Short Sale

What is a Short Sale

A “short sale” is a dignified alternative to foreclosure that allows a homeowner to sell at a lower price than what is owed. You would list your home for sale with a Tampa Realtor, obtain the best possible price and terms, execute a contract contingent upon your lender’s acceptance, then send the contract to your lender(s) for approval. When the home is sold, the lender pays the closing costs, commissions and liens. A short sale allows the seller to avoid foreclosure and allows the lender to avoid taking ownership of the property. Your lender may be willing forgive a significant portion of your mortgage debt.

HAFA Short Sale Program

The U.S. Treasury has announced programs to reward homeowners and lenders who complete short sales. For those who qualify, the HAFA Short Sale Program provides money to the lender, the servicer and the homeowner at closing. The program speeds the process and requires that lenders give up any possible future claims against a homeowner (a.k.a. deficiency judgment). Those eligible for the HAFA Short Sale program are free from the possibility them from future liability for the mortgage(s). HAFA also pre-approves short sales before listing and guarantees a fast decision on offers.

HAFA Video

The Certified Distressed Property Institute has created this award winning overview to cover the primary points of HAFA.

HAFA 2.0

As of February 1, 2011, revised HAFA guidelines were implemented to clarify and expand the HAFA foreclosure alternatives program (see HAFA Supplemental Directive 10-18 or HAFA Overview).

Mortgage Forgiveness Tax Relief

Since the passage of H.R. 3648: The Mortgage Forgiveness Debt Relief Act, the forgiven debt under is no longer counted as income and cannot be taxed by the federal government in most, but not all, cases. As the CBO summarized “H.R. 3648 excludes from the gross income of a taxpayer any income by reason of discharge, either in whole or in part, of debt on the taxpayers’ principal residence”. Since passage, most Tampa homeowners have not owed tax on the forgiven amount of their principle residence. While homeowners must report the canceled debt as income (Form 1099-A), most are granted a corresponding deduction (Form 982) to write off the income. Consult a qualified tax professional for details and see this NAR Summary.

HR 3648 Expires in 2012

A short sale can take several months to complete if the lender delays, or if the buyer withdraws causing the process to start over. If you think that a short sale may be in your future, be advised that the H.R. 3648 Mortgage Debt Relief Act expires December 31, 2012! At that time, the law will either be renewed or it will expire.

Credit Score

It is possible to do a short sale without missing payments. Missing mortgage payments will lower your credit score. The more payments you miss, the greater the impact. Alternatives to foreclosure, such as short sales, and deeds-in-lieu of foreclosure are often recorded as “not paid as agreed”. While not as potentially damaging as a foreclosure, your FICO score will be negatively impacted. A short sale could potentially avoid: a higher amount owed, a collections action, a deficiency judgment and other derogatory public records. For up-to-date credit and legal advice, we highly recommend consulting a credit counselor, CPA or attorney.

Deficiency Judgment

Florida is a state in which lenders have recourse to pursue uncollected debts. If a loan is not paid in full, a lender can ask the court for a “deficiency judgment” that allows the lender to collect the balance of funds owed. This is true for both foreclosures and short sales. In 100% of foreclosures in Florida, lenders are entitled pursue a deficiency judgment. In some short sales, the lender waives the right to a deficiency. In almost all cases, a short sale results in a lower possible deficiency. Since short sales usually result in a higher sale price and a lower loss to the bank, you will be exposed to a lower potential deficiency. If lender forecloses, the loss severity is greater (outstanding mortgage principle, legal fees, holding costs, maintenance costs, homeowner association fees, taxes, commissions and closing costs). Every short sale is evaluated on a cases-by-case basis. It is impossible to predict if a lender will waive their right to pursue a deficiency judgment. The business case will potentially be evaluated by several parties: the servicer, the investor, the mortgage insurance company, Fannie Mae and/or HUD.

Buying Again

Fannie Mae has issued guidelines on how long a borrower must wait to obtain a federally insured loan (see Announcement SEL-2010-05 : Underwriting Borrowers with a Prior Preforeclosure Sale). The new guideline only apply to Fannie Mae loans. FHA and VA have shorter waiting periods. The waiting period for those who did a Short Sale depends upon the proposed loan-to-value ratio of the new loan: you could buy again in 2 years with 20% down, 4 years with 10% down, and 7 years with less than 10% down (all figures are subject to change). Borrowers who can document extenuating circumstances can buy even sooner. By contrast, buyers with a true foreclosure must wait 7 years.

Proceed With Caution

Review the terms and conditions of the short sale approval carefully. A mortgage has two parts: a pledge of collateral (the home) and a promise to pay off the loan (the note). When the lender agrees to a sale, they are releasing their claim on the title of the home but not necessarily the debt. Ideally, a short sale approval letter would contain the following language  such as “lender waives all rights to pursue a deficiency judgment” and “full satisfaction of the debt”.  We recommend relying upon a real estate attorney to evaluate the short sale approval letter, deficiency waiver, and any potential promissory note. An attorney can interpret the often ambiguous language contained within an approval letter and offer an opinion if the deficiency balance is forgiven, or how long the lender can pursue this judgment.

Qualified Assistance

A short sale may save you from the distress that foreclosure causes on your credit, finances, future employment and stability. Can you afford to go down this road with an average real estate agent who is still going through on-the-job training for short sales? As Certified Distressed Property Experts (CDPEs), Annette, Doug and Dale Bohannon have training and systems to help navigate the short sale approval process. The Bohannons have the most current information about government programs, participating lenders and required documentation. Even in a short sale scenario, however, it is important to reduce the potential loss and sell for top dollar.

See ShortSaleMoves.com for more information or contact the Bohannons at Coldwell Banker Residential Real Estate in Tampa, Florida for a confidential consultation.

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FTC DISCLAIMER: You may stop doing business with us at any time. You may accept or reject the offer of mortgage assistance we obtain from your lender [or servicer]. If you reject the offer, you do not have to pay us. If you accept the offer, you will have to pay us [per the listing agreement] for our services.  Coldwell Banker & Team Bohannon are not associated with the government, and our service is not approved by the government or your lender.  Even if you accept this offer and use our service, your lender may not agree to change your loan. If you stop paying your mortgage, you could lose your home and damage your credit rating.
 
FURTHERMORE: The listing agent will not provide Sellers with legal or tax advice. Sellers should consult a certified public accountant in the matters of state and federal taxes. Sellers should seek independent Counsel such as a real estate attorney to understand the legal implications and questions about selling the property. The listing agent may only perform clerical functions relating to the “short sale” part of the transaction.