Sellers – Short Sale FAQ
If you have a question about short sales and cannot find the answer listed below, feel free to contact me at 719-660-9058.
What is a short sale?
A short sale is the situation in which a homeowner cannot sell their home to cover the amount owed on their loan and is therefore upside down. It is up to the lien holder(s) as to whether they will accept the shortage and release the lien.
Should I stop making mortgage payments?
Most banks no longer require a borrower to be behind on payments in order to consider a short sale. Although the bank will make their recommendation on whether or not to keep current on payments, it is ultimately up to the borrower. Many borrowers cannot afford to keep up on their mortgage needing to short sale their home.
Are there alternative options to short selling my home?
A borrower’s loan type and situation will impact what alternative options are available. Contacting the bank to discuss your situation is the first step. Some borrowers decide to modify their loan in order to avoid a short sale and make the mortgage payment more manageable. A negative alternative to a short sale is foreclosure and can be avoided with the options now available to borrowers.
What if the home is a rental property?
Short sales can be completed on investment properties. If the property is a rental, there may be tax ramifications as a result of a short sale and it is important to consult with an accountant. Borrowers with an FHA loan may not be eligible for a short sale if the property was rented for 18 months or more.
How long do I have to wait before purchasing a home again?
It depends. Borrowers who stay current on their payments and have a good credit score, are able to purchase a home after a short sale is completed as long as they downsize. An FHA loan is also the only loan product that can be utilized. If payments were missed, most borrowers have to wait two years to purchase a home after a short sale. It is best to gain advice from an experienced loan officer regarding your options to purchase after a short sale.
How long will the short sale take?
Every bank is different and if the lender is local, it should take less time. Lenders are getting better with short sales but still have a long way to go. If the loan is VA or FHA backed, it can take longer to obtain approval. Additional liens or judgments can also cause delays in short sale approval. The other part of the formula is the listing agent the homeowner hires. Hiring a real estate agent in Colorado Springs that has short sale experience is important.
Do I qualify for the Mortgage Forgiveness Debt Relief Act?
As long as the property is a primary residence or was a primary residence when a borrower first defaulted on payments, the deficiency amount should be forgiven under the Mortgage Debt Relief Act. It is recommended that homeowners considering a short sale speak with the IRS or a CPA to make sure they qualify. There may be tax consequences for homeowners that obtained a Home Equity Line of Credit (HELOC).
I received a Notice of Election and Demand (NED) from the El Paso County Public Trustee’s Office, can I avoid foreclosure?
It is best to list the home for sale before the NED is received with a pre foreclosure. Once the NED is received, the clock starts ticking. The NED marks the beginning of the foreclosure process and then the seller has approximately 120 until the home goes to foreclosure sale at the auction; unless, the seller becomes current again with mortgage payments or if a short sale is completed.
Will the bank postpone the foreclosure sale if I list my home for sale?
Typically banks will postpone the sale once an offer from a buyer is received. Some banks will not postpone the foreclosure sale date at all, it depends on the lender. There is a cost involved when banks postpone the foreclosure sale date and banks may also have a limited number of times that it can be postponed.
Will I be responsible for the deficiency amount?
Depending on the seller’s hardship, the lien holder may or may not require a promissory note (promise to pay back) for part or all of the difference. Whether the bank will pursue a deficiency judgment must be made clear in the short sale approval letter that is issued to the borrower. It is important to make sure the bank discharges the mortgage and agrees the borrower will not be responsible for the deficiency after the short sale. After closing, the seller will receive a 1009C which can be given to a tax professional to determine if there will be any tax consequences.
What happens to monies in my escrow account?
Any remaining funds in your escrow account typically goes to the lien holder.
Can I receive money back at closing?
No. When a short sale is performed, the seller(s) cannot receive any proceeds from the sale of the property.
Can a family member purchase the home I am short selling?
Nearly every bank has an “arm’s length” affidavit that must be signed by all parties agreeing that the short sale is an “arm’s length” transaction affirming that none of the parties are related or affiliated.
Will my credit score be affected?
Yes. Typically, the credit report will reflect the account was paid in full for less than the full balance. It is agreed by many that short sale is better than a foreclosure but there are still negative implications the seller must be aware of when it comes to a short sale. Therefore, it is wise to seek the counsel of a tax professional or attorney.