Short Sale Process
Short Sale
We are both Short Sale and REO Specialist. Below are some common questions regarding Short Sales. Please don't hesitate to contact us with any questions of how we can be of service to you. Here are a few of our designations .
Question on the Short Sale process?
Q: What is a Short Sale?
Answer: In a short sale, the lender agrees to settle a debt owed on the property for less than the full amount. "Settled" means the lender is writing off the debt (which is shy 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 the deficiency judgement in the future.Q: How will I know if I will qualify for a short sale?
Answer: Call our office and we can tell you over the phone whether you will likely qualify. We have former underwriters from major national lenders who work in our office on our short sale team. The overwhelming majority of our clients are approved for a short sale for 2 reasons.
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.
Q: How Will a Short Sale affect my credit?
Answer: This is a great question as there is a lot of misinformation on the internet about this topic. A short sale is recorded on your credit report as "debt settled for less than the amount owed". This typically will result in a relatively minor hit on your credit compared to a foreclosure or late payments on your mortgage. We say "typically" because it affects everyone credit different. The more established your credit, the less of an impact it will have on your score.
The reason you often hear and read that a short sale will drop your credit 100 points or more, is that, many people, when they do a short sale,stop making their mortgage payments. If you stop making your mortgage 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.
With this said, 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 payment and can stay current throughout the short sale process, you will save your credit to a large extent.
Finally, if you stop making your mortgage payments, there are various credit repair agencies that can repair your credit by removing late payments from your credit report after a short sale.
Q: Can my lender go after me for the money it loses in the short sale?
Answer: 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." Your lender cannot write off their loss on their corporate taxes, send you a 1099-C so you have to pay taxes on the loss, report the short sale as a "settled debt" on your credit and then turn around and go after you for the money.
If you hire and inexperienced short sale agent or negotiator who does not negotiate 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)
Q: What if I have a first and a second loan on my property with 2 different lenders (or the same lender)?
Answer: Most people that we do short sales for have a first and a second loan, ofter with 2 different lenders, For the short sale to reach a successful close of escow, both lender have to approve the short sale and agree to settle the debt.
It is important to note that both lenders have a vested interest in doing this. The lender with the first loan does not want to foreclose, and therefore 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.
Q: What is the difference between a recourse and a non recourse loan?
Answer: In general, 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 techinically has recourse to go after the borrower for the money they lose in a foreclosure. "Technically" 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.
Q: How will I know that I am being released from the debt?
Answer: It will be stated clearly on the bank's short sale approval. Your lender will state in plain English (though in different verbiage depending on the lender) 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 satisfation of the mortgage", "not pursing a deficiency judgement", or some other variation that states they are settling the debt for less that what they were owned.
Futher, 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.
Q: What are the advantages of a short sale vs letting my home go to foreclosure?
Answer: The primary advantage to doing a short sale vs 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 a short sale, your credit takes much less of a hit compared to a foreclosure. The impact on your credit will vary depending on how established your credit is at the time of the short sale or foreclosure.
Finally, Fannie Mae & Freddie Mac revised their guidelines in August 2008 with regard to how they view borrowers who have filed bankruptcy, gone through foreclosure or done a short sale. Through these new guidelines, they are in effect serevely penalizing those who go the route of foreclosure or bankruptcy, and rewarding or encouraging those who do short sale, 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 bankrupcty 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.
