Phone: (623)693-6509
Fax: (623)218-9055
Considering a Short Sale? Info and Resources You Will Need.

How Does a Short Sale Work?

A short sale occurs when the loan balance on a property is more than the home’s Current Market Value. Therefore, a seller asks their lender(s), and often private mortgage insurance provider (PMI), to release liens on the home and accept a “short pay off” in lieu of foreclosing. The lender agrees, allowing a sale to occur and usually forgives all or a large portion of the remaining debt.

Who is Eligible?

A short sale is not simply a way of getting out of an upside down mortgage. Typically, a lender will require documentation that the seller has incurred some type of hardship that has made it tough or impossible to continue making payments. A few examples include:
• Loss of employment or decrease in wages earned
• Job Transfer
• Increase in mortgage payment due to an Adjustable Rate Mortgage (ARM)
• Divorce
• Illness or disability
• Other unforeseen circumstances that have resulted in an inability to pay
Sellers often fear that because they have money in the bank, they will not be considered “insolvent” or not be approved for a short sale of their home. This is a common misconception. The lender wants to see that over time, you'lll not be able to pay off your mortgage obligation. Having money for other living expenses is normal. The best way to determine your eligibility is to begin by completing the Sample Financial Worksheet attached below. Most lenders require that your mortgage payment (including taxes, insurance, and homeowner’s association dues) is more than 31% of your current gross monthly income.

Do I Have to be Late on my Payments to be Considered for a Short Sale?

I wish I could say no. However, it depends on the particular lender. Because of overwhelming market changes, many banks and lenders have become much more agreeable to accepting short sales on properties in which the owner is not currently delinquent. Government programs, such as HAFA, have actually mandated that this not be a requirement when considering a borrower’s eligibility for the program (more on HAFA below), but unfortunately, all lenders have not yet come on board with these changes.

What if I Really Want to Keep my Home?

Short selling your home is absolutely not the only solution to an inability to continue making your current monthly mortgage payments. If your desire is to keep the home, your first step should be to apply for a loan modification. Call your lender and find out their requirements. Just as short sale restrictions have been modified to adapt to the current market crisis, so have the prerequisites for a modification. Even if you have attempted to have your loan modified in the past, if you truly want to save your home, try again before proceeding with any other alternative. However, be leery of “temporary modifications”. Although they provide a “quick fix”, they may not be the wisest choice and may set you up for severe tax penalties in the future. (Read more about the tax implications of short selling below.) Unless you believe that your financial situation will greatly improve prior to the end of the modification term, you may be better off to go ahead and short sale now, before The Mortgage Debt Relief Act expires.

Will There be Tax Implications if I Short Sale?

Consult with a tax advisor before deciding to short sale your home because situations vary. However, if this is your primary residence and the total forgiven debt is less than $2 million, then the answer is no. The Mortgage Debt Relief Act of 2007 states that any cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes and secured by the home, will not be treated as income if the transaction is completed in calendar years 2007-2012. If the home is not your primary residence, there are also other exclusions you may be eligible for. Again, your first step should be speaking with a tax professional.

I Have Already Received a Foreclosure Notice of Sale. Is it too Late to Short Sale?

No. In most cases, we can delay the foreclosure date. But you need to act right away. Most lenders will not postpone the date unless a valid short sale offer is in place. Therefore, we need to act immediately to get your short sale package ready to present to the lender, develop a top-notch aggressive marketing plan, get your property on the market, and find a ready, willing and able buyer quickly.

What are my Costs to do a Short Sale?

There typically are no fees, closing costs or commissions owed by the seller. Those fees must be paid by your lender in order for the short sale to proceed. However, it is strongly suggested that you keep the property in “showing condition” with the utilities on, landscaping maintained and all amenities in proper working order. Also, if possible, keep making payments to your Homeowner’s Association as they have the authority to place a lien on your property for past due payments. Often lenders and buyers are unwilling to pay those fees on your behalf which can prevent the property from closing.

What is a Deficiency Judgment?

In most states, when a home is sold in foreclosure, the lender can come after the borrower personally for any deficiency that remains between what the home sales for and the amount that was due on the original loan. However, in Arizona, there is an Anti-Deficiency Statute that protects homeowners from this liability, if:
• The home is a single family residence or a dual family dwelling on 2½ acres or less
• All of the money borrowed was used to purchase the property
• The property value was not diminished by the borrower stripping the home of fixtures and amenities
(Note: The FBI is beginning to prosecute owners who do this. It is considered Mortgage Fraud and punishable by law.)
• If you have lived in the property for six consecutive months as a primary residence

What if I have a 2nd Mortgage or a HELOC (Home Equity Line of Credit)?

Arizona’s Anti-Deficiency Statute does not protect you from a deficiency judgment on a loan that was not used towards the purchase of your home. (Note: If the loan was used to make significant improvements to the home and greatly improved its value, protection could apply. You should seek legal counsel to verify.) Typically in a short sale where the sale proceeds are not enough to cover the amount due on the first lien, your primary lender will offer the lender of your second mortgage or HELOC a small amount of compensation to accept the short sale offer and allow the home to close. It is usually in this lender’s best interest to accept because in a foreclosure proceeding, the lender in first position will retain rights to all of the sale proceeds and they will be left with nothing. However, in these circumstances, the lender often retains the right to pursue the remaining deficiency. (In HAFA, this right to pursue deficiency must be released.)

What is HAFA and How Do I Apply for it?

The Home Affordable Foreclosure Alternatives (HAFA) program provides financial incentives for both lenders and borrowers to avoid foreclosure through short sales or deeds in lieu of foreclosures. Participation in the HAFA program requires adherence to specific guidelines and provides a standard process developed to speed up the transaction. The HAFA program is for homeowners who are not able to keep their homes with the help of a loan modification. It provides incentives such as full release from all liens currently on the home, and up to $3,000 to assist with moving expenses at the time of closing. The complete set of guidelines for HAFA is available in pdf format at the link below.

How Does a Short Sale affect my Ability to Purchase a Home in the Future versus a Foreclose?

In most instances, short selling will inhibit your ability to purchase a new home for an extended period of time. However, you can become a homeowner again more quickly with a short sale in your past than with a foreclosure. Lender timelines for eligibility to repurchase after each of these occurrences have experienced multiple recent changes so I will leave quoting exact guidelines up to your lender. But in SOME instances, it may be possible to purchase again right away after a short sale! Please check with your lender for more details.

How Does a Short Sale Affect my Credit Score?

There is no specific reporting system for a short sale on your credit report. Typically, the lender records it as “paid less than full balance”. That, in conjunction with being 30, 60, or 90+ days late are the two elements that affect your credit score. The numerical drop actually depends upon the amount of credit you have that is reported. Someone with many lines of credit will be less affected than someone with only a few. In most cases, if you were 90+ days late on a mortgage payment, your credit will initially be hit just as hard as if you had foreclosed on the property, although the repercussions will not last as long.

Can a Friend or Family Member Simply Buy My Home at a Short Sale Price and Sell it Back to Me?

Although a great idea, short sale agreements specifically prohibit such arrangements. Referred to as an “Arm’s Length Transaction”, federal programs such as HAFA consider it a federal offense. As you can read in the complete guideline attached below in the first paragraph of Section A-3, “You may not have an expectation that you'll be able to buy or rent (servicer may delete “or rent” in accordance with investor guidelines) your house back after the closing. Any knowing violation of the arm’s length transaction prohibition may be a violation of federal law.”

How Long Does a Short Sale Take?

Although timelines on gaining a short sale approval from your lender vary from a few days to six months, an average approval in today’s market takes about two to two-and-a-half months. Add to that, the time for your buyer to close,, and start to finish, you’re looking at approximately three months. However, prepare yourself for anything! Typically I can get a better idea of a timeline after speaking with your specific lender.

How do I get Started?

Going through the short sale process can be stressful. It often requires letting go of pride and a willingness to release emotional ties you may have towards your family’s home. It is extremely important to be willing to price your home aggressively and to make price reductions when necessary until we get the home sold. It also requires you to communicate openly and honestly with me and on all paperwork required by your lender. And it requires a willingness to cooperate with showings, keep the property looking presentable, and respond quickly to all offers. I am here to work for you and make this as easy as possible! So if you’re ready to begin, click on the link below to start collecting the information I will need to get your home sold!


Short Sale Package

HAFA Guidelines

Helpful Websites

www.makinghomeaffordable.gov
This site gives great information on the government’s new modification and short sale programs.

www.irs.gov
To learn more about the cancellation of debt income on your federal taxes, you can query the following publications within this site:

“Publication 4681”
(2009)-Canceled Debts, Foreclosures, Repossessions and Abandonments.

“IR-2008-17”
Mortgage Workouts, Now Tax-Free for Many Homeowners; Claim Relief of Newly-Revised IRS Form.

“Form 982”
Reduction of Tax Attributes Due to Discharge

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Realty One Group
Realty One Group
7975 N. Hayden Road Suite 101A • Scottsdale, AZ 85258
Phone: (623)693-6509 • Fax: (623)218-9055



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