What is a Short Sale?

There are alternatives to bankruptcy or foreclosure proceedings for homeowners/borrowers who can no longer afford to keep mortgage payments current. One of those options is called a “short sale.” Sometimes, to avoid going through the costs of foreclosure, a lender will sanction a short sale by allowing a homeowner to sell (allowing a buyer to purchase) the home for less than the mortgage balance while the home is in pre-foreclosure stage.

Sample steps of a short sale:

• Seller signs a listing agreement with a real estate agent subject to selling as a short sale with third-party approval.
• The owner, or if the owner has an agent, finds a buyer who makes an offer for less than the amount of the mortgage.
• Seller accepts the buyer’s purchase offer subject to the lender’s approval.
• Seller’s lender accepts the buyer’s purchase offer.
• Transaction closes when the buyer delivers the funds, the lender releases the lien and the seller delivers the deed.

The decline in market value of a property below the total debt owed on that property does not automatically

qualify a homeowner for a short sale. Banks take several factors into consideration when determining if it will allow for a short sale to occur.
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• The Home’s Market Value Has Dropped. Comparable sales must substantiate that the home is worth less than the unpaid balance due the lender. This unpaid balance may include a prepayment penalty.
• The Mortgage is in or Near Default Status. It used to be that lenders would not consider a short sale if the payments were current, but in many cases, lenders realize that other factors contribute to a potential default making them eager to head off future problems.
• The Homeowner Has Fallen on Hard Times. The homeowner must submit a letter of hardship that explains why they can not pay the difference due upon sale, including why the homeowner has or will stop making the monthly payments.

Examples of hardship are:

• Unemployment
• Divorce
• Medical emergency/sudden illness
• Bankruptcy
• Death
• Other unforeseen circumstances that caused financial hardship.

The Homeowner Has No Assets. The lender will probably want to see a copy of the owner’s tax returns and/or a financial statement. If the lender discovers assets, the lender may not grant the short sale because the lender will feel that the homeowner has the ability to pay the shorted difference. Homeowners with assets may still be granted a short sale but could be required to pay back the shortfall.
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A short sale is dependent on a buyer making an offer to purchase. If you do not receive an offer, you will not qualify for a short sale. So even if you meet all the other criteria, it is possible that no one will buy the short sale. It is also dependent on the lender accepting the buyer’s offer. If the lender rejects the offer, a short sale will not take place.

• Tax Consequences. If the lender agrees to the short sale, the lender may possess the right to issue you a 1099 for the shorted difference, due to a provision in the IRS code about debt forgiveness. Many situations are exempt from debt forgiveness, according to the Mortgage Forgiveness Debt Relief Act of 2007.

You should speak to a real estate lawyer and a tax accountant to determine the amount of short sale tax consequences, and whether you can afford to pay those taxes, if any.

• Blemished Credit Report. A short sale will show up on your credit report. It’s a pre-foreclosure that has been redeemed. Short sales affect credit ratings. While the damage to your credit report may not seem as bad as a foreclosure to you, creditors may not make the distinction.

Always seek legal counsel before attempting to pursue a short sale. A real estate agent cannot give you legal advice.

In March 2009, the Obama Administration published detailed program guidelines for the Making Home Affordable (MHA) Program. Mortgage servicers were authorized to begin modifications under the plan immediately. With the assistance of several government agencies, GSEs, and servicers – this effort involved the development and refinement of servicer guidelines, modification documents, and data collection and modeling tools. Key servicer documents and tools required to service HAMP loan modifications are stored and maintained on HMPadmin.com. This site provides general guidelines and overview documents available to the public as well as secure access to core tools and documents needed to complete the loan modification process. HMPadmin.com continues to evolve just like the Making Home Affordable Program. As new program updates are announced, the servicer documents and tools required to administer those programs are developed and added to this site to allow for a one-stop experience for mortgage servicers.

The Home Affordable Foreclosure Alternatives (HAFA) Program provides additional options to avoid costly foreclosures and offers incentives to borrowers, servicers and investors who utilize a short sale or deed-in-lieu (DIL) to avoid foreclosures. HAFA alternatives are available to all HAMP-eligible borrowers who: 1) do not qualify for a Trial Period Plan; 2) do not successfully complete a Trial Period Plan; 3) miss at least two consecutive payment during a HAMP modification; or, 4) request a short sale or DIL.

In a short sale, the servicer allows the borrower to list and sell the mortgaged property with the understanding that the net proceeds from the sale may be less than the total amount due on the first mortgage. Generally, if the borrower makes a good faith effort to sell the property but is not successful, a servicer may consider a DIL. With a DIL, the borrower voluntarily transfers ownership of the property to the servicer – provided the title is free and clear of mortgages, liens and encumbrances. With either the HAFA short sale or DIL, the servicer may not require a cash contribution or promissory note from the borrower and must forfeit the ability to pursue a deficiency judgment against the borrower.

HAFA simplifies and streamlines the short sale and DIL process by providing a standard process flow, minimum performance timeframes and standard documentation.

In July 2009, FHA launched the FHA-Home Affordable Modification Program to provide assistance to borrowers to modify their mortgages to provide more affordable payments. Under Chapter VI of the MHA Handbook, FHA-insured first lien mortgage loans that are modified under FHA-HAMP are eligible for certain incentive payments under HAMP.