Short Sale Q&A
1. Who is a short sale right for?
Those who have had a hardship, and are financially unable to pay for, due to said hardship(s), their current mortgage with a lender who is willing to agree to a short sale rather than go through the expensive process of foreclosure.
2. What are typical hardships that allow for a short sale to be possible?
Common hardships include family illness/injury, loss of job, job relocation, unforeseen increase in living expenses, proof of insufficient income to pay current mortgage and divorce.
3. Must there be a delinquent payment on mortgage to be eligible to qualify for a short sale?
It completely depends on the lender, and their policies. Some lenders require for a delinquent payment, where others do not.
4. Why would a lender accept a short sale, if they know they will lose money in the deal?
Lenders want to work with the borrower to reach a compromise solution, in such they will do extensive calculations to see if it is more financially viable to accept the short sale and have the opportunity to sell the property, netting a smaller loss than with the other option of a foreclosure. The foreclosure process is usually time consuming, and expensive, not to mention, if the property goes to auction, it could bring significantly less than it would through a short sale.
5. Do all lenders accept a short sale?
It completely depends on who the lender is, and what their level of experience they have in dealing with short sales. The larger the bank, the more likely they are to accept, and the smaller, “local” banks tend to be more hesitant, or may not even accept at all. The scenario may also, have a considerable bearing on the lender’s decision as well.
6. In the event of a short sale, who is responsible for expenses necessary for resale?
Once a lender has accepted and approved the terms of the short sale, the lender then incurs all of the foreseen expenses involved in the resale of the property, often paying for most of the repairs necessary for resale. The lender has most likely taken these expenses into consideration in their calculations prior to acceptance.
7. After a short sale, is the person responsible for paying taxes on the cancelled debt?
President Bush passed legislation which is still in effect, specifying if a primary residence goes into short sale, the previous owner is not responsible for paying taxes on the cancelled debt via a 1099 form.
8. Does a short sale affect one’s credit?
The short sale itself does not directly affect one’s credit, it is a fair better solution than a foreclosure which is catastrophic to credit. The problem that arises with a short sale affecting credit comes in the form of delinquent mortgage payments while the short sale is in progress.
9. What is an “Arms Length Transaction”?
Mandatory in a short sale, it is an agreement by the previous owner of the property in the short sale that they are at “Arms Length” from the Seller, meaning they are not related to, or friends with the seller in the deal.
10. Why is a deed in lieu not recommended over a short sale?
A deed in lieu is basically viewed as a foreclosure, and carries significant damage to one’s credit, typically marring credit for 3 years. A short sale is a safer option, and is much easier to repair damages to credit.