Short Sale (In a nut shell)

Disclaimer:

The following text is offered as general information and not intended to be the ultimate source with regards to a short sale or foreclosure.  The information was accumulated by the web site owner through personal experience, research and practicing as a real estate agent in the state of California.  If legal or other expert assistance is required, the services of a competent professional should be sought. What may be acceptable in one state may not be in another. Therefore, it is always recommended to follow the laws and regulations of state and local governments as well as the Internal Revenue Service rules, which change from time to time.

Short Sale (definition):   Simply said,   “The proceeds from the sale of a property will not completely satisfy the repayment of the loan (or loans) against the property”.   Without being fully aware of their options, many   property  owners  choose the foreclosure process .   The  “short sale” option  prevents  foreclosure and typically has less impact on credit than a foreclosure.   A short sale will also allow the seller to repurchase within 12 to 24 months after closing.  Currently,  the owner of a foreclosed property  will not be able to qualify to purchase another property  within 5 to 7 years of the foreclosure.

Not everyone will qualify for a short sale:  First of all and foremost, a hardship must exist with the seller.  That is,  a reason why payments are not being made.  Examples of a hardship are: Loss of job or salary reduction, divorce or separation,  an illness, medical bills, business failure, too much debt, mortgage payment increase,  a  recent loss of a close family member, such as a child or spouse.

Beware of the IRS:  Recently (2008) a law was passed to help sellers avoid paying taxes on the short fall of the loans ( the  money not paid back to the lender to satisfy the  debt) .  The IRS considers the difference as income or gain and is therefore taxable. This  applies to certain conditions  regarding the  loan secured by the property.  Every situation is different so some loans may not qualify . Please consult a tax professional for updated advice and guidance.

What is the main difference between a foreclosure and a short sale?  Most lenders will not consider a short sale unless the seller is behind  in a payment or two, however, we are seeing some lenders consider  the  short sale option without having missed a payment.  From the time of officially missing the first payment,  It  takes  6 months and 3 weeks to complete the  foreclosure process ( California) .  It will take  5 – 7 years before  the seller  is eligible (by most lenders) to purchase another home after a foreclosure and usually damages a credit score,  in some cases, over  200 points.  A  short sale will normally allow the seller to repurchase a home within 18 – 24 months and will typically does not effect the credit score as much as a foreclosure. 

Timing is critical.   The sooner the seller begins the short sale process the better.  Finding a buyer  will usually take 30-90 days and lenders vary in responsiveness ( also  depends on the expertise of the individual working with the lender) .  Due to the high volumes of foreclosures and recently, short sales, most lenders tend to be slow in responding .  Sellers (or sellers representative) need to be   persistent  and  have a high level  of stamina to accomplish a short sale.  Keeping  copious notes of each conversation with the lenders representative  and maintaining accurate records  is critical ( just in case the lenders representative is replaced and/or files are misplaced).  It does  happen