Frequently Asked Short Sale Questions
What is a short sale?
A “short sale” is a term to describe a transaction where the sale price of the property will not be sufficient to generate proceeds to pay off the existing mortgage or mortgages, and where the lender(s) agrees to accept less than full payoff. It is a type of loan modification.
What is a short sale negotiator?
A Short sale negotiator is someone who provides assistance in negotiating with the lender on the seller’s behalf. The goal is to convince the lender to accept less than the debt amount on the mortgage(s). There are currently several variations of the term “short sale negotiator.” These are just a few of the terms which exist and are not inclusive: “debt negotiator”, “debt resolution experts”, “loss mitigation practitioners”, “foreclosure rescue negotiators”, “short sale processors”, “short sale coordinators” and “short sale expeditors.”
May a real estate licensee (Realtor) act as a short sale negotiator within the state of Washington?
Yes. In order to negotiate a short sale in the state of Washington, a person must have either a mortgage originator license, a real estate license or be an attorney licensed to practice law in Washington.
How is a short sale negotiator different from a foreclosure consultant?
Foreclosure consultants help a person stay in their home, typically by working with the lender to lower monthly mortgage payments. Short sale negotiators engage in activities intended to result in the sale of the home. Helping a consumer stay in their home, with changes to their mortgage, is not a professional real estate activity and such activities must comply with the requirements of HB 3630. If a foreclosure consultant decides a short sale is the best resolution for the consumer, the consultant may not participate in the short sale negotiations or transactions unless they are properly licensed as a mortgage banker, a mortgage broker, or a real estate broker.
Short Sale Considerations
FIRST, Understand that a Short Sale May not Discharge the Debt. You should know whether you will still owe your lender money (a deficiency) after the short sale. You should know this BEFORE you close the sale of your home. Even if a lender agrees to a short sale, the lender and any junior lien holders may not agree to forgive the debt entirely and may require you to pay the difference as a personal obligation. This outstanding personal obligation could result in a subsequent collection action against you. For example, a lender may accept the short sale purchase price to “release the lien” on the property but still require you to pay the full amount of the original debt. You must be certain of the terms of any short sale before making a decision. All agreements between you and the lender must be in writing. Consult an attorney regarding whether the lender is entitled to pursue collection of any deficiency. Obtain any debt forgiveness agreements with the lender in writing but be aware that the language used in these agreements can be extremely confusing and even misleading. Seek the advice of legal counsel before accepting the lender’s terms.
SECOND, Understand that a short sale may result in a higher tax debt A short sale in which the debt is forgiven is considered a relief of debt and may be treated as income for tax purposes. The Mortgage Forgiveness Debt Relief Act of 2007 created a limited exemption to allow homeowners to pay no taxes on debt forgiveness; however, only cancelled debt used to buy, build or improve a principal residence or refinance debt incurred for those purposes qualifies for this tax exemption. For more information on the tax consequences of debt relief, seek professional tax advice and go to www.irs.gov and conduct a search regarding the Tax Relief Act.
If you decide to pursue a short sale, understand that the process will likely take several months or more to complete.
Consider taking the following actions:
Contact a Qualified Real Estate Professional
Interview several real estate professionals and ask about their experience in short sales, the number of short sale transactions they have handled, their education and training in short sales and inquire about any past or pending lawsuits or disciplinary actions.
Investigate Documentation and Eligibility
Documentation and eligibility criteria for short sales vary depending on specific lender and investor guidelines. Generally, you must prove that you are financially incapable of paying the loan. The lender will consider this when determining the costs of accepting the short sale versus foreclosing. You will have to document your financial situation. If you have funds to pay the Short Sale deficiency, a lender will not necessarily allow a short sale. However, some lenders will not require you to dip into retirement accounts to fund the deficiency. These issues will have to be negotiated with your lender.
Determine the Amount Owed on the Property
All debt and costs must be factored in before a lender can determine whether a short sale is more economical for them. The analysis will include the delinquent loan, all other recorded debt (past due homeowner’s association fees, unpaid property taxes), and the costs of a sale (closing costs, brokerage commissions, and necessary repairs). If you have more than one loan on the property, a short sale will require the approval of all lenders.
Determine the Estimated Fair Market Value of the Property
You must prove to the lender that the home is worth less than the unpaid loan balance plus closing costs. Consult a real estate professional or an appraiser for assistance in estimating the value of the property.
Consult Legal Counsel Legal
Counsel can help you determine whether a short sale is the best option and can advise you during the short sale process. A short sale is a complex transaction.
Be Aware of the Impact on Your Credit Score
The impact of a short sale on your credit score depends upon a variety of factors, including late or missed payments. A short sale may appear on your credit report as “pre-foreclosure redemption,” “paid in full for less than full balance” or other similar term. It is possible that a short sale will have a different impact on your credit than a foreclosure or deed in lieu of foreclosure (or any other outcome). But, beware that once you miss mortgage payments, your credit rating will be severely impacted. Some lenders will tell you that they will not consider you as a short sale candidate unless you are behind on payments. Do not intentionally withhold mortgage payments, solely for short sale consideration, without first consulting legal counsel.
Understand There May Be a Waiting Period Before You Can Buy Another Home
Your ability to qualify for a loan to purchase another home after a short sale will likely be impacted because of the impact on your credit score. It may be some time before a lender will loan you the money to purchase another home.
Home Affordable Foreclosure Alternative (HAFA) Program
The HAFA program was designed to give homeowners alternatives to a foreclosure, which include incentives for completing a short sale. If your home sale can close as a HAFA transaction, you will emerge owing no deficiency. However, it can be very difficult to qualify as a HAFA transaction. For more information on the options available, visit the HAFA program website: www.makinghomeaffordable.gov/hafa.html
To find the option for which you may be eligible. See: www.makinghomeaffordable.gov/eligibility.html
To find out if your mortgage servicer participates in the HAFA program go to: www.makinghomeaffordable.com/contact_servicer.html
For More Information, Visit: The Washington Department of Financial Institutions website: www.dfi.wa.gov