Some Facts About The Short Sale Process

What is a short sale?

A short sale is a sale of real estate in which the proceeds from the sale fall short of the balance owed on a loan secured by the property sold. In a short sale, the bank or mortgage lender agrees to discount a loan balance due to an economic or financial hardship on the part of the mortgagor. This negotiation is all done through communication with a bank’s loss mitigation department. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender, sometimes (but not always) in full satisfaction of the debt. In such instances, the lender would have the right to approve or disapprove of a proposed sale.

Extenuating circumstances influence whether or not banks will discount a loan balance. These circumstances are usually related to the current real estate market and the borrower’s financial situation.

A short sale typically is executed to prevent a home foreclosure. Often a bank will allow a short sale if they believe that it will result in a smaller financial loss than foreclosing. For the home owner, advantages include avoidance of a foreclosure on their credit history and partial control of the monetary deficiency. A short sale is typically faster and less expensive than a foreclosure for all parties involved. A short sale is nothing more than negotiating with lien holders a payoff for less that what they are owed, or rather a sale of a debt, generally on a piece of real estate, short of the full debt amount.

What is a Lien Release?

A Lien Release is a release of the bank or lender’s security interest against a property upon receiving their accepted payoff. There can be multiple liens of various kinds on a property such as tax, homeowners’ association dues, and mechanic’s liens. The property ultimately will be conveyed with a clear title since all liens will have to be resolved.

What is a deficiency note, judgment or promissory note?

A deficiency note, judgment or promissory note may be issued when a lender approves a lien release but requires the home owner to pay the difference between the original payoff and the accepted short sale payoff. If this occurs, the bank or lender will indicated this clause prior to closing with the acceptance of the short sale. If this occurs, we can often negotiate a reduced amount due. The lender may execute a deficiency note, judgment or promissory note on a case by case basis, dependent on debt-to-income ratio. A financial institution may pursue the entire balance if the home is foreclosed upon.

What is a Satisfaction?

Satisfaction occurs when the bank or lender accepts the short sale as a complete satisfaction of the note. As a result, the lender agrees to release the lien against the property without threat of future collection on the note.

What is the timeline for a short sale?

The short sale, from the beginning to closing, can be a lengthy process and rather frustrating at times for the home owner. Each bank or lender handles short sale requests differently and some are more demanding than others. In today’s turbulent real estate market, financial institutions are struggling to keep up with the large volume of short sale requests received on a daily basis. Due to these circumstances, it is important to remain patient throughout the short sale process.

Do I have to talk with the lender?

During this difficult period, you typically will have had previous contact with the lender because of being past due on mortgage payments. When a short sale proceeds, all subsequent conversations with the lender will be handled by me and my assistant. Once you sign the Authorization to Release Information document (allowing me to represent you and negotiate on your behalf), all communications/negotiations will be handled by me.

How much time do I have?

It depends on how many months you are behind on your mortgage payment and your particular lender. In most cases, you will receive a foreclosure notice after failing to make a payment for 90 days. Please know that foreclosure proceedings vary from state to state. Once foreclosure proceedings have been issued, you typically have thirty days before the auction date.

As soon as you know that making mortgage payments will be financially impossible, you need to contact me immediately to begin the short sale process and thus avoid foreclosure proceedings.

Will I face any tax consequences as a result of a short sale?

The Mortgage Forgiveness Debt Relief Act was introduced in Congress on September 25, 2007, and became law on December 20, 2007. This act offered relief to homeowners who would formerly owe taxes on forgiven mortgage debt after facing foreclosure. The act extends such relief for three years, applying to debts discharged in calendar year 2007 through 2009. With the Emergency Economic Stabilization Act of 2008, this tax relief was extended another three years, covering debts discharged through the calendar year 2012.

Normally, United States law dictates that when a lender decides to forgive all or a portion of a borrower’s debt and accept less, the forgiven amount is considered as income for the borrower and is liable to be taxed.

However, after the signing of the Mortgage Forgiveness Act, amendments have been made to remove such tax liability and allow the borrower and lender to work freely together to find a common solution that is beneficial to both parties. This protection is limited to primary residences – rental properties are ineligible for relief – so consultation with a tax attorney is necessary to ensure that a borrower qualifies. The amount of forgiven mortgage debt allowed to be excluded from income tax is limited to $2 Million per year.

Regarding investment properties and non-owner occupied properties, please consult with a tax attorney.

Can I profit from a short sale?

A home owner will not have the ability to earn a profit from the short sale of his/her property. Upon a bank or lender approval, a clause will state the following:

“The seller is to receive no proceeds from the transaction”.

Banks and lenders will include this clause for two reasons:

1. The financial institution is taking a los on what is owed to cover the original payoff by accepting a discounted purchase price.
2. The financial institution will typically cover all closing costs including but not limited to delinquent real estate taxes, HOA fees, liens, public utilities and transfer costs.