A short sale is a negotiated settlement with your lenders as a result of a sale of the property to accept less than what is owed on the property to do one of two things.  The first is simply to release their lien or tie to the property.  This can be very dangerous because, although you are protected in a foreclosure from ongoing liability in most cases, in a short sale you may not be unless it is specifically negotiated.  The second option, which is always our goal, is to recieve a lien release and a full settlement of the debt for the amount of the proceeds. In some cases, especially in the case of Home Equity Lines of Credit and Cash Out Refinances, the lender may require an additional amount to settle the remainder of the debt.

With a few exceptions a short sale is free?  That is to say our fee and all of your closing costs are paid by the short sale lender.  There are a few exceptions when you need to setttle with the bank because you took out a Home Equity Line of Credit or a Cash Out Refinance.  You will still be responsible for the utilities and maintenance of the home and the HOA dues until close of escrow.  The debt to the HOA remains even after the foreclosure so it is far superior to allow us to negotiate a settlement with them as well if you are past due.  In almost, 85% of the cases, the short sale is completed with no cash out of pocket for the seller.

There are several incentives to do a short sale.  There are a couple of programs such as the HAFA program which offers up to $3,000 and the HUD Preforeclosure sale program which offers up to $1,000 dollars to the seller for completing their short sale programs. Bank of America has recently unveiled their pre-approved price short sales with incentives of between $2500 and $30,000 for a seller to do a short sale instead of a foreclosure   Chase has also been giving significant incentives up to $20,000 in incetives but the larger figures are very rare and dependent upon which investor you have. In addition to financial incentives, a short sale is better on your credit theoretically than a foreclosure.  Trying to settle your debt with the lender instead of walking away is just the right thing to do.  A short sale nets the banks more than a foreclosure otherwise they wouldn't do them.  This is helpful in improving our economy but more specifically the home values in a neighborhood.  It may not benefit you directly, but if home values had stabilized in 2008, you might be selling your home at a profit rather than considering a short sale.

The truth is there are only 2 ways to stop a foreclosure. Either pay the delinquent balance or come to an arrangement with the bank to modify the loan.  Obviously, it is not likely to modify the loan on very short notice so paying it may be the only viable option.  A foreclosure can be postponed by the filing of a bankruptcy but, contrary to some peoples opinion, this is no longer a one or two day process either. Much more commonly, we get a foreclosure postponed.  This can be accomplished by submitting a short sale package and a bona fide offer to purchase.  Our ability to do this is greatly affected by the amount of lead time we are given prior to a foreclosure date.  Many banks have a policy of not accepting initial short sale offers within 30 days of the scheduled foreclosure date.  Never pay an upfront fee for a short sale or an offer to stop foreclosure as they are likely scams.  If not, what is there incentive to do the work once they have been paid.  It is illegal for us to charge an upfront fee for a short sale.

The answer to this depends on your situation.  We are not attorneys so do not rely on this as legal advise but Arizona has two anti-deficiency laws that protect most homeowners. In either case, the laws apply to residential property of less than 2.5 acres that has been occupied at some point.  This means that it has been occupied by someone and that it is a residential structure at the time the mortgage in question was obtained.  It does not apply to vacant land or commercial buildings. 

 

If the loan was a purchase money loan whether an investor or owner occupied, they should be protected under the anti-deficiency statute.  This means that if the home goes to foreclosure the bank can not pursue the borrower for the remainder of the balance and makes the banks more willing to do a short sale with a full release of liabililty.

 

If it wasn't purchase money but a refinance with no cash out the law is a little unclear.  For the most part the lenders are treating these the same as purchase money.

 

If it was a cash out refinance, Home Equity Line of Credit or cash out second mortgage then the lenders are inclined to believe that they can collect from the borrower after a foreclosure and they may be CORRECT.  In these circumstances, it is even more important to short sale the home and SETTLE these mortgages.  Yes it may mean a little money out of your pocket (but not always) but it is a known quantity versus something that may pop up years down the road.

Since the credit scoring models are somewhat of a secret, we are not sure.  We can tell you, that of the people that have short sold their homes versus those that went to foreclosure, the short sales have had less (although not insignificant) impact on the ones who would share that information with us.  The late payments involved in a short sale have more of an impact on credit scores than the actual settlement does in many cases.  Doing a short sale or a foreclosure is a serious negative on your credit and should not be taken lightly.  We usually ask, " What is your credit worth to you?"  If the answer exceeds the amount you are upside down in your home then you shouldn't consider a short sale or foreclosure.  If the answer is less than the amount you are upside down then a short sale may be viable.

Short sales are typically treated the same as foreclosures and deeds in lieu unless the borrower was current  and paid as agreed at the time of the short sale (very rare and almost impossible to do).  It is not in the guidelines anywhere but common sense says an underwriter or credit model should look on a short sale more favorably than a foreclosure.

 

The required times mean that this is the minimum amount of time after the credit event before another loan of the specified type can be obtained.  Other factors such as ongoing credit, work history and income amounts will also effect your ability to obtain a loan. I have also included the waiting times for bankruptcy as well.  The waiting times are:

 

FHA

Again we are not CPA's and this information should not be considered tax advice.  In almost all circumstances the lender will issue a 1099 for the amount of the debt that is forgiven.  How this effects your personal tax situation depends on a number of things.  If you are living in your primary residentce, generally the amount gained can be written off in almost the same fashion as if the sale had been a capital gain on a primary residence as long as it doesn't exceed $250,000 for a married person and $500,000 for a married couple.  For an investor, this is really more of a tax advisor question because it depends on the overall basis in the property.  In most scenarios, the investor will have some tax liability as a result of a foreclosure or a short sale.  A more peculiar scenario is when a owner occupant is co-signed by a non-owner occupant, we have actually had this scenario and it depends on to which party the lender assigns the loss. In most cases the loss is assigned to the primary borrower and therefore they are treated as an owner occupant as outlined above.

Typically all the banks will ask for:

 

1)Two years tax returns including all pages and schedules.

2)Paystubs covering the immediately past 30 days.  If self employed, 1 year profit and loss.

3)All bank statements for the immediately prior 60 days including all pages.  Not the online statement.

4)Hardship letter stating the reason for default.

5)Letter of authorization authorizing our team to speak on your behalf.

 

In addition banks often ask for:

1)IRS form 4506 to authorize the lender to verify the information you provide

2)Copies of statements of other assets such as 401K and IRA's.

3)Signed and notarized affidavit of arms length transaction.

 

Many, many bankruptcy attorneys do not see the benefit of a short sale versus a foreclosure but in many cases the whole reason for the bankruptcy is the enormous house payment and the inability to sell the home.  We have had borrowers sell their home in a Chapter 7 and 13 bankruptcy and we have had borrowers dismiss their banrkuptcy after the short sale was completed.  We are very experienced in this area.  In some cases, specifically Chapter 13 cases, the removal of the debt can facilitate the need to re-modify the bankruptcy. On this one, call us for an individual consultation and if you need an attorney, we can help you out with that as well.

 

One of the biggest mistakes we routinely see, is clients waiting until after a bankruptcy is completed to short sale their home.  The short sale can still be done but it is much better on your credit to do the short sale before or during your bankruptcy.

These are questions that can not be answered for everyone.  We consider them ethical from the point of view that the bank agreed to a settlement offer where as they were forced to settle in a foreclosure.  In addition, we also must point out that we see many clients who are unable to sell there home even though they were not in any way "undeserving" of a mortgage.  NOONE expected us to go back to 1994 pricing.  The banks received government assistance and a bailout but none of us recieved any real assistance.  In the past, if someone lost their job or became ill, they would simply sell their home.  The current mortgage crisis which has dropped home values so low, was not caused by the individuals but by a perfect storm of economic conditions. The lenders didn't consider your market value when they continued to place more and more homes on the market or choose their agents based on their market times rather than preserving neighborhood values.  The banks continue to make decisions on the homes they own based on how fast they can get rid of it rather than what the actual values are.  Keep in mind, with mortgage insurance, many lenders are not losing a dime on the property that short sales

The HAFA program or Home Affordable Foreclosure Alternative is short sale version of the HAMP or the Homes Affordable Modification Program.  If you have received, applied for or declined a HAMP modification you may be eligible for the HAFA Program and receive an incentive of up to $3,000 at closing for doing a short sale of your home. IF YOU DONT KNOW WHO THE INVESTOR IS ON YOUR LOAN PLEASE CALL OR EMAIL US TO LOOK IT UP.  Below are the guidelines for eligibility in the HAFA Program;

 

 

Must meet the HAMP threshold eligibility requirements;

 

Same as non GSE except:

Freddie Mac

Same as non GSE except:

Program Effectiveness

In most short sale transactions, the seller will be required to sign an Arms Length Affidavit or statement which says they "do not have any agreements written or implied that will allow the seller to remain in the property as renters or regain ownership of said property at anytime after the execution of this short sale"  That is pretty self explanatory.  Most of the time it also has to be notarized and to violate this provision is pretty clearly fraud.  Not all banks use exactly the same verbiage but the intent is generally the same.

 

In most short sale transactions, the seller will be required to sign an Arms Length Affidavit or statement which says they "do not have any agreements written or implied that will allow the seller to remain in the property as renters or regain ownership of said property at anytime after the execution of this short sale" That is pretty self explanatory. Most of the time it also has to be notarized and to violate this provision is pretty clearly FRAUD. Not all banks use exactly the same verbiage but the intent is generally the same.