Short Sales can be really frustrating and complex. That is why you need a professional in your corner guiding you through the process every step of the way. Here is a list of FAQs that may help explain Short Sales and Foreclosures. As always, contact me if you have any questions and need more information. I can generate a foreclosure and pre-foreclosure list for any area you like.
Q: What is HAFA?
Answer: Many homeowners may feel that they can no longer afford their home, but want to avoid the negative effects of foreclosure. The Home Affordable Foreclosure Alternatives (HAFA) Program offers homeowners, their mortgage servicers, and investors an incentive for completing a short sale or deed-in-lieu of foreclosure. With these options, under HAFA, a homeowner leaves their home to transition to more affordable housing and alleviate the mortgage debt they owe.
These options are available for homeowners who: 1. do not qualify for a trial mortgage modification under the Making Home Affordable Program; 2. do not successfully complete the trial period for their modification; 3. miss at least two consecutive payments during their modification period; or 4. request a short sale or deed-in-lieu of foreclosure.
Q: What is a Short Sale?
Answer: In a short sale, the lender agrees to settle the debt owed on the property for less than the full amount. “Settled” means that the lender is writing off the debt (which is why you get a 1099 after a short sale for the amount of debt forgiven) and that they are not going to go after you for the money they lost by filing a deficiency judgment in the future.
The HAFA Program streamlines short sales to make them easier for a homeowner to work with their servicer. Under the program, a homeowner can receive $3,000 to help with relocation costs.
Q: How will I know if I will qualify for a short sale?
Answer: Call me (760) 525-9735 and I can tell you over the phone whether you will likely qualify. The short answer is that the homeowner has to show some type of hardship like loss of income, divorce, death in the family, etc.
Q: How will a short sale affect my credit?
Answer: A short sale is recorded on your credit report as “debt settled for less than the amount owed”. This typically will result in a relatively minor hit on your credit compared to a foreclosure or late payments on your mortgage. The more established your credit, the less of an impact it will have on your score.
The reason you often hear that a short sale will drop your credit 100 points or more, is that, many people, when they do a short sale, stop making their mortgage payments. If you stop making your mortgage payments, regardless of whether you do a short sale or not, missed mortgage payments will have a significant negative impact on your credit. In other words, it is the missed mortgage payments that have the big impact on your credit, not the short sale itself.
With this said, if you are already behind on your payments, you have already incurred the majority of the hit that a short sale will have on your credit. Doing a successful short sale at this point will insure that your debt is settled with your lender.
If you are current on your payments and can stay current throughout the short sale process, you will save your credit to a large extent.
Finally, if you must stop making your mortgage payments, there are various credit repair agencies that can repair your credit by removing late payments from your credit report after a short sale.
Q: Will I have to pay federal taxes on the money my lender loses in the short sale?
Answer: There are several different scenarios with regard to whether or not you will owe federal income taxes on the loss the lender takes in a short sale.
When you do a short sale, your lender is agreeing to settle the debt on the property for less than the amount they are owed. The IRS therefore allows them to write off this loss, which is why your lender will send you a 1099-C after the short sale.
The IRS considers “debt relief” to be income for tax purposes. In other words, if your lender writes off $50,000 on your short sale, they will send you a 1099-C for that amount, and you would include that when you file your income taxes. The “C” stands for “Cancellation of Debt” and the law says cancelled debt is taxable as income.
There are however a few exceptions that most people who do a short sale qualify for that exclude them from having to pay taxes on their short sale.
Thanks to the Mortgage Tax Debt Relief Act signed into law in January of 2008, homeowners who do a short sale on their primary residence, and have a purchase money loan (in other words, they have not pulled cash out of their home with a cash-out refinance) pay no taxes on the loss that their lender incurs in a short sale.
Homeowners who have pulled out cash from their home but have put that money back into their home to “substantially improve” their home, also are excluded from taxes on the short sale.
All other short sale scenarios – if you pulled cash out on your primary residence but spent it on something other than upgrading your home or if you are doing a short sale on a second home or investment property – result in a taxable event unless you qualify for the “Insolvency” exclusion.
The IRS does not require you to pay taxes on the loss the lender takes in a short sale if, at the time of the short sale, you are insolvent. Insolvency means your debts (including your mortgage) exceed the value of all your assets. In other words, if, at the time of the short sale, you have more debt than you do money or assets, you are considered insolvent.
Many people who find themselves facing a short sale are in exactly this situation and are thus excluded from paying taxes on a short sale. We recommend you check with your CPA or accountant or go to the IRS website and look up IRS Form 982, which is the IRS form for debt relief and short sales. The IRS gives an explanation of “Insolvency” on this form.
Finally, the time period for The Mortgage Tax Debt Relief Act was originally only slated to go until the end of 2008, however it has now been extended to the end of 2012.
Q: Will I have to pay CA state taxes on the money my lender loses in the short sale?
Answer: California has passed its own version of the federal Mortgage Tax Debt Relief Act. It is Senate Bill 1055, which conforms to the federal law described in detail above, but applies to California state income taxes on a short sale.
There are differences between the state and federal law. For example, the term of the California law was only until the end of 2008. As of Jan 2009, this law is no longer in effect.
However, CA Revenue & Taxation Code Section 17131 provides that, unless there is some specific California statute to the contrary, California law tracks federal law on what income is excluded from taxation. Since there is currently no specific California law on this issue, short sales do not produce taxable income under California law as long as the Federal Mortgage Tax Debt Forgiveness Act is in effect (until the end of 2012).
With this said, we recommend you review your specific tax scenario with your CPA or accountant and have them answer any tax questions that you have. We are not tax advisors and do not dispense tax advice.
Q: Can my lender go after me for the money it loses in the short sale?
Answer: The point of a short sale is to get out from under the debt of the mortgage. This is why your lender will send you a 1099-C after the short sale. The “C” in “1099-C” stands for “Cancellation of Debt.” Your lender cannot write off their loss on their corporate taxes, send you a 1099-C so you have to pay taxes on the loss, report the short sale as a “settled debt” on your credit and then turn around and go after you for the money.
If you hire and inexperienced short sale agent or negotiator who does not negotiate a full release from your lender, then, yes, you could be liable for the money the lender loses in a short sale or end up being forced to sign a promissory note to close the deal.
I do not ever recommend that our clients sign a promissory note or close escrow without a full written release from their lender(s).
Q: What if I have a first and a second loan on my property with 2 different lenders (or the same lender)?
Answer: Most people have a first and a second loan, often with 2 different lenders. For the short sale to reach a successful close of escrow, both lenders have to approve the short sale and agree to settle the debt.
It is important to note that both lenders have a vested interest in doing this. The lender with the first loan does not want to foreclose, and therefore is willing to give a little money to the second in order to get them to agree to the short sale.
The second lender will get nothing if the first forecloses, so with the attitude that something is better than nothing, they will agree to take a fraction of what they are owed in order to avoid getting absolutely nothing.
Q: What is the difference between a recourse and a non recourse loan?
Answer: In general, a purchase money loan is considered to be a “non recourse” loan, while a “cash out” loan is considered to be a “recourse” loan.
The difference between these two loans is that in a “recourse loan” the lender technically has recourse to go after the borrower for the money they lose in a foreclosure. I say “technically” because, for this to happen, the lender has to file a judicial foreclosure, which is rarely done in California.
The overwhelming majority of foreclosures in California are “non-judicial” foreclosures, where the property is sold at a trustee sale.
Q: How will I know that I am being released from the debt?
Answer: It will be stated clearly on the bank’s short sale approval. Your lender will state (though in different verbiage depending on the lender) that they are “releasing the lien”, “accepting a short payoff to satisfy the lien”, “reporting the sale as a settled debt to the reporting agencies”, “issuing a full satisfaction of the mortgage”, “not pursuing a deficiency judgment”, or some other variation that states they are settling the debt for less than what they were owed.
Further, your bank will issue a 1099-C to you, the borrower, after the short sale, confirming that the debt has been written off and is settled. Your lender cannot write off the debt, issue you a 1099-C & then go after you for the deficiency.
Q: What are the advantages of a short sale vs. letting my home go to foreclosure?
Answer: The primary advantage to doing a short sale vs. walking away and letting your home go to foreclosure is that in a short sale the debt is settled and you no longer owe the bank any money. If your home goes to foreclosure, you may still be liable for the deficiency in the event that the bank files a judicial foreclosure.
A secondary (but still very important) advantage is that in a short sale, your credit takes much less of a hit compared to a foreclosure. The impact on your credit will vary depending on how established your credit is at the time of the short sale or foreclosure.
Finally, Fannie Mae & Freddie Mac revised their guidelines in August of 2008 with regard to how they view borrowers who have filed bankruptcy, gone through foreclosure or done a short sale. Through these new guidelines, they are in effect severely penalizing those who go the route of foreclosure or bankruptcy, and rewarding or encouraging those who do short sales, which they view as the borrower doing the responsible thing in light of the circumstances.
Per recent Fannie Mae / Freddie Mac guidelines, borrowers who file bankruptcy or go through foreclosure have to wait up to 7 years to buy another home.
By contrast, the new guidelines stipulate only a 24 month waiting period after a short sale, so borrowers who do a short sale can buy again in just 2 years.
Q: Are there any advantages to letting my home go to foreclosure vs. doing a short sale?
Answer: I have yet to hear a good argument for letting your home go to foreclosure vs. doing a successful short sale. Depending on whether you have a recourse or non-recourse loan, when you let your home go to foreclosure you either run the risk of being liable for the deficiency amount or liable for the income taxes on that loss.
Secondly, your credit will drop up to 400 points and you will not be able to buy a home or get any decent credit for up to 7 years.
The impact on your credit from a short sale will be significantly less than with a foreclosure and you will be able to buy again within 2 years, compared to up to a 7 year waiting period to buy a home after a foreclosure.
Further, the loss that the lender takes in a short sale will be MUCH LESS than the loss the lender takes at the end of the foreclosure process. The foreclosure process takes months & months, at the end of which the lender has to process the property through its overwhelmed system (another 3 -5 months) and then put the property back on the market.
Q: How much will a short sale cost me?
Answer: A short sale costs the seller nothing – the lender pays all closing costs, escrow fees, commissions etc. The lender may also pay any outstanding property taxes.
Q: How long will a short sale take?
Answer: The short sale process typically takes about 3-4 months, start to finish. It can take longer depending on how backlogged the lender is. You can live in the property for the entire duration of the short sale or you can move out whenever you wish.
Q: Do I need to be behind on my payments to do a short sale?
Answer: No. This is a common misconception. You do not need to be behind on your payments or have been late on a payment to do a short sale although the lenders are more motivated to do the short sale if you are not making payments.
Q: Do I need to hire an attorney to do a short sale?
Answer: It is our belief that you will be best represented in a short sale by a competent, experienced real estate agent who works every day in the real estate business, will market your property aggressively in order to attract buyers, and who is experienced at doing short sales and negotiating with lenders.
If you have questions about the tax implications of a short sale, we recommend you seek the advice of a qualified CPA or tax accountant.
If you want to explore filing bankruptcy, we recommend you seek the advice of a competent bankruptcy attorney. Call our office – we can recommend several.
With this said, a word of caution. Many attorneys seem to be preying on the fear and desperation of people facing foreclosure. Their websites use scare tactics to make people think that they would be crazy to do a short sale without first hiring an attorney, that attorneys are the only ones qualified to interpret a short sale approval, and that hiring an attorney is a normal and accepted part of doing a short sale, like hiring an attorney for divorce proceedings.
The bottom line is that this is just not the case. The overwhelming majority of short sales are conducted by real estate brokers who are experienced at negotiating with the lenders and charge NO UPFRONT FEES for their services.
Finally, many of these attorneys do not even negotiate the short sales themselves, and instead subcontract out all of the short sale negotiations. In our opinion, these short sale negotiation companies (known in the industry as “short sale mills”) are absolutely the wrong entities to entrust with the negotiation of your short sale. See the following FAQ.
Q: I found an attorney's short sale website that talks about a new law in California that, as of July 1 2009, supposedly limits negotiating short sales to attorneys ONLY. It says that from July 1 on, all short sales have to be negotiated by attorneys and not realtors. Is this true?
Answer: No. There has been a good deal of misinformation put out of late regarding this law by attorneys looking to get into the short sale business. We recommend you be very wary of any attorney trying to distort or interpret the law for his or her advantage.
The California Foreclosure Consultant Act (July 1 2009) applies to foreclosure consultants – those who collect an advance fee for modifying loans or helping borrowers avoid foreclosure in situations where a Notice of Default has been filed on the property. This Act has an exclusion in it for licensed real estate agents.
Per CA Civic Code and the CA Assoc of Realtors, The California Foreclosure Consultant Act does not apply to real estate agents facilitating a short sale except in the extremely unusual event that an agent is 1) Making a direct loan for a residence in foreclosure, 2) Acquiring an interest in a residence in foreclosure, 3) Receiving an advance fee before performing services for a residence in foreclosure, or 4) Assisting an owner in obtaining the remaining proceeds if any from a foreclosure sale of an owner's residence.
That's it. 99% of the short sales in CA have always been, and continue to be, negotiated and completed by licensed Realtors, not attorneys.
Q: Who will be negotiating my short sale with the bank? Do you do this in your office or do you sub it out to an outside company?
Answer: I negotiate the short sales personally. I do not farm any part of the negotiations out to an outside company and recommend you be extremely skeptical of any agent or attorney who uses an outside company to handle their short sale negotiations.
Real estate agents & bankruptcy attorneys are solicited on a daily basis by the many “short sale negotiation” companies that have sprung up on the web over the past couple of years. For the agents or attorneys that use these companies, it’s a very attractive set up: they just take the listing and refer the file out to the negotiation company, and wait to see what happens.
The agent has invested almost no time or effort into the deal, so if it closes, great, they pay a referral fee to the negotiator and keep the rest of the commission. If the negotiator tells them they couldn’t get an approval, or that the bank wants an unreasonable amount of money for the property, or the bank wants the seller to sign a promissory note, well, the agent has invested almost no time or money into the deal.
Q: Should I file bankruptcy? Will it allow me to keep my home? I’ve heard the lender cannot foreclose if I file bankruptcy.
Answer: There are 2 types of bankruptcy commonly used by individuals – Chapter 7 (“Fresh Start”) and Chapter 13 (“Wage Earner”). Chapter 7 can enable individual filers to wipe away debts such as credit card and medical bills so they can continue to make their mortgage payments.
Chapter 13 involves setting up a 3-5 year repayment plan to repay your debts. Chapter 13 requires that you are earning a steady income, as you will be repaying all of your debt. Both have a very negative impact on your credit and remain on your credit report for 10 years.
Because of the new 2005 bankruptcy law, which raised the bar for people to qualify for Chapter 7 "fresh start" bankruptcy proceedings, fewer and fewer people pass the “means” test to qualify for Chapter 7 and for this reason can only qualify for Chapter 13 bankruptcy (a 3-5 year repayment plan).
While both Chapter 7 and Chapter 13 can temporarily delay foreclosure proceedings, neither will allow you to keep your home unless you can bring your mortgage current.
If you would like more information on whether a bankruptcy is right for you, we recommend you consult a competent bankruptcy attorney, as we are not attorneys and do not dispense legal advice. Call our office – we can recommend several.
Q: Can any agent do a short sale?
Answer: Absolutely not. Many agents have no interest in doing short sales because they require a tremendous amount of time and expertise, and if you do not know what you are doing, they often go to foreclosure and then the agent does not get paid. If an agent is not extremely experienced at doing short sales then I would not use them.
You get one shot at doing a short sale – if your agent does not know what they are doing and has not learned the many tricks to the trade, you will likely find yourself being asked to sign a promissory note or worse, be denied by your lender or lenders and go to foreclosure.
In other words, let the inexperienced agents and/or attorneys learn the short sale process on someone else’s property – as the saying goes, don’t allow yourself to be one of the surgeon’s first patients.
Q: Why should I use BEACHBROKERBILL?
Answer: 1) I am certified by the National Association of REALTORS as a Short Sale and Foreclosure Resource (SFR) Specialist. 2) I believe we will do the most effective job at marketing your property (remember, I have to generate offers from qualified buyers & sell your property) 3) You need someone you can trust and in this industry, they are hard to find. Luckily, you found me!