Pre-qualification of the lender.
3. Hiring the real
estate agent, setting the list price, and a schedule of price
4. Analyzing and packaging your financials.
5. Documenting predatory lending violations by the
6. Negotiating offers with the lender.
Negotiating post-sale liability and credit reporting with the
How Long Does a Short Sale Generally Take?
It can take too long to even be reviewed by your lender before
the foreclosure sale or the buyer withdraws the short sale offer.
That’s why it is important to begin the process as soon as you know
you are challenged. Typically a short sale is completed within a few
months from the time we have an accepted offer to submit to the
lender. If the foreclosure trustee sale is imminent, we have
successfully negotiated a short sale in as little as a few weeks.
Timing depends on how quickly we can begin negotiating with your
lender and how receptive they are to working quickly on files. The
sooner, the better.
Can the process be expedited if I am facing foreclosure
or an auction date has been set?
If you are imminently facing foreclosure or even if an auction
date has already been set, the process can be expedited, but this
depends. Why wait this long and deal with the resulting stress.
Be proactive. Don’t wait until the last minute and don't ignore the
notices sent to you by your lender. If you are not sure what they
mean, we can help you review them.
It all sounds so negative. Where are the positives?
Losing your home is high on the list of life challenges. But, it
can represent an opportunity to realize that life is so much more
than the temporary loss of a home that has become too expensive. Do
you have family by your side? Are you healthy? Do you have a faith
in something greater than yourself? Life is full of challenges. It
is all up to you how you respond to them. You will be able to have a
home again in a few years and in the interim, take a break from
house payments. Lease a nice house. Pay a lease price and sit back
and count your blessings as you save the down payment. Then, when
you’re ready, scoop up a deal on your next home. Maybe this time you
will be a short sale buyer yourself.
Why are we different from other short sale
When you speak with us you will know that you have found highly
skilled licensed professionals to get you through what can be a
complicated, lengthy process in the best possible way. With us in
your corner, you will feel empowered instead of disempowered. You
will understand that there is light at the end of a tunnel that is
not as long as you thought.
Why would a borrower want to do a Short Sale?
Short Sales are a benefit to homeowners because they are
typically able to stop mortgage foreclosure and when negotiated
properly prevent the lender from suing the homeowner. Deficiency is
the difference between what the lender would have received under the
contract and what the property finally sells for. In California, this
shortfall can often be hundreds of thousands of dollars.
entering into a voluntary agreement with the lender, you ultimately
stop foreclosure and your credit report does not merit a FORECLOSURE
entry. This puts you in a much better position to qualify to buy
another property in the future, especially with current FHA
Through our negotiation process,
we negotiate for the lender to forego suing you for any monies which
they write off associated with the Short Sale transaction.
Short Sale transaction also provides peace of mind and
predictability because you know exactly when the sale will close,
and thus when you will need to vacate the property. There's no risk
that sheriff's deputies will come to your door one morning to evict
What are the tax implications of a Short Sale?
The tax situations of individual borrowers are different, but in
general, any 1099 income generated by a Short Sale is usually offset
by the loss the borrower took on a bad investment. Often, critics of
Short Sales look only at the 1099 income without considering the
benefit of the offsetting deduction for the loss on the property.
The bottom line on taxes is that the tax year in which the
borrower completes the Short Sale is a complicated one, and it is
critical to have a Certified Public Accountant prepare taxes for
that year. It is easy to miss the deduction. Don't let it happen to
you. To our knowledge we have yet to hear from a client who has had
to pay on an issued 1099 because of all of the exclusions. It is
important to speak to your CPA in the year in which you experience
the loss, we unfortunately are not tax professionals and are unable
to advise or assist you on these matters.
The above is for
educational and information purposes and does not constitute tax or
legal advice. For information about your individual situation,
please consult with a licensed tax professional or attorney.