SHORT SALE - FAQ's

In a short sale, the lender agrees to settle the debt owed on the property for less than the full amount. "Settled" means that the lender is writing off the debt (which is why you get a 1099 after a short sale for the amount of debt forgiven) and that they are not going to go after you for the money they lost by filing a deficiency judgment in the future.

Call our office and we can tell you over the phone whether you can or may qualify. Most of our clients are approved for a short sale because:

1. We know how to submit the short sale package in such a way that the lenders will approve them.
2. We have a tremendous amount of experience with short sales and negotiating with the lenders.

Great question. A short sale is recorded on your credit report as "debt settled for less than the amount owed". This usually results in a relatively minor hit on your credit compared to a foreclosure or late payments on your mortgage. I say '"usually" because it affects everyone's credit differently. The more established your credit, the less of an impact it will have on your score.

You often hear and read that a short sale will drop your credit 100 points or more The reason 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.

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.

Last, if you do stop making your mortgage payments, there are several credit repair agencies that can repair your credit by removing late payments from your credit report after a short sale.

When you do a short sale, your lender is agreeing to settle the debt on the property for less than the amount they are owed. The IRS therefore allows them to write off this loss, which is why your lender will send you a 1099-C after the short sale.

There are several different scenarios with regard to whether or not you will owe federal income taxes on the loss the lender takes in a short sale.

"Debt relief" is considered by the IRS to be income for tax purposes. This means, if your lender writes off $50,000 on your short sale, they will send you a 1099-C for that amount, and you would include that when you file your income taxes. The "C" stands for "Cancellation of Debt" and the law says cancelled debt is taxable as income.

There are a few exceptions that most people who do a short sale qualify for that can exclude them from having to pay taxes on their short sale.

The Mortgage Tax Debt Relief Act that George W. Bush signed into law in January of 2008, allows:

1. Homeowners who do a short sale on their primary residence, and have a purchase money loan (meaning, they have not pulled cash out of their home with a cash-out refinance) pay no taxes on the loss that their lender incurs in a short sale.
2. Homeowners who have pulled out cash from their home but have put that money back into their home to "substantially improve" their home, also are excluded from taxes on the short sale.
3. If you pulled cash out on your primary residence but spent it something other than upgrading your home or if you are doing a short sale on a second home or investment property - is a taxable event unless you qualify for the "Insolvency" exclusion.

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. Restated, if, at the time of the short sale, you have more debt than you do money or assets, you are considered insolvent.

Many people who find themselves facing a short sale are in exactly this situation and are thus excluded from paying taxes on a short sale. We suggest you check with your CPA or accountant or go to the IRS website and look up IRS Form 982, which is the IRS form for debt relief and short sales. The IRS gives an explanation of "Insolvency" on the form.

Lastly, the time period for The Mortgage Tax Debt Relief has been extended to the end of 2012.

There are differences between the state and federal law. For example, the term of the California law was only until the end of 2008. As of Jan 2009, this law is no longer in effect.

California passed its own version of the federal Mortgage Tax Debt Relief Act, known as Senate Bill 1055. This bill conforms to the federal law described in detail above, but applies to California state income taxes on a short sale.

Debt forgiveness on non-recourse loans is not taxable in California. In simpler English, if your lender forgives debt on a purchase money or non-recourse loan, you are not subject to CA state income taxes.

There is pending legislation in the CA legislature at this time regarding the taxation of debt forgiveness on recourse loans. We suggest you review your specific tax scenario with your CPA or accountant and have them answer any tax questions that you have. We are not tax advisors and do not dispense tax advice.

Your lender cannot write off their loss on their corporate taxes, then send you a 1099-C so you have to pay taxes on the loss, turn around and report the short sale as a "settled debt" on your credit and then afterward go after you for the money. The point of a short sale is to get out from under the debt of the mortgage. This is why your lender will send you a 1099-C after the short sale. The "C" in "1099-C" stands for "Cancellation of Debt."

If you do not receive a full release from your lender, then, yes, you could be liable for the money the lender loses in a short sale or end up being forced to sign a promissory note to close the deal.

We do not ever recommend that our clients sign a promissory note or close escrow without a full written release from their lender(s).

For the short sale to reach a successful close of escrow, both lenders for the first and second trust deed have to approve the short sale and agree to settle the debt.

Both lenders have a vested interest in doing this. The lender with the first loan does not want to foreclose, and each 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.

A purchase money loan is considered to be a "non recourse" loan, while a "cash out" loan is considered to be a "recourse" loan. The difference between these two loans is that in a "recourse loan" the lender technically has recourse to go after the borrower for the money they lose in a foreclosure. I say "technically" because, for this to happen, the lender has to file a judicial foreclosure, which is rarely done in California. The overwhelming majority of foreclosures in California are "non-judicial" foreclosures, where the property is sold at a trustee sale.

It will be stated clearly on the bank's short sale approval. Your lender will state in plain English that they are "releasing the lien", "accepting a short payoff to satisfy the lien", "reporting the sale as a settled debt to the reporting agencies", "issuing a full satisfaction of the mortgage", "not pursuing a deficiency judgment", or some other variation that states they are settling the debt for less than what they were owed. Further, your bank will issue a 1099-C to you, the borrower, after the short sale, confirming that the debt has been written off and is settled. Your lender cannot write off the debt, issue you a 1099-C & then go after you for the deficiency.

The primary advantage to doing a short sale compared to, 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. Your credits impact will vary depending on how established your credit is at the time of the short sale or foreclosure.

In August of 2008, Fannie Mae & Freddie Mac revised their guidelines on how they view borrowers who have filed bankruptcy, gone through foreclosure or done a short sale.

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 24 month waiting period after a short sale, so borrowers who do a short sale can buy again in just 2 years.

1. 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.
2. 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).
3. 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, all while the market continues to drop.
4. 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.

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.

The short sale process typically takes about 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 whenever you wish.

No. You do not need to be behind on your payments or have been late on a payment to do a short sale although the lenders are more motivated to do the short sale if you are not making payments.

It is our belief that you will be best represented in a short sale by a competent, experienced real estate agent who works every day in the real estate business, will market your property aggressively in order to attract buyers, and who is experienced at doing short sales and negotiating with lenders.

If you have questions about the tax implications of a short sale, we recommend you seek the advice of a qualified CPA or tax accountant.

For filing bankruptcy, we recommend you seek the advice of a competent bankruptcy attorney.

Many attorneys seem to be preying on the fear and desperation of people facing foreclosure. Their websites use scare tactics to make people think that they would be crazy to do a short sale without first hiring an attorney, implying attorneys are the only ones qualified to interpret a short sale approval, and that hiring an attorney is a normal and accepted part of doing a short sale, like hiring an attorney for divorce proceedings.

The overwhelming majority of short sales are conducted by real estate brokers who are experienced at negotiating with the lenders and charge NO UPFRONT FEES for their services.

Many attorneys do not even negotiate the short sales themselves, and instead subcontract out all of the short sale negotiations. We feel, these short sale negotiation companies (known in the industry as "short sale mills") are absolutely the wrong entities to entrust with the negotiation of your short sale. See below . . .

No. There has been a good deal of misinformation put out of late regarding this law by attorneys looking to get into the short sale business. Be very wary of any attorney trying to distort or interpret the law for his or her advantage.

This law applies to foreclosure consultants - those who collect an advance fee for modifying loans or helping borrowers avoid foreclosure in situations where a Notice of Default has been filed on the property. This Act has an exclusion in it for licensed real estate agents.

Per CA Civic Code and the CA Assoc of Realtors, The California Foreclosure Consultant Act does not apply to real estate agents facilitating a short sale except in the extremely unusual event that an agent is:

1. Making a direct loan for a residence in foreclosure.
2. Acquiring an interest in a residence in foreclosure.
3. Receiving an advance fee before performing services for a residence in foreclosure.
4. Assisting an owner in obtaining the remaining proceeds if any from a foreclosure sale of an owner's residence.

99% of the short sales in CA have always been, and continue to be, negotiated and completed by licensed Realtors, not attorneys.

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.

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).

Absolutely not. Many agents have no interest in doing short sales because they 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.

1. Cash for you - No Cost to You! Upon closing of your short sale transaction, we will pay you a Moving Allowance from our real estate commission. The amount of this allowance will vary, but will be at least $1,000. Commissions are paid by the short sale lender and all services are free to you.
2. Effect on your credit: Foreclosure usually has a very negative effect upon credit. FICO scores could drop 300-400 points. After a foreclosure, the individual will need to wait 5-7 years to obtain financial backed by FannieMae or FreddieMac. A short sale has less damage to FICO scores. In as little as 24 months, a short sale seller may be able to qualify for financial backed by FannieMae or FreddieMac.
3. Logistically and emotionally superior: With a short sale, the seller has a great deal of control. The sale proceedings are the same as a normal sale (except you need lender approval). Seller can maintain occupancy until close of escrow. In a foreclosure, the bank will take title and secure the property. Oftentimes, with a foreclosed property; the home sits vacant and unattended for months. Friends and neighbors see the home neglected with "Foreclosure" stigma attached to the property.
4. Easier and more timely in order to find a new home: A short sale is easier for a new landlord to accept versus a foreclosure. Oftentimes owners of distressed properties move out prematurely. In a short sale, you will have 30-45 days of escrow. This is adequate time in order to find a new home.
5. Forgiveness of Debt: With a properly structured short sale, you will not owe any monies to your lender after close of escrow. All debts will be forgiven.
6. Ease of transaction: We will help the short sale seller complete all information required by the lender. We will negotiate with the lender and buyer on your behalf.

1. We will give you a cash Moving Allowance upon close of escrow. Very few Realtors will do this.
2. We are experienced, professional and will provide knowledgeable advice. Our principal has 25+ years in the real estate and mortgage lending fields. If a short sale is not your best solution, we will tell you.
3. We are truly full-service. We will help you complete necessary paperwork in order to qualify for a short sale. We will handle the marketing and sales processes. We will negotiate with the buyer and short sale lender. We will monitor and close the transaction. We will help you find a new home.
4. We will communicate with you! You will always know where you stand. We will continually update the timing schedule. We will advise when you should plan on moving.