When Buying a Short Sale Home is the Right Fit

Purchasing a home can feel overwhelming at times, but a short sale home offers a unique opportunity for a prospective buyer. A short sale occurs when a homeowner owes a lender more than their home is worth, and the lender agrees to let the owner sell the home and accept less than what is owed. Lenders may agree to a short sale because they believe it will net them more money than going forward with a lengthy and costly foreclosure process.

Short sales do differ in a number of ways from conventional home sales. Here are a few things to consider if you’re thinking about buying a short sale property.

  • Short sale homes sell for less, but not significantly less than market value.

Buyers hoping to snap up a home for half the market value will be disappointed. The selling price for short sales averages about 10 percent less than for non-distressed properties. The bank is looking to recover as much of the value of the home as possible, so they will not accept offers that are significantly under market value. That said, with savings that can equal tens of thousands of dollars, a short sale is a great way to get more house for your money.

  • Short sale properties are sold “as is”.

The lender will not be making repairs to the home. Any improvements that need to be made are most likely going to be the responsibility of the buyer. A savvy buyer’s agent/broker will get contractor bids for any necessary repairs and use those to help negotiate a lower sales price with the bank.

  • A short sale will take longer than a conventional home sale.

Once you and the seller have mutual acceptance on an offer, you need to allow 60 to 90 days for the lender approval process. There are often long stretches when the offer is slowly winding its way through the bank’s system, so buyers need to be patient.

  • If you have to sell your home first, a short sale is probably not the best fit.

Lenders generally will not take contingent offers on a short sale.

  • A short sale is one real estate transaction that you shouldn’t attempt on your own. 

Short sales are complicated transactions that involve a different process and significantly more paperwork than a standard real estate sale. An agent/broker that is unfamiliar with short sales can write an offer in such a way that they inadvertently cause their buyers to lose the deal. An experienced short sale agent/broker will protect your interest and help the process move forward smoothly.

The bottom line: As long as you can be patient, and are working with an agent/broker who understands the process, buying a short sale is a great way to purchase the house you want at a price you’ll love.

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Short Sale FAQs: Understanding the Short Sale Process

What Is A Short Sale?

A short sale is the sale of a property for less than what the owner still owes on the mortgage. A short sale is an alternative to foreclosure when a homeowner needs to sell and can no longer afford to make their mortgage payments. The lender agrees to accept less than the amount owed to pay off a loan now rather than taking the property back by foreclosure and trying to sell it later. Lenders agree to a short sale because they believe it will net them more money than going forward with a lengthy and costly foreclosure process.

Can Any Real Estate Agent Effectively Handle My Short Sale?

No. A short sale is a very complicated real estate transaction and one that has very important implications for you. More than any other type of residential real estate transaction, a short sale should be handled only by a real estate broker who has substantial experience with the short sale process , and a strong track-record of success in negotiating short sales for their clients. You wouldn’t have your family doctor perform heart surgery. And, you shouldn’t expect any real estate broker to be qualified to handle this highly complex real estate transaction for you.

Why Should I Choose A Short Sale Over Foreclosure?

Whether you should do a short sale or let your property go to foreclosure depends on several factors. In most instances, a short sale makes more sense than foreclosure. In general, when you want to obtain a loan to purchase a property in the future, more opportunities will be available to you if you do a short sale. And, contrary to popular belief, you can be current on your payments and still do a short sale. In fact, if you are current on your mortgage through a short sale, you can qualify for an FHA loan afterwards without any waiting periods. The same option will not be available following a foreclosure.

While doing a short sale will negatively affect your credit, there are many benefits to choosing a short sale over foreclosure. With a short sale, you are in control of the sale, not the bank. You may sleep better at night knowing who is buying your home, and you can spare yourself the social stigma of foreclosure.

Every homeowner’s situation is different, so we always recommend that you speak with a real estate attorney that can advise you on the legal and tax implications for your circumstances.

How Do I Know If I Qualify For A Short Sale?

If you owe more than your house is worth and can’t afford your mortgage payments, you may qualify for a short sale. Every situation is unique, but in general the basic criteria for qualifying for a short sale are:

  • You need to sell your home.
  • You owe more on your mortgage than your home is worth.
  • You have a personal financial hardship that will prevent you from making future payments. (Examples of hardship include loss of job, divorce, death of a spouse and medical emergency or illness.)

When calculating if your house is worth less than the amount owed on the loan, you should deduct out what you would pay in real estate commissions, closing costs, and state excise taxes to sell your home.

Will I Get Any Money From The Sale?

Unless specifically authorized through a federally-sanctioned program such as HAFA, when a lender approves a short sale, they typically require that the borrower (seller) not receive any money from the sale of the property since the lender is going to take a loss on the loan.

How Long Does A Short Sale Take?

The short sale process is complicated and time-consuming. It can take several weeks, or even months, to get a short sale approved. Many lenders have several layers of management, insurers, and investors that will have to be satisfied before a short sale is approved. As a homeowner, it is important to be patient during this long process. It is also critical that you work with a short sale negotiator who is familiar with the various requirements of individual lenders to ensure that the process moves as quickly as possible.

Is There Enough Time To Do A Short Sale Before A Foreclosure?

Maybe, maybe not. Just starting a short sale will not automatically stop a foreclosure. However, many times a lender can be convinced to postpone the foreclosure to let a short sale negotiation take place. So, while there are no guarantees, it does not hurt to try.

Does A Short Sale Always Work?

No, there is no guarantee that this will work. Once you fall behind on your loan, the lender can proceed to foreclosure if they choose to. But typically, lenders prefer not to foreclose and, if effectively presented with smart alternatives, they will often agree to a short sale rather than foreclose. If a short sale is attempted but doesn’t work, your house will likely go to foreclosure.

I Have More Than One Mortgage On My House. Can I Still Do A Short Sale?

Yes. Each mortgage can be negotiated individually. However, multiple mortgages make a short sale more complicated and time-consuming. Not only do you need the cooperation of the first lender, the second mortgage holder needs to agree to a short sale as well.

What Is A Release?

A lender may offer to “release” its security interest against the property in exchange for less than the total amount of the note. A release will allow the property to be sold without paying off the obligations of the note. However, the note is not satisfied. The advantage of a release is it allows the property to be sold and helps you avoid a foreclosure. The disadvantage is the remaining debt on the property (sometimes called a deficiency) still exists. You are still liable for the note. In other words, you still owe the money. In reality, it’s not likely that the lender will pursue the deficiency unless you have other significant assets. Furthermore, if you don’t attempt a short sale and the property goes to foreclosure, you can be liable for the full amount of remaining debt on any additional mortgages beyond your first mortgage.

What Is A Satisfaction?

A lender may agree to accept less than it is owed as complete and total satisfaction of the debt and release its lien against the property. Your note and obligation to the lender are satisfied for less than you owe. When the property is sold, the debt is paid off completely. Sometimes short sale negotiations are successful in obtaining complete satisfaction. Sometimes all that can be obtained is a release.

Are There Tax Consequences?

When a lender cancels or forgives your debt, the tax laws may consider the forgiven debt as taxable income. If a lender agrees to a satisfaction, the Mortgage Forgiveness Debt Relief Act of 2007 provides that debt forgiveness of up to $2 million is not considered taxable income if:

  • The house has been used as your principal place of residence for at least two of the previous five years.
  • The debt has been used to buy, build, or make substantial improvements to the home.

Home equity loans where the money was not used to buy, build, or improve the home do not qualify for the exclusion. Neither do mortgages for second homes or rental properties. The law has been extended to include debt forgiven through 2013.

There are additional tax considerations to keep in mind. A debt cancellation will affect your property’s cost basis. Insolvency or bankruptcy may also alleviate some of the tax burdens of a debt cancellation resulting from a short sale. You should always confirm tax matters with your tax professional.

Can I Keep The House Through A Short Sale?

The purpose of a short sale is to get the property sold, so you do not keep the house. Just as in a normal sale, you will be moving, typically when the sale closes. Some sellers choose to move before the house closes. You will not be allowed to remain in the house. If your intention is to remain in your house, you should consider other options besides a short sale.

Download a copy of Short Sale Frequently Asked Questions [PDF].

Richard Eastern is a Windermere broker in Bellevue, WA and co-founder of Washington Property Solutions,a short sales negotiating company. Since 2003 he has helped more than 900 homeowners sell their homes. A Bellevue native and a University of Washington grad, Richard is an avid sports fan and a devoted Little League and basketball coach. You can learn more about Richard here or at www.washortsales.com.

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5 Things to Consider if You’re Behind on Your Mortgage

Financial setbacks like the loss of a job or large medical bills can make it tough to make ends meet. If you find yourself behind on your mortgage payments, it helps to be proactive.  It’s also good to know that federal and local agencies, even banks, are working to help those who are behind on their mortgages from going into foreclosure.

If you are behind on your mortgage, here are 5 steps you can take.

1)  Call your lender as soon as possible.

As uncomfortable as that call can be, the problem will not go away by avoiding your lender. If you are having trouble making your payments, the sooner you contact your lender, the more options you will have. Some homeowners postpone communicating with their lender for so long, that foreclosure becomes the only option.  Don’t let that happen to you.

2) Talk to a housing counselor.

The U.S. Department of Housing and Urban Development (HUD) has a list of approved nonprofit housing counselors, who will provide free counseling for homeowners who are behind on their mortgages. They’ll go over options and suggest next steps. Call HUD at 888-995-4673 or visit the HUD site to find a counselor in your area.

3)  See if you can lower your mortgage payment.

You might be able to refinance or do a loan modification to make your monthly payment more affordable. There are a number of programs available depending on your circumstances. A HUD housing counselor or your lender can help you explore your options.

4)  Find out if you qualify for a short sale.

A short sale is an alternative to foreclosure when a homeowner needs to sell and can no longer afford to make mortgage payments. The lender agrees to accept less than the amount owed to pay off a loan, rather than going forward with a lengthy and costly foreclosure process.

Although every homeowner’s situation is unique, the basic criteria for qualifying for a short sale are:

  • You need to sell your home.
  • You owe more on your mortgage than your home is worth.
  • You have a personal financial hardship that will prevent you from making future payments. (Examples of hardship include loss of job, divorce, death of a spouse and medical emergency or illness.)

In most instances, a short sale makes more sense than foreclosure. In general, when you want to obtain a loan to purchase a property in the future, more opportunities will be available to you if you do a short sale. Find out more about how short sales work.

5) See if you qualify for cash incentives tied to a short sale.

Several programs offer cash incentives to homeowners to do a short sale in order to avoid foreclosure.

The federal government’s Home Affordable Foreclosure Alternatives (HAFA) program might provide $3,000 in relocation assistance to homeowners who do short sales.

Lenders, including Chase and Bank of America, have paid significant cash incentives to encourage sellers to do a short sale and avoid foreclosure. In the past few months, we have had homeowners receive checks from their lender at closing in amounts that range up to $35,000. And these large incentives are not restricted to owners of high-end properties. The owner of a short sale property that recently sold for $164,000 received a check for $25,000. The checks are given for relocation assistance and can be used however the homeowner sees fit. There are no restrictions.

It’s important to note that the seller incentive is determined by the investor, so not every lender is paying incentives. However, if you are considering a short sale, it’s a good time to find out if you qualify.

Richard Eastern is a Windermere broker in Bellevue, WA and co-founder of Washington Property Solutions, a short sales negotiating company. Since 2003 he has helped more than 700 homeowners sell their homes. A Bellevue native and a University of Washington grad, Richard is an avid sports fan and a devoted Little League and basketball coach. You can learn more about Richard here or atwww.washortsales.com.

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