Top 10 Frequently Asked Short Sale Questions
1. What is a short sale?
A short sale is a type of agreement between the homeowner in the beginning stages of foreclosure and their lender(s), permitting the home to be sold for less than the current outstanding loan balance. The lender(s) will agree to accept less than the loan amount in order to avoid foreclosure. This short sale results in the buyer(s) purchasing the home at a discounted purchase price. The process can be timely and both parties should not expect to close for several months.
2. How much time in the pre-foreclosure process can seller(s) start a short sale?
In Illinois it can take 200+ days for an uncontested a foreclosure can proceed as quickly as 35 days from the date the notice to the borrower is filed.
3. Will a lender(s) approve a real estate short sale if the homeowner has equity in the home?
Lender(s) may choose to continue with a traditional foreclosure proceeding to regain title to the property if a property has some considerable amount of equity and dispose of it at a market price. With the current state of the real estate market, the home will most likely be over encumbered, hence the reason for the short sale in the first place. A surplus of homes for sale in the home’s market area may make the lender(s) think twice about taking title to the property.
4. What documents are necessary to proceed with a short sale?
Hardship letter detailing the circumstances behind the short sale
An executed sales contract
Preliminary HUD-1 settlement statement
Preliminary estimate of proceeds to the lender(s)
Financial condition of the seller, (i.e.; pay check stubs, bank statements, a personal financial statement and monthly budget assessment, etc.)
5. How is the seller(s) credit affected if they sell their home as a short sale?
Often the loan will report as "paid", “paid as agreed”, "settled for less than originally owed" or something similar on their credit report. It is up to the individual lender(s) to decide what to report. It is more advantageous for a short sale to be referenced than a foreclosure on a credit report.
6. Do lender(s) allow the seller to make a profit on a short sale?
The seller is not going to make a profit on the short sale. Homeowner(s) may have taken out equity via a previous refinance of the home, but the current loan balance is higher than the selling price of the home.
7. Will the short sale of the property be affected if seller(s) are in bankruptcy?
Yes, as most lender(s) will not consider a short sale if homeowner(s) are filing bankruptcy proceedings. A short sale is prohibited in bankruptcy.
8. Will the lender(s) require an appraisal on the home in a short sale?
Some lenders may only require a broker’s price opinion but some may require a full appraisal. The lender(s) will need some formal assessment of the value of the home in order to make a decision as to accept or reject the short sale offer.
9. Are there tax implications with a short sale?
As a short sale is a loss for the lender(s) and they can report the amount of the debt forgiveness to the seller. The circumstances are individual to the lender(s). If a formal tax form 1099 is filed by the lender(s), the seller(s) may be responsible for paying taxes on the amount of debt forgiveness. Seller(s) are encouraged to consult with their accountant regarding the tax implications.
10.Why do lender(s) allow a short sale?
It may benefit all the parties involved in the transaction. The seller is relieved of the mortgage they cannot afford. A costly foreclosure proceeding by the lender(s) is avoided and the buyer(s) purchase the home at the current market value.