Real Estate Short Sale Guide

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Short Sale Qualifications

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Many seller who cannot sell their home at the price imagined are now toying with the idea of selling their home as a short sale.

So what exactly is a short sale?

A short sale is when a seller sells their home for less than what is owned on their mortgage(s).  To avoid foreclosure, a lender will agree to a short sale by letting a new buyer purchase the home for less than the mortgage balance while the home is in a pre-foreclosure status.

Here are some steps to a short sale:

  • Seller signs a listing agreement with a real estate listing agent subject to a short sale with 3rd party approval
  • The agent finds a buyer who makes an offer for less than what is owed on the mortgage
  • The seller accepts the purchase offer
  • The seller ‘s lender(s) accept the buyer’s purchase offer
  • Transaction closes when the buyer can deliver the funds and then the lender releases the lien and the seller goes ahead and delivers the deed.

If the above happened as smoothly as it sounds, then it would be an easy transaction.  Well, it usually not that easy.

You need to be qualified to do a short sale by meeting all of the below requirements:

  1. The Home’s Market Value Has Decreased – Comparable sales will tell the lender(s) that the home is worth less than the unpaid balance.
  2. The Mortgage is in or Close to Default Status – Lenders typically didn’t consider a short sale if the payments were current but now it is difference.  Many lenders now want to avoid future problems.
  3. The Seller Has Entered into Hard Times – The seller must submit a hardship letter truthfully telling the lender why they cannot pay the difference upon sale and why they have stopped or will stop making payments on the mortgage.  These are not considered hardships: Bad purchase decisions, unhappy with neighbors, buying another home, pregnancy, moving into an apartment.  Hardships are instead: unemployment, divorce, bankruptcy, death, medical emergency/illness.
  4. Seller has no Assets – The lender will want to see a copy of the seller’s tax returns.  If the lender sees assets, the lender may not grant a short sale as they will feel that they have some money to pay the shorted difference.  Sellers with some assets may get a short sale but need to pay back the shorted difference.

Consequences of a Short Sale –

A short sale is dependent on the seller finding a buyer that is qualified.  If the lender rejects the offer, then the short sale may not take place.

Short Sale Tax Consequences: Due to a provision in the IRS code, debt will be forgiven and not taxed due to the Mortgage Forgiveness Debt Relief Act of 2007 which will only last till the end of 2009.

Blemished Credit Report: A short sale will show up on your credit score and will have effect on scoring but not as much as a foreclosure but creditors may not make that distinction.