What is a Short Sale and how would it Affect me?
February 6, 2009 by Gordon Corsie · Leave a Comment
Simply put a short sale is a process of selling a house where the proceeds are insufficient to pay off the loan amount. Before Escrow closes the lender or lenders if there are more that one need to agree and provide in writing an approval of the process and the amount “shorted” to them. This can be a lengthy and frustrating process compounded by often times a lack of skilled staff on the bank side who really have no understanding of a real estate transaction, the law or common procedures.
However there are good reasons for all parties bank, seller and buyer to conduct a short sale and if done correctly it can be a win win situation.
There can often be tax ramifications for the seller in a short sale and much will have to do with the existing loan and if it is a RECOURSE or NON_RECOURSE loan. More on that later. To be safe check with a tax attorney or accountant before you do anything.
The process can be aided by hiring an agent that is familiar with the short sale process. He or she can help a seller put together a package and open a dialogue with the lender to ease the way. It is best if the process is begun at least several weeks before the house is placed on the market. Banks are notorious for being slow to respond and it may take 2 months to get the pre approval process which includes
- Seller providing a hardship letter
- providing last 3 months W2s
- profit and loss statement for the seller for the last 3 months in a format acceptable
- statement of expenses for the seller (household)
In addition the lender will need;
- A fully executed listing agreement
- A fully executed purchase agreement
- A fully executed bank addendum
- An affidavit from the seller stating this is an arms length transaction. (Banks are concerned that the seller not receive any hidden credits or kickbacks from the agents involved).
Once the bank has these items they will review and provide an answer usually in about 4 weeks, and after a positive approval then the escrow on the house can proceed as normal and usually can close in a month or so after that.
- Q/ Can the government come after a homeowner for a tax payment for the forgiven amount?
A/ That was the norm in the past however if the loan is a non-recourse loan on a personal residence then currently there is no tax liability. However if The loan is a recourse loan (refinance or purchase money loan for an investment property) then there is a possibility that the mortgagor will receive a 1099 for the forgiven amount and may owe income tax on that amount. CHECK WITH YOUR LEGAL AND FINANCIAL PROFESSIONALS!
- Q/Will my credit be affected?
A/Yes but less affected than if you do nothing and the home goes to foreclosure!
If you would like to get more info give us a call 461-0993 we will be happy to sit down and have a chat.
Guidelines for a successful short sale.
Get organized, have all your household and financial paperwork handy.
START EARLY! The entire process will take 3-5 months.
Find a professional Realtor that has experience with short sales. Ask them point blank how many they have handled and how many they have closed. This is not a time to use an inexperienced person!
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