Understanding Short Sales
A short sale occurs when the market value of a property is less than the outstanding balance on the mortgage. The lender(s) agree to accept less than what is owed on the property in order to avoid a possible foreclosure situation.
Upon approval from the lender, the seller is able to walk from the property limiting their potential credit damage and tax liability. You should note that short sales may not be for everyone, call or read on to see if it is a viable option for you.
- Is A Short Sale Right For Everyone?
- What are the CREDIT benefits or doing a short-sale vs. foreclosure?
- Are there TAX consequences of doing a short sale vs. foreclosure?
- Can my lender come after me for the difference?
- Will Bank of America (Countrywide) come after me for the difference?
- Why would I do a Short Sale if I could get an Approval Letter removing the deficiency balance?
- What is the difference between a 2nd mortgage and Home Equity Line of Credit (HELOC)?
- Can I do Short Sale with a Home Equity Line of Credit (HELOC) as a 2nd Mortgage?
- Will the Short Sale cost me anything?
- Do I Qualify for a Short Sale?
- Do I Have to Stop Making Payments on My Mortgage in order to do a Short Sale?
- Should I File For Bankruptcy?
- When should I begin the short sale process?
- How Long Does a Short Sale Take?
- How Do You Handle Short Sales? Do You Hire Other 3rd Party Negotiators?
- How Long Have You Been Doing Short Sales?
- Why Would My Lender Agree to a Short Sale?
- Should I Do a Loan Modification?
- Will the Bank Reduce My Loan Amount or Principle with a Loan Modification?
- Do I Need An Attorney to Do a Short Sale?
- What does your success rate REALLY mean?
- What is my obligation?
- How Do I Start the Process?
1. Is A Short Sale Right For Everyone?
NO! There are too many agents, especially here in the Phoenix Metro area, that make it sound like anybody can do one. Every person’s situation has to be assessed by a professional during a consultation. This is NOT a one size fits all solution. We have a collective team of experts to determine what will be the best outcome for you, your family and your credit. Contact Jeff Cameron at (480)502-7699 for a FREE, no obligation and completely confidential consultation about your Phoenix Area short sale.
2. What are the CREDIT benefits or doing a short-sale vs. foreclosure?
Let’s start with how it will be reported to the credit bureaus. Short sellers will have type of verbiage stating that they worked out a deal with their lender. Such terms reported by lender are “debt settled for less than what was owed”, “debt settled”, “debt setteled with agreement” or some other similar verbiage dependent on each lender. A short sale can possibly be less damaging to your credit and there are cases where the damage was as little as 25-150 points, compared to a foreclosure which mortgage and credit experts say that, after bankruptcy, having a foreclosure on your credit report is the worst result and will possibly reduce your credit score by over 300-400 points.
The next situation that plays out as to your credit damage is whether you are late on your payments or not. Once you stop making payments lenders will report you 30, 60, 90 days late all the way out to 150 days late which all contributes to the degradation of your credit. If you have two loans then the damage can be even greater. People who are late on their payments will suffer much more severe credit damage than those who never miss a payment and do a short sale. And YES you can do a short sale even if you are not behind on payments. (See below)
People who successfully complete a short sale may also qualify for a mortgage at a reasonable interest rate in as little as 12 months. So, if buying a home is a future goal, then a short sale is the better option for many families. Fannie Mae and Freddie Mac have recently changed their guidelines (August 2008) stating if you have a short sale on your record you may be able to buy another home in 24 months with financing that is ultimately going to be backed by them. While if you have a foreclosure on your record you will have to wait 5-7 years with financing backed by Fannie or Freddie.
3. Are there TAX consequences of doing a short sale vs. foreclosure?
Every situation is different for each person, so it is important to consult with a tax professional, CPA, tax attorney or someone who is qualified to make this determination for you. But here is some information to get you started, after which you should confer with a CPA to see if any of this applies to you. When you do a short sale or a foreclosure the lender is allowed to write off the loss and pass it on to you as income in the form of a 1099-C. The IRS considers this income for you and is taxable. For example, you borrowed $200,000 to purchase a home, but only were able to repay $150,000 in the short sale, you will receive a 1099-C for that $50,000 and possibly taxed on that according to your tax bracket.
Federal Taxes: The Home Mortgage Forgiveness Debt Relief Act of 2007 states if the property is your primary residence and the debt discharged was from your original “purchase money” loan, and then you will not have to pay the taxes for that amount. Further, if you did refinance and used the money to only improve your home, then you may be eligible for exclusion of the taxes as well. This act has been extended until the end of 2012. Find up to date information on this exemption and its rules at the IRS website HERE.
If you refinanced your home and pulled the money out for other expenses or it is not your primary residence, then it is possible that you may have to pay the taxes unless you are eligible for “insolvency.”
The IRS does not require you to pay taxes on the loss the lender takes in a short sale if, at the time of the short sale, you are insolvent. Insolvency means your debts (including your mortgage) exceed the value of all your assets. In other words, if, at the time of the short sale, your debt is greater than your assets, then you are insolvent. Ask your tax advisor if you are eligible for the Debt Relief Act qualifications or are eligible for “insolvency” and filing the IRS Form 982.
State Taxes: The state of Arizona follows the Federal guidelines.
It is important to understand tax implications can apply whether you do a short sale, deed in lieu or a foreclosure
4. Can my lender come after me for the difference?
There are two types of loans in AZ. That is “non-recourse” and “recourse”. A “non-recourse” loan is one you obtained to initially purchase the home. If you go through a non-judicial foreclosure process with a “non-recourse” loan the bank will not be able to come after you for the difference. If you do a short sale with a “non-recourse” loan, some attorneys feel you should be protected and not have to worry about the bank coming after you. You should consult a legal expert to determine what recourse your mortgage company could have.
If you have done any type of refinancing or obtained any cash out financing or have a Home Equity Line of Credit taken out after the date of purchase, then these are considered “recourse” loans and the ability is there for a bank to come after you for the difference if you go through a short sale. Unless you receive a short sale approval letter specifically stating that they will not pursue a deficiency judgment or some other verbiage of that sort. Every lender issues a completely different approval letter with different verbiage, so it is important to review you approval letter when it is issued. It is also our goal to always get you a full release from any liability from your bank when obtaining a short sale approval, and we have an excellent success rate of approval letters.
The ultimate goal of a short sale however is to get a full release in an approval letter which will absolve you from having to pay back any deficiency.
5. Will Bank of America (Countrywide) come after me for the difference?
Currently Bank of America (Countrywide) does NOT issue approval letters stating that they WILL NOT pursue for the difference. They will issue an approval letter stating that BAC and its investors as well as Mortgage insurance carriers reserve the right to pursue for the remainder of the balance. This is simply an issue that we have not been able to get around. The only instance being we have seen this done is where our client has hired attorneys to litigate and negotiate with top level executives and Bank of America’s legal department to get a letter separately issued directly to the home seller that they will NOT pursue the homeowner for the deficiency. We can facilitate putting the home on the market, receiving an offer, presenting it to Bank of American to accept in order to sell the home but it will NOT absolve you from having to pay back any of the difference. If you would like to hire an attorney to litigate with Bank of America to negotiate their release of a deficiency or talk about your other options you are free to do so at your own costs and we will be happy to work with them.
It is our understanding that after the short sale is completed, Bank of America’s recovery department to contact you about a trying to make arrangements to cover the difference. If you are unable to make any payments towards recovery they will then “charge off” the account and issue you a 1099-C, for what ever loss that is sustained by the bank.
6. Why would I do a Short Sale if I could get an Approval Letter removing the deficiency balance?
If you are worried about a lender coming after you or your financial future, you may not want to. But some home owners are willing to accept an approval letter without a deficiency removal for the following reasons:
- To stop the payoff clock and stop incurring future or larger deficiency, or payoff.
- To avoid a foreclosure on their credit.
- To settle the deficiency issue at a later date.
- To try and do the most responsible thing and get the bank the highest price possible for the home.
- To avoid any attorneys or additional fees out of pocket to dispose of the home.
- They simply will take their chances and file for Bankruptcy if the lender does try to collect.
- They simply will take their chances that the lender will not come to collect and “write off” the loss instead.
While any or none of these reasons may apply to you, it is important to understand every home owner has different levels of comfort and risk tolerance, personal goals, and opinion on the matter. You will always have the chance to review your approval letter with an attorney before selling your home and you can cancel your listing at any time prior to entering into an escrow with a buyer without any fees paid to us.
7. What is the difference between a 2nd mortgage and Home Equity Line of Credit (HELOC)?
A true “closed ended” second mortgage is one that is usually used to purchase the home and used as additional financing. While some seconds are not always used at purchase, in either event they are loans that are only secured by the property and may be wiped out if a first forecloses and there is not enough equity to pay them anything.
A HELOC is completely different in that, while it does include a lien on a property, it is still a line a credit that can stay open even if the lien is wiped out in a foreclosure. Many inexperienced agents do not understand this, and HELOC’s need special attention in order to do a successful short sale with full release for the borrower. Be sure to question whether your short sale agent understands the difference between these two types of loans.
8. Can I do Short Sale with a Home Equity Line of Credit (HELOC) as a 2nd Mortgage?
Yes, you can still do a short sale if you have a 2nd HELOC, however it can be more difficult depending on your lender. It is important to understand that HELOCS are a completely different type of loan, and the lender can allow you to do the short sale and release the lien on the property, but still leave the entire account open and thus you still owing the entire balance due. HELOC’s are like credit cards with a lien on a property. If the lien is released from the property, it doesn’t always mean the line of credit is closed. MANY inexperienced short agents do not understand this. A new trend that is happening is that the bank can sell the bad HELOC loan on the secondary “debt collection” market for a higher price (10%-20% of note value) than what the lender in first position is willing to pay (1%-3% of loan value). Because of this many HELOC lenders have become extremely more aggressive in requiring a 10%-30% payout from borrowers to allow a borrower full release from these loans. Banks such as Chase, Citi Mortgage, and National City have been the most aggressive so far requiring at least a 10% payout, and I am sure many more will plan to follow suit.
If the HELOC lender wants a 10%-30% payout to allow a short sale with FULL SATISFACTION, and the first is not willing to come up to that amount and other remedies cannot be found, it is possible that you as the borrower to cover the difference if you are looking for a short sale with FULL SATISFACTION, by bringing money to the table and/or signing a promissory note under certain terms.
After a consultation, we will be able to talk to you about your goals and likely scenario outcome. You will also not be obligated to commit to anything until you understand the terms the lender is requiring. If you do not agree to what you lender requires then you can cancel your listing at anytime without any fees paid and not go through with the short sale!
9. Will the Short Sale cost me anything?
Our real estate fees will cost you absolutely nothing, but there are fees that some mortgage companies do not allow for a short sale. These vary from company to company and will be addressed at approval.
10. Do I Qualify for a Short Sale?
In order to be eligible for a short sale and have us represent you we must be able to prove to the lender that you are a victim of a “hardship” and therefore unable to continue making payments on your mortgage. A hardship situation is one that is the result of some extenuating circumstance that forces the borrower into a position where they can no longer afford their mortgage payments. While every situation is different, some frequent examples of hardship include:
- Unemployment or loss of primary income source
- Inability to work due to health crisis
- Mounting medical expenses
- Employment relocation
- Failure of business
- Bankruptcy
- Death of spouse or significant other
- Divorce or separation
- Incarceration
It is best though to get a free consultation to see if you would qualify.
11. Do I Have to Stop Making Payments on My Mortgage in order to do a Short Sale?
Not Always. Just because you called you particular lender and they told you that you could not do a short sale unless you miss some payments, don’t believe it to be true. These people who answer the phones at these mortgage companies are low level personnel who do not care about your credit. Every borrowers situation is different and a short sale can be done while staying current on your mortgage payments. We have successfully closed many short sales where the borrower never missed a payment. However we are seeing more and more investors (owners of loans) deny short sale requests, due to the fact that there has not any missed payments, or if all other obligations are current. Fannie Mae, FHA, and some other investors are starting to claim this once again. The important thing to note, is that if you are able to afford your payments, you should continue making them until we devise a plan for you based on your goals and objectives. Many times in short sales you need to gather further information from the lender(s) to determine what they want and are willing to do, before voluntarily missing any payments. If you have a true hardship and simply cannot afford your payments, well then there is no need to worry. Be sure to call for a consultation before to decide to miss any payments if you don’t have to.
12. Should I File For Bankruptcy?
At this point in the market there are many attorneys who are advising clients to file bankruptcy in any situation and charging very high fees. For some this may be the correct solution. However it is important to understand that going through a bankruptcy, which ever kind you choose (Chapter 7 or Chapter 13), will not allow you to keep your home unless you bring your mortgage current. While you may be able to stay in your home while the bankruptcy is taking place, it also “freezes” the home from being able to be sold or do a short sale. You should speak with a competent bankruptcy attorney and decide if you want to sell your home before filing or when the filing is completed. We prefer you talk to an attorney prior to making any decisions and know what your options are. We have an attorney that will give you a 15 minute FREE consultation over the phone.
13. When should I begin the short sale process?
Immediately. Foreclosure and short sale situations tend to be extremely time sensitive and consuming for negotiations. The sooner we can begin the negotiations with your lender, the greater the chances of a successful resolution. There is no need to wait until the lender sends you a notice of default or initiates formal foreclosure proceedings against you. Time is of the essence!
14. How Long Does a Short Sale Take?
Depends on many different factors, such as who your lender is, how long it takes to get an offer, how many loans you have, if you are behind on payments, and the list goes on. With an inexperienced agent it could take 6-8 months. With our system, and contacts with each lender, we have an average turnaround time of 4 months. Our fastest record of getting a home on the market and an approval is 10 business days, but that is not the case for everyone. Each scenario is different.
15. How Do You Handle Short Sales? Do You Hire Other 3rd Party Negotiators?
We use the services of an attorney short sale negotiator. While many agents are negotiating their own Short Sales, their success rate is below 30%. That is a very low success rate. We found a Short Sale negotiator in late 2008 and have used their services since then. They get approvals on just about every one of our Short Sales, however, issues come up (lose the buyer, inspection of home, price declines or strings from the bank) that have kept our success rate at about 75%.
While some of the most successful Realtors close 20+ Short Sales per year, our negotiator has closed hundreds. She has connections at banks, is knowledgeable about their systems and their “back doors” to get things done. This is a law firm and that holds more weight than a Realtor in negotiating. They can and have threatened possible legal actions on banks to get approvals.
16. How Long Have You Been Doing Short Sales?
Since Jeff Cameron became a Realtor in 1994, he has prided himself on his work ethic and has negotiated with many lenders on behalf of his clients. Every situation is different, every lender is different, and the banks are changing ALL THE TIME. So the learning curve is tremendous. We use a law firm to negotiate, diligently work to keep the buyer involved and in the transaction, and have proven successful systems to sell Short Sales at the highest price.
Be sure to ask your agent these questions:
- How long have they been doing Short Sales?
- How do you negotiate your Short Sales, yourself or negotiator?
- How many lenders have they worked with?
- How many listings have they closed?
- And what is their success rate, of listings to closings?
Just because they have 25 short sale listings doesn’t mean they know how to close them and that they are the #1 short sale expert. Although, I think you will find them all claiming that #1 spot.
17. Why Would My Lender Agree to a Short Sale?
In most distressed mortgage situations, foreclosure is a last resort for all parties involved. The homeowner and the lender usually want to avoid foreclosure at all costs. That is why a short sale is advantageous to foreclosure and lenders are typically very motivated to pursue a short sale prior to foreclosure.
A short sale gives the lender the ability to cut its losses up front thereby avoiding the expense and time of a foreclosure and potentially greater losses. Lenders want to make loans; they do not want to be in the business of owning and managing real estate. Whether the lender chooses to go through with a foreclosure or agree to a short sale, they are taking a loss either way, but in many cases they would take less of a loss with a short sale and resolve the matter in a comparatively shorter time frame. In nearly every case, a short sale offers a significantly better return on the lender’s investment than a foreclosure does.
18. Should I Do a Loan Modification?
If you would like to try and keep your home, then yes, a loan modification would be the first option for you to pursue. If you want out, then a short sale is a better option. There are two ways to do a loan modification, the first is to do it yourself, and the second is with the help of a professional. It’s just like selling your home, you can do it yourself, but the chances of success are much greater if you employ the services of a professional.
To do it yourself you will be required to provide a substantial amount of financial information to your lender and the process takes about 2-3 months, and is very much like a short sale, however you are trying to show to your lender that you are not able to make your current payments, but you could afford to make payments on an adjustment on the loan in the form of interest rate reduction or a longer term loan.
If you do use a professional, please be sure to do your research on them first. Many companies are springing up everywhere, and many are not licensed, and do not have the proper Department of Real Estate contracts in place in order to charge you any upfront money. We know many reputable loan modification companies that we can refer you to, and have give you a fee consultation.
19. Will the Bank Reduce My Loan Amount or Principle with a Loan Modification?
We work with many loan modification companies and we have yet to ever see it in writing that this has ever happened. While there have been examples of deferment of interest on portions of loans, we have yet to see IN WRITING an example of this actually happening. Fed Chairman Ben Bernanke has been pleading with banks for the past 2 years for banks to do this, and President Obama has plans to entice banks to do this in order to obtain further TARP funds, but to this date we have never seen it. At this time we have only heard of lenders changing interest rates on loan, making the payments interest only for a set time, or increasing the loan term in order to reduce the payments for homeowners, but bottom line is when you sell the property you will still be responsible for paying back what you owe on the property. For some homeowners a loan modification is right for them if they plan to stay in the home for a longer term and anticipate a return in their equity in time, in order to pay off the lender in full if they ever decide to sell.
20. Do I Need An Attorney to Do a Short Sale?
I believe so, YES! First, you should consult with an attorney and determine if you are protected from the bank through a Short Sale. If not, you have to determine if Short Sale is still better or would a Foreclosure or Bankruptcy be your best route.
Next, an attorney has so much more weight in negotiating with the banks. That is why we use attorney negotiators.
21. What does your success rate REALLY mean?
When I talk about my success rate, it means the ratio of short sale listings I have taken, to the amount of short sale that have sold before a foreclosure occurred. It is important to understand, that I do NOT take every short sale listing I am presented with.
We believe in starting off with, “Can you save your home?” Then, “Are you Protected?” Once these questions are answered you determine if Short Sale is best for you. We have listed some homes with people still confused and canceled their listing when they realized there was a better alternative for them.
You are free to cancel your short sale at any time with no fees paid to The Cameron Team. The Short Sale company does have an up front fee that is non-refundable.If you are able to find other alternatives or solutions you can cancel your contract and keep your home. We are in the business of helping people and if some solution other than a short sale presents itself in order for you to keep the home, such as winning the lottery, you are absolutely free to cancel your contract. No Fees and No obligations!
23. How Do I Start the Process?
First thing to do is contact Jeff Cameron (480)502-7699 for a free 30 minute phone consultation to make sure a short sale is right for you, or fill out our website form. From there he will set up a time to come to your home and again counsel you in person and go over the entire process and his methods of doing short sales. There is NO OBLIGATION and NO FEES!
