Why Short Sale?
Government Program = NO COST TO YOU
Short Sale Frequently Asked Questions
What is a Short Sale? A short sale is the lender agreeing to settle the debt owed on the property for less than the full amount. “Settled” means that the lender is writing off the debt, and that they are not going to collect the money that was lost by filing a deficiency judgment in the future.
How will I know if I will qualify for a short sale? Brandon Long can tell you over the phone whether you will likely qualify. Brandon has direct connections with underwriters from major national lenders whom he works with directly. The overwhelming majority of his clients are approved for a short sale because 1) Brandon is knowledgeable on how to submit the short sale package in such a way that the lenders will approve them and 2) Brandon has a tremendous amount of experience with short sales and negotiating with the lenders.
Do I need to have a major hardship to do a short sale? This is another common misconception. At Regional Realty & Investment’s we have done 100's of short sales for borrowers who have absolutely no financial hardship to speak of. There are many reasons that lenders will agree to a short sale aside from a financial hardship. To find out about your particular situation, call our office. It is very, very rare for one of our short sales to be denied due to a lack of hardship.
How will a short sale affect my credit? This is a great question as there is a lot of misinformation on the internet about this topic. A short sale is recorded on your credit report as “debt settled for less than the amount owed.” This typically will result in a relatively minor hit on your credit compared to a foreclosure or late payments on your mortgage. We say ‘”typically” because it affects everyone’s credit differently. The more established your credit, the less of an impact it will have on your score. The reason you often hear and read that a short sale will drop your credit 100 points or more is that many people, when they do a short sale, stop making their mortgage payments. If you stop making your mortgage payments for 4 months, regardless of whether you do a short sale or not, 4 months of missed mortgage payments will have a significant negative impact on your credit. In other words, it is the missed mortgage payments that have the big impact on your credit, not the short sale itself. With this said, if you are already behind on your payments, you have already incurred the majority of the hit that a short sale will have on your credit. Doing a successful short sale at this point will insure that your debt is settled with your lender. If you are current on your payments and can stay current throughout the short sale process, you will save your credit to a large extent. Finally, if you do stop making your mortgage payments, there are various credit repair agencies that can repair your credit by removing late payments from your credit report after a short sale.
Will I have to pay federal taxes on the money my lender writes off in the short sale? There are exceptions that most people who do a short sale qualify for that exclude them from having to pay taxes on their short sale. Thanks to the Mortgage Tax Debt Forgiveness Relief Act that George W. Bush signed into law in January of 2008, most homeowners who do a short sale on their primary residence pay no taxes on the loss that their lender incurs in a short sale.
Will I have to pay CA state taxes on the money my lender writes off in the short sale? Internal Revenue Service (IRS) recognized that the debt written off in a short sale does not constitute recourse debt under California law, and thus does not create so-called “cancellation of debt” income to the underwater home seller for federal income tax purposes. Following the IRS’s clarification, C.A.R. sought a similar ruling by the California FTB. Now with the FTB’s clarification, underwater home sellers also are assured that they are not subject to state income tax liability, rescuing tens of thousands of distressed home sellers from California tax liability for debt written off by lenders in short sales.
Can my lender go after me for the money it loses in the short sale? No. With the passage of CA SB 931 & CA SB 458, lenders cannot pursue any deficiency judgment after a short sale. All debts are considered settled "Full & Final" after a short sale in California.
What if I have a first and a second loan on my property with 2 different lenders (or the same lender)? Most people that we do short sales for have a first and a second loan, often with 2 different lenders. For the short sale to reach a successful close of escrow, both lenders have to approve the short sale and agree to settle the debt. It is important to note that both lenders have a vested interest in doing this. The lender with the first loan does not want to foreclose, and therefore is willing to give a little money to the second in order to get them to agree to the short sale. The second lender will get nothing if the first forecloses, so with the attitude that something is better than nothing, they will agree to take a fraction of what they are owed in order to avoid getting absolutely nothing. What is the difference between a recourse and a non recourse loan? A purchase money loan is considered to be a “non recourse” loan, while a loan that has been refinanced is considered to be a “recourse” loan. In the event of a foreclosure, the lender can pursue a deficiency judgment (pursue the seller for the money they lost in the foreclosure) on a 2nd lien that is a “recourse” loan (has been refinanced). In a short sale, thanks to CA SB 458, lenders cannot pursue any deficiency after close of escrow regardless of whether the loan is “recourse” or not. In a short sale, all debt is "settled."
How will I know that I am being released from the debt? Prior to the passage of CA Senate Bill 931 & CA Senate Bill 458, lenders could pursue deficiencies on recourse loans in California after a short sale, assuming the seller's agent did not negotiate a "Full & Final Satisfaction of the Debt." SB 931 applies to first liens, SB 458 applies to second or junior liens. Now, as of July 2011, with the passage of CA SB 458, lenders can no longer pursue a deficiency on first or second loans after a short sale in California. In other words, they must take whatever they get in the short sale and call it a day. What are the advantages of a short sale vs. letting my home go to foreclosure? The primary advantage to doing a short sale vs. walking away and letting your home go to foreclosure is that in a short sale the debt is settled and you no longer owe the bank any money. If your home goes to foreclosure, you may still be liable for the deficiency in the event that the bank files a judicial foreclosure. A secondary (but still very important) advantage is that in a short sale, your credit takes much less of a hit compared to a foreclosure. The impact on your credit will vary depending on how established your credit is at the time of the short sale or foreclosure. Finally, Fannie Mae & Freddie Mac revised their guidelines in August of 2008 with regard to how they view borrowers who have filed bankruptcy, gone through foreclosure or done a short sale. Through these new guidelines, they are severely penalizing those who go the route of foreclosure or bankruptcy, and rewarding or encouraging those who do short sales, which they view as the borrower doing the responsible thing in light of the circumstances. Per recent Fannie Mae / Freddie Mac guidelines, borrowers who file bankruptcy or go through foreclosure have to wait up to 7 years to buy another home. By contrast, the new guidelines stipulate only a 12-24 month waiting period after a short sale, so borrowers who do a short sale can buy again in just 1-2 years.
Are there any advantages to letting my home go to foreclosure vs. doing a short sale? We have yet to hear a coherent argument for letting your home go to foreclosure vs. doing a successful short sale. Depending on whether you have a recourse or non-recourse loan, when you let your home go to foreclosure you either run the risk of being liable for the deficiency amount or liable for the income taxes on that loss. Secondly, if you foreclose, your credit will drop up to 400 points and you will not be able to buy a home or get any decent credit for up to 7 years. Compare this with a short sale, in which the lender agrees to SETTLE the debt for less than the amount owed. If you have recourse loan, you may be liable for income taxes on the lender’s loss (just as in a foreclosure) but you will not be liable for the deficiency (and if you qualify for the “Insolvency” exclusion, you will avoid the income taxes as well). Further, the loss that the lender takes in a short sale will be MUCH LESS than the loss the lender takes at the end of the foreclosure process. The foreclosure process takes months & months, at the end of which the lender has to process the property through its overwhelmed system (another 3 -5 months) and then put the property back on the market. Finally, the impact on your credit from a short sale will be significantly less than with a foreclosure and you will be able to buy again within 2 years, compared to up to a 7 year waiting period to buy a home after a foreclosure. How much will a short sale cost me? A short sale costs the seller nothing – the lender pays all closing costs, escrow fees, commissions etc. The lender may also pay any outstanding property taxes.
How long will a short sale take? The short sale process typically takes about 2 - 4 months, start to finish. It can take longer depending on how backlogged the lender is. You can live in the property for the entire duration of the short sale or you can move out.
Do I need to be behind on my payments to do a short sale? You do not need to be behind on your payments or have been late on a payment to do a short sale. Although, lenders are more motivated to do the short sale if you are not making payments.
Do I need to continue to make my HOA payments when I do a short sale? How about my property taxes? If possible, you should keep up to date on your HOA as lenders will not pay this and all HOA liens must be paid prior to close of escrow. If you cannot afford to pay this, we will do our best to get the buyer to pay this through escrow. We can typically get the lender to pay delinquent property taxes through escrow.
Who will be negotiating my short sale with the bank? Do you do this in your office or do you sub it out to an outside company? We have negotiated 100’s of successful short sales and handle every aspect of the short sale process. We do not farm any part of the negotiations out to an outside company and recommend you be extremely skeptical of any agent or attorney who uses an outside company to handle their short sale negotiations. Real estate agents & bankruptcy attorneys are solicited on a daily basis by the many “short sale negotiation” companies that have sprung up on the internet over the past couple of years. For the agents or attorneys that use these companies, it’s a very attractive set up: they just take the listing and refer the file out to the negotiation company, and wait to see what happens. In this situation, the agent has invested almost no time or effort into the deal, so if it closes, great, they pay a referral fee to the negotiator and keep the rest of the commission. If the negotiator tells them they couldn’t get an approval, or that the bank wants an unreasonable amount of money for the property, or the bank wants the seller to sign a promissory note, well, the agent has invested almost no time or money into the deal, so…who’s next?
Should I file bankruptcy? Will it allow me to keep my home? I’ve heard the lender cannot foreclose if I file bankruptcy. There are 2 types of bankruptcy commonly used by individuals – Chapter 7 (“Fresh Start”) and Chapter 13 (“Wage Earner”). Chapter 7 can enable individual filers to wipe away debts such as credit card and medical bills so they can continue to make their mortgage payments. Chapter 13 involves setting up a 3-5 year repayment plan to repay your debts. Chapter 13 requires that you are earning a steady income, as you will be repaying all of your debt. Both have a very negative impact on your credit and remain on your credit report for 10 years. Because of the new 2005 bankruptcy law, which raised the bar for people to qualify for Chapter 7 "fresh start" bankruptcy proceedings, fewer and fewer people pass the “means” test to qualify for Chapter 7 and for this reason can only qualify for Chapter 13 bankruptcy (a 3-5 year repayment plan). While both Chapter 7 and Chapter 13 can temporarily delay foreclosure proceedings, neither will allow you to keep your home unless you can bring your mortgage current. If you would like more information on whether a bankruptcy is right for you, I recommend you consult a competent bankruptcy attorney.
Can any agent do a short sale? Absolutely not! Short sales require a tremendous amount of time and expertise, and if you do not know what you are doing, they often go to foreclosure and then the agent does not get paid. If an agent is not extremely experienced at doing short sales – in other words they have done at least 100 of them in the current downturn – then we would not recommend using them. You get one shot at doing a short sale – if your agent does not know what they are doing and has not learned the many tricks to the trade, you will likely find yourself being asked to make a cash contribution, sign a promissory note for the balance or worse, be denied by your lender or lenders and go to foreclosure. In other words, let the inexperienced agents and/or attorneys learn the short sale process on someone else’s property.
Why should I use Brandon Long with Regional Realty? Brandon is confident that he will do the most effective job at marketing your property (remember, we have to generate offers from qualified buyers & sell your property) and because he is one of the most experienced and the most effective short sale negotiators in Southern California. Brandon has done successful short sales with every lender that loans money in the state of California. He knows how to negotiate short sales so that his clients do not sign promissory notes, are given a full release from the lender and walk away with an approval that states that the debt is satisfied and settled. Brandon Long consults with each and every one of our sellers, prices & monitors each listing and is involved in the negotiation of every offer. Brandon has sold more homes over the past several years than just about any other individual agent/broker in Southern California, and has negotiated several hundred short sales in just the past few years alone.
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