Short Sales - FAQ

What is a Short Sale?

The sale of a house in which the seller owes more than what the total payoff to the lender of record is.

Why would a lender accept a Short Sale?

Lender's are in an economic crunch. Either they can accept a short sale and still write off the loss on their taxes or they can foreclose. While foreclosing, the lender will incur costs for processing the foreclosure, taking chances of vandalism and liability costs, as well as maintaining the property until the property is sold.

What options does a homeowner have when the homeowner needs to sell?

1.  Sell the house and pay the difference to the lender.  
2.  Walk away and give the house back to the lender (Deed in Lieu).
3.  Make a deal with the lender to accept less than the loan amount (Short Pay).
4.  Walk away and the property forecloses.

What hardships would qualify a seller for a Short Sale?

1.  Death, family illness or injury
2.  Job relocation
3.  Job loss or significant loss of income
4.  Divorce or split of domestic partners
5.  Adjustment in mortgage payment or unforeseen increase in living expenses

What documentation will a seller have to provide to the lender?

1.  Letter of Authorization (for the Broker to act on the behalf of the seller)
2.  Reference Mortgage loan number, contact phone and fax numbers. (including 2nd loans, HOA, etc.)
3.  Hardship Letter
4.  Two most recent years tax returns and W-2's
5.  Last three paycheck stubs
6.  Three most recent bank statements and all income source
7.  Monthly expense breakdown

What other possible documentation will the seller have to provide to establish hardship?

1.  Declaration of divorce/separation
2.  Bankruptcy discharge
3.  Proof of unemployment insurance
4.  Proof of job termination (pink slip)
5.  Medical records
6.  Death Certificate

What are the advantages for the seller to complete a short sale?

1.  No out of pocket cost to close escrow.
2.  Fewer stigmas than a foreclosure.
3.  A short sale raises fewer legal issues.
4.  Less damage to credit than a foreclosure or bankruptcy. However, since most banks will not approve a    short sale unless the seller is in default and can show a true hardship, the late or no payments will show on the credit report for 7 - 10 years.

What are the disadvantages or consequences to the seller for completing a short sale?

1.  Seller receives no monies at the close of escrow.
2.  A short sale can make a home harder to sell.
3.  There is damage to the credit score.
4.  Tax Implications-this has to do with "Debt Forgiveness." The lender of record will be able to write any loss off in their taxes. The IRS realizes this is money they are not receiving. That is when the IRS goes after the seller. The seller may be liable to pay taxes on the shortage amount. The IRS sees this money as income earned. That is why the seller needs to seek the advise of a financial/tax specialist  or an attorney.