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Patrick Lopez and Associates Certified Distressed Property Experts

Short Sale Information

Did you know that a short sale of your home costs you nothing? In a short sale, your lender pays all the fees normally paid by the seller including:

  • Real Estate Commissions
  • Escrow Fees
  • Title Fees

Also known as a real estate short pay-off or a pre-foreclosure workout, a short sale is an agreement with a lender to accept less than the amount owed by a borrower via a sale of the property to a third party. With this agreement, the lender releases the borrower from the mortgage, thereby preventing foreclosure.
With a short sale, your FICO score will not be as negatively impacted as it would be with a foreclosure, and you will be able to purchase a new home much sooner as well. In many foreclosure situations, the lender will ultimately sell the property at a significant discount once they foreclose and repossess the property. The homeowner can then be financially liable to the lender. While the same may be true with a short sale, the difference is with a short sale the homeowner is still involved in the process and can therefore contribute their input and have more control over the sale price of the property and the potential associated liabilities. In a foreclosure, however, once the lender repossesses the property, the homeowner is typically defenseless with respect to what follows next.
In order to be eligible for a short sale, a homeowner must be able to prove to the lender that they are a victim to a "hardship" and are therefore unable to continue making payments on their mortgage.

A hardship situation is one that is the result of some extenuating circumstance that forced the borrower into a position where they can no longer afford their mortgage payments. While every situation is unique, some common examples of hardship include:

  • Unemployment or loss of primary income source
  • Inability to work due to health crisis
  • Mounting medical expenses
  • Employment relocation
  • Failure of business
  • Bankruptcy
  • Death of spouse or significant other
  • Divorce or separation
  • In addition to the homeowner proving hardship, lenders require a specific set of supporting financial documents to consider a short sale.

As with all foreclosures, there are several potential tax and liability considerations when doing a short sale. With a short sale, however, these potential tax and other liabilities are typically less frequent and less severe.

Tax ramifications: After completing the short sale your lender may decide to issue you a 1099 for the difference between the price your home sold for and what you owed, and you can later be taxed by the IRS on this amount as income.

It is important to note that if specific criteria are met, the IRS may release the borrower from this tax liability. Furthermore, Congress is currently considering legislation that would eliminate this taxation of so-called "income" due to cancellation of debt.

Lender recourse: In some states and with certain types of loans, lenders can pursue a court decision called a deficiency judgment making you personally liable for the remaining amount owed to them above the short sale price. In some cases, the lender may ask you to pay a portion of the difference back in the form of an IOU.

The lender has sole discretion whether to pursue a deficiency judgment in those instances when a deficiency judgment is permitted. A short sale gives the lender the ability to cut its losses upfront thereby avoiding the expense and time of a foreclosure and potentially greater losses. Whether the lender chooses to go through with a foreclosure or agree to a short sale, they are taking a loss either way, but in many cases they would take less of a loss with a short sale and resolve the matter in a comparatively shorter time frame. In nearly every case, a short sale offers a better return on the lender's investment than a foreclosure does.

In conclusion, a short sale can prevent your home from being foreclosed upon. If you are upside down on your mortgage or are facing foreclosure, EVEN IF YOU HAVE RECEIVED A NOTICE OF DEFAULT, we can help you avoid foreclosure. Contact us today for details. We are here to help.

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