Short sale (real estate)

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For short selling in the financial markets, see Short (finance).

A short sale has two intrinsic and inseverable components. Lien Holder - It is understood that the Lien holder (aka Mortgage Company) is agreeable to net less than the amount owed on the note (debt). Property Sale - It is also implicitly understood that the Lien holder is agreeable to a sales price (selling price) that is equal to or less than the appraised value since an arms length buyer will not pay and cannot acquire a mortgage for more than its appraised value.

In a Short Sale the Lien holder can demand a sales price greater than the appraised value. However, this is not deemed a course in good faith. It violates the intrinsic definition of what makes for a successful Short Sale and is predestined to fail when relying on a legitimate arms length buyer. A sale of real estate in which the net proceeds from selling the property will fall short of the debts secured by liens against the property. In this case, if all lien holders agree to accept less than the amount owed on the debt, a sale of the property can be accomplished. Creditors holding liens against real estate can include primary mortgages, second mortgages, home equity lines of credit (HELOC), homeowner association liens, mechanics liens, IRS and State Tax Liens, all of which will need to approve the sale in return for being paid less than the amount they are owed. The lien holders do not have to agree to accept less, but they often do since the alternative is to let the property go to foreclosure.

A short sale is a more beneficial alternative to foreclosure and has become commonplace in the United States since the 2007 real estate recession. Other countries have similar procedures. For instance, in the UK the process is called Assisted Voluntary Sale. [1] While both short sale and foreclosure result in negative credit reporting against the property owner, because the owner acted more responsibly and proactively by selling short, credit impact is less.

Home Affordable Foreclosure Alternative Program (HAFA)[edit]

In 2009 the government implemented the Making Home Affordable Program (MHA) [2] to address the real estate recession and the need to help homeowners deal with their real estate loans. Its primary components are loan modification (Home Affordable Modification Program known as HAMP) [3] and foreclosure alternatives (Home Affordable Foreclosure Alternatives known as HAFA).[4] HAFA® provides homeowners the opportunity to exit their homes and be relieved of the remaining mortgage debt through a short sale. It also provides homeowners or their tenants with up to $10,000 in relocation assistance. Through HAFA, you can short sell your primary residence or rental property. Once you complete a HAFA short sale, there is a waiver of deficiency, meaning you are released from any remaining mortgage debt.

You may be eligible for HAFA if you meet the following basic criteria:

· You are struggling to make your mortgage payments due to financial hardship.

· You are delinquent or in danger of falling behind on your mortgage.

· You obtained your mortgage on or before January 1, 2009.

· Your property has not been condemned.

· You owe up to $729,750 on your primary residence or one-to-four unit rental property (loan limits are higher for two- to four-unit properties).

The HAFA program expires December 31, 2016.

The Short Sale Process[edit]

The Short Sale Facilitation Process consists of the following.

1. Interviewing real estate agents and selecting the most qualified person to handle your short sale (if you have not already selected a listing agent).

2. Obtaining a detailed Broker Price Opinion letter from the agent who will list the property for sale, and setting a listing price schedule that will have the best chance of gaining your lender's approval.

3. Reviewing the property’s loan to value ratio to ensure that it conforms to short sale requirements.

4. Obtaining a package of financial documents from you and analyzing them to ensure that you pre-qualify for short sale status.

5. Monitoring the listing to ensure that it is proactively handled.

6. Preparing addenda to the Listing Agreement and any offers that will be accepted. These addenda are required because the transaction is a short sale, and often times the lender requires that special language be incorporated in the sale documents.

7. Identifying all lien holders and clearing short sale eligibility with them in advance to ensure that borrower and the property meet their eligibility requirements.

8. Submitting the short sale offer to all lien holders and negotiating with them to obtain approval of the sale.

9. Making sure government programs, such as Home Affordable Foreclosure Alternatives (HAFA) eligibility, are explored, including relocation assistance to the borrower.

10. Working with the lien holders to obtain release of any deficiency liability.

Parties to a Short Sale[edit]

Some junior lien holders and others with an interest in the property may object to the amounts other lien holders are receiving. It is possible for any one lien holder to prevent a short sale by refusing to agree to negotiate a reduction in their payoff to release their lien. If a creditor has mortgage insurance on their loan, the insurer will likely also become a third party to these negotiations, since the insurance policy may be asked to pay out a claim to offset the creditor's loss. The wide array of parties, parameters and processes involved in a short sale can make it a complex and highly specialized form of debt renegotiation. Short sales have a high risk of failure for the many reasons stated, but have the best chance of success if the right professional is hired to facilitate.

Deficiency Judgments[edit]

Any unpaid balance owed to creditors above the pay off they receive at short sale is known as a deficiency.[5] Short sale agreements do not necessarily release borrowers from their obligations to repay any shortfalls on the loans, unless specifically agreed to between the parties or provided by law. Most states allow lenders to obtain a deficiency judgment following a short sale, but a few states including Arizona, California, Nevada and Oregon, prohibit this.[6] In other states that permit deficiency judgments after short sale, it is imperative that the Short Sale Agreement between the borrower and the lien holders include a clear deficiency release agreement.

Credit and Tax Implications[edit]

A short sale will result in negative credit reporting to the borrower. However, the borrower who has short sold a property has a much shorter waiting period for a loan than the borrower who let the property go to foreclosure. [7] [8] With the FHA Back to Work Program [9] some borrowers can qualify for a new loan a year after a short sale. It has become the norm that the borrower who acted responsibly by short selling is rewarded.

The short sale borrower will receive a 1099-C (C meaning Cancellation of Debt) following a short sale. [10] The Mortgage Forgiveness Debt Relief Act [11] may give you an exemption from tax liability if the property sold short was your principal residence.

See also[edit]

References[edit]

  1. ^ "Voluntary or Assisted Voluntary Sale (AVS) NHAS factsheet" (PDF). Retrieved 2 September 2014. 
  2. ^ "Making Home Affordable Program". The government. April 2, 2016. Retrieved April 2, 2016. 
  3. ^ "Making Home Affordable". Home Affordable Modification Program (HAMP). Making Home Affordable. Retrieved March 31, 2016. 
  4. ^ "Making Home Affordable". Home Affordable Foreclosure Alternatives. Making Home Affordable. Retrieved March 31, 2016. 
  5. ^ Blacks Law Dictionary (March 31, 2016). "Blacks Law Dictionary Online, definition of DEFICIENCY". TheLawDictionary.org. Retrieved March 31, 2016. 
  6. ^ "Nolo Press". States That Prohibit Deficiency Judgments Following Short Sales. Nolo Press. March 31, 2016. Retrieved March 31, 2016. 
  7. ^ "When Can I Get a Mortgage After Short Sale?". Nolo Press. Nolo Press. April 1, 2016. Retrieved April 1, 2016. 
  8. ^ "National Association of Realtors". How to Repair Your Credit Score After a Short Sale. National Association of Realtors. Retrieved March 31, 2016. 
  9. ^ "FHA Back to Work Program". Back to Work Program. Fannie Mae. April 1, 2016. Retrieved April 1, 2016. 
  10. ^ "Short Sale Tax Implications". Short Sale Tax Implications. Nolo Press. April 1, 2016. Retrieved April 1, 2016. 
  11. ^ "Home Foreclosure and Debt Cancellation". Home Foreclosure and Debt Cancellation. Internal Revenue Service. April 1, 2016. Retrieved April 1, 2016. 

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