The basics you need to know about a short sale. Top 10 questions.
Top 10 Frequently Asked Short Sale Questions
1. What is a real estate short sale
A real estate short sale is a form of agreement between the seller
of a home in the beginning stages of foreclosure and their lender,
allowing the home to be sold for less than the existing loan balance
outstanding. The mortgagee would accept less than the loan amount in
order to avoid a foreclosure proceeding. This short sale would
result in a substantially discounted purchase price for the buyer of
the home. The buyer would then proceed with the purchase of the home
much the same as in any conventional realty transaction.
2. How late in the pre-foreclosure process can you start a short
Depending on individual state law and regulations, a foreclosure can
proceed as quickly as 35 days from the date the notice to the
borrower is filed. For that reason, time is of the essence and you
should allow a window of no more than 60 days to effectuate a lender
approved short sale.
3. Will a lender allow a real estate short sale when the seller
has some a good amount of equity?
If the home has some considerable amount of equity, the lender may
choose to continue with a traditional foreclosure proceeding to
regain title to the property and dispose of it at a market price.
Given the current state of affairs with the real estate market, the
home will most likely be over encumbered, hence the reason for the
short sale in the first place. A glut of homes for sale in the
market area of the home may make the lender think twice about taking
title to the property.
4. What documents are necessary to proceed with a short sale?
The individual documents necessary to proceed with the short sale
will depend on the lender. Typically the lender will require
hardship letter detailing the circumstances behind the short sale. A
signed, valid purchase and sales contract, preliminary HUD-1
settlement statement and a preliminary estimate of proceeds to the
lender. There may be additional requests for more detailed
information on the financial condition of the seller, ie; pay check
stubs, bank statements, a personal financial statement and monthly
budget assessment, amongst other things.
5. Will the seller’s credit rating be affected if they allow a
short sale on their property to occur?
While it is up to the individual lender to decide what to report,
what often happens is the loan will report as "paid" on their credit
report. While that good news the bad news is that there will likely
be a reference that says "settled for less than originally owed" or
something similar. It is certainly more advantageous to have the
short sale referenced than to have a foreclosure on their credit
6. Will a lender allow the seller to make a profit on a short
By the nature of the transaction, the seller is not going to make a
profit on the short sale. They may have extracted equity from a
previous refinance of the home, but their current loan balance will
be higher than the selling price of the home.
7. If a seller is in bankruptcy, will that affect the short sale
of the property?
Absolutely, as most lender would not consider a short sale if the
homeowner is in the middle of a bankruptcy proceeding. Negotiating a
short sale between the parties is considered a collection activity
and such a negotiation is prohibited in bankruptcy.
8. Will the bank or lender require an appraisal on the home in a
Most lenders will require that a full appraisal be submitted in the
short sale package. Some may only require a BPO or brokers price
opinion. The lender 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 in the short of real estate.
Much like the issue of credit reporting, the circumstances are
individual to the lender. As a short sale represents a loss for the
lender, they can report the amount lost a debt forgiveness to the
seller. If a formal tax form 1099 is filed, the seller may be
responsible for paying taxes on the amount of debt forgiveness.
10.Why would a lender allow a short sale to occur.
Quite simply, it may benefit all the parties involved in the
transaction. The seller is relieved of the home they cannot afford.
A costly foreclosure proceeding by the lender is avoided and the
buyer purchases the home at an attractive price.