Short Sale FAQs
What is a Short Sale?
In a short sale, the lender allows a property to be sold for less than the amount owed on the mortgage. This usually occurs when the market value of a home has dropped and the property is now worth less than the amount of the current mortgage(s). This can occur with or without the homeowner being in foreclosure or behind on payments.
What is a HAFA Short Sale?
In 2009, the US Treasury Department introduced the Home Affordable Foreclosure Assistance (HAFA) program to provide a viable option for homeowners who are unable to keep their homes. The HAFA program took effect on April 5, 2010 and is scheduled to end on December 31, 2012. Homeowners that qualify for a HAFA Short Sale will receive a $3,000 payment at the close of escrow. Please contact us to determine if you qualify for this program.
How will a short sale affect my credit?
A short sale is recorded on your credit report as “debt settled for less than the amount owed”. A short sale itself typically results in a relatively minor hit to your credit score (when compared to a foreclosure). That being said, during the short sale process, many homeowners skip mortgage payments and sometimes allow the foreclosure process to be started. These items can have a more serious affect on your credit score (regardless of whether a short sale takes place).
If you are already behind on your payments, or the foreclosure process has been started, you have already incurred the majority of the negative credit effects. Completing a short sale can ensure that your debt is completely settled with your lender. If you are current on your payments, and your lender allows you to stay current throughout the short sale process, the effect to your credit is significantly less damaging than a foreclosure and can insure that your debt is completely settled with your lender.
How much will a short sale cost me?
When done correctly, a short sale does not cost the seller anything. As part of your lender’s short sale approval, your lender agrees to pay all closing costs, escrow fees, commissions etc. In some cases, your lender may also pay outstanding property taxes and HOA dues. If your lender does not approve the necessary terms, you are under no obligation to sell or to cover any costs or commissions yourself. We make sure to include wording to this effect in all of our short sale agreements.
How long will a short sale take?
Short sales generally take 3-6 months but can move more quickly or slowly depending on how quickly you provide the necessary information and on your particular lender’s workload. During the entire short sale process, you can remain in the home if you choose.
Will I have to pay taxes on the money my lender writes off in the short sale?
When your lender approves a short sale, your lender is agreeing to settle the debt for less than the amount they are owed. They are then allowed to write this amount off as a loss. Because of this, your lender may send you a 1099-C after completion of the short sale. A 1099-C is used for cancellation of debt (or debt forgiveness) and is considered income for tax purposes. PLEASE NOTE, A 1099-C CAN BE SENT TO A HOMEOWNER AT THE COMPLETION OF A FORECLOSURE AS WELL (this is not unique to a short sale transaction).
It is important to note that there are several exceptions to a 1099-C tax liability that provide exemption for many homeowners. If you qualify for an exemption, you are not obligated to pay taxes on the mortgage debt that is forgiven as part of the short sale.
For example:
If you are insolvent at the time of the short sale, the IRS will not require you to pay taxes on the mortgage debt that is forgiven as part of the short sale. Insolvency means that your debts (including your mortgage) exceed the value of your assets. Many people who are doing short sales fall into this category and are exempt from paying taxes on the 1099-C.
In addition to this, the “Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief. This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.” IRS.gov. (2009). Retrieved July 20, 2011, from IRS.gov.
Further information can be found here.
The Mortgage Debt Relief Act of 2007 covers homeowners who do a short sale on their primary residence, and have a purchase money loan (in other words, they have not pulled cash out of their home with a cash-out refinance) and these homeowners are not obligated to pay taxes on the mortgage debt that is forgiven as part of the short sale.
Homeowners who have taken cash out of their home but have only used the money for home improvements (and can document this), are also excluded from the potential taxes liabilities of a short sale.
As you can see, there are many exceptions to the 1099-C tax liability. However, there are still some circumstances that are not covered and may result in a tax liability (with short sales and foreclosures both). We strongly recommend that you check with your CPA or accountant regarding your particular situation. The IRS also provides helpful information and resources on their website (referenced above).
Please note, California has passed its own version of the federal Mortgage Tax Debt Relief Act. It is referred to as Senate Bill 401, The Conformity Act of 2010, which conforms to the federal law described above, but applies to California state income taxes on a short sale. It allows taxpayers who had all or part of the loan balance on their principal residence forgiven by their lender to exclude the forgiven debt from their California gross income taxes.
Again, we recommend you review your specific situation with your CPA or accountant and have them answer any tax questions that you have. The information above is deemed reliable but is not guaranteed.
Can my lender go after me for the money it loses in the short sale?
The point of the short sale is to settle your debt so that the lender cannot pursue you for their loss. When done correctly, this should be stated clearly on your lender’s short sale approval and you are protected from any further deficiency.
In the past, some lenders have tried to issue a “Release of Lien” instead of a short sale approval. While the two documents appear to be very similar, they are actually very different. It is extremely important that you work with an experienced team that knows the difference! A Release of Lien merely removes the debt obligation from the property; allowing the home to be sold. It does not release YOU personally from the debt. We do not recommend that our clients accept a Release of Lien.
IMPORTANT UPDATE: Governor Brown recently signed into law Senate Bill 458, prohibiting a deficiency after a short sale of a residential property, regardless of whether the short sale lender is a senior or junior lien holder (1st or 2nd mortgage holder). Both senior and junior lien holders cannot require a borrower to owe or pay for a deficiency in a short sale. There are some exceptions to the new law so please speak with an attorney to review your specific situation.
What is the difference between a recourse loan and a non-recourse loan?
A recourse loan means the lender has the right to pursue a deficiency after a short sale (unless they clearly state that they are waiving this right in the approval – as mentioned in the question above). This generally applies to mortgages that have been refinanced and 2nd mortgages that were taken out after the time of purchase. California law has been modified so that 1st mortgages (including refinanced loans) can no longer be considered recourse loans.
A non-recourse loan means the lender does not have a right to pursue deficiency after a short sale (regardless of whether that is clearly stated in their approval). This generally applies to all 1st mortgage and purchase money loans in California.
IMPORTANT UPDATE: Governor Brown recently signed into law Senate Bill 458, prohibiting a deficiency after a short sale of a residential property, regardless of whether the short sale lender is a senior or junior lien holder (1st or 2nd mortgage holder). Both senior and junior lien holders cannot require a borrower to owe or pay for a deficiency in a short sale. There are some exceptions to the new law so please speak with an attorney to review your specific situation.
Do you outsource my short sale to a 3rd party negotiating company?
No, we do not! We have an experienced team and handle our transactions ourselves! You hire us based on OUR experience and credentials. We are 100% vested in our transactions, our client’s satisfaction, and our reputation.
Why should I use the Capstone?
You should use the Capstone because we are a full service brokerage with experience and an unbeatable track record. We know how to market a property to its fullest potential and find pre-qualified buyers with the best chance of “sticking it out” through a short sale transaction. Adam and Emily Manville, the founders of Capstone Realty and Financial, have extensive backgrounds in wholesale lending. We know how to work with the lenders! We know what the lenders are looking for, how to push them on important matters and how to generate approvals that fit our client’s needs. In addition to this, we know how to take care of our clients! Our team consists of experienced professionals that handle these transactions on a daily basis and that know how to represent our clients’ best interests.
