Short Sale FAQs

Who Qualifies for a Short Sale?

In order to qualify for a short sale, the seller must prove to the bank one or more of the following conditions:

• Loss of job, and difficulty in finding new suitable job
• Job Relocation, when equity is deficient
• High medical expenses due to disability, injury or illness in family
• Divorce
• Unable to afford the loan from the beginning
• House needs unexpected major repairs
• Overextended Credit
• Changing Economy
• Adjustment in mortgage payment due to interest rate or an unforeseen increase in living expenses

Incidentally, these are also the most common reasons for a foreclosure.

Why Would a Lender Accept a Short Sale?

Why would a lender accept less than they are owed? The only alternative for the Bank is foreclosure. Just as with the borrower, there are significant consequences to the lender if they foreclose.

• The legal costs of eviction and repossession.
• The loss of loan payments during the foreclosure process until it is re-sold.
• A foreclosed house will need work before it can be resold.
• The bank must hold cash reserves for every property foreclosed and cannot lend those funds for profit.

After the foreclosure, the bank has two options: Sell it at the public trustee sale or try to resell on the market. If they resell in the market, they are penalized by the government by freezing 3-10 times the loan amount so the lender cannot lend those funds to another borrower.

Will my lender consider a Short Sale if the mortgage is current?

Sometimes, some lenders will accept a Short Sale file for approval on loans that are not delinquent. Other lenders will not accept the file until the loan is delinquent.

Do lenders approve all Short Sales?

What if a property needs work, can I still apply for a Short Sale?

Yes. In fact, lenders are more motivated to do a Short Sale on a property that needs work than on a property that doesn't. The lender knows the risk of loss goes up when they foreclose on a property that needs lots of work.

What is a Short Sale Packet and What Must Be Submitted?

A short sale package it used to determine whether a homeowner can qualify for a short sale. Most lenders already have a standard package which they will send to the borrower upon request. The borrower is expected to provide financial information to include income and household expenses.The seller must fill out forms with the Listing Agent to be submitted to start the Short Sale process - and submitted with any offer. These forms include:

• The Listing Agreement
• Authorization to Release form (to allow agent to discuss with bank)
• Hardship Letter
• Financial Statement
• Seller Net Sheet (a copy of the HUD form with offer)
• Contract (when offer is accepted)
• Buyer's Proof of Funds (with offer)

How Long Will the Process Take?

Both Sellers and Buyers need to realize this is a lengthy process. It can take 45-60 business days from the time the offer is submitted to the bank to the time the bank answers with an acceptance or rejection of the offer. Patience is required!

What are the Tax Consequences to the Seller of a Short Sale?

Prior to 2008, the Seller was sometimes required to declare the difference between the loan principal and the amount the bank received as income on their tax forms, and pay tax on it. In November 2007, a law was passed that changed this law.

Effective January 1, 2008, "Forgiven Mortgage Debt" (the difference between the principal and the amount the bank received) is excluded from taxable income. There are restrictions. In order to qualify for this exclusion, the house must be occupied by the owner as a principal residence (not a summer home, vacation house, rental property, etc.). Investors do not qualify. Please contact your accountant or attorney for additional information on the possible tax consequences based on your specific circumstances.