What is a “Short Sale?”
A “short sale” is an agreement between the seller and their mortgage lender, allowing the home to be sold for less than the existing loan balance. The mortgage lender agrees to accept less to cut its losses and accepts a reduced payoff amount and relieases its lien on the real estate. The lender may or may not release the homeowner from the remaining balance due on the loan.
Why would a lender accept a “Short Sale?”
-To avoid the cost of foreclosure
-To avoid the cost of taking back the property as an REO – carrying/selling costs
-To keep their liquidity ratios in line with federal regulations. Federal regulations require that lenders maintain a certain ratio of bad loans to cash/liquidity. The fewer bad loans on the books, the less funds the lender has to have.
Under what conditions would a lender accept a “Short Sale?”
- Financial situation of the homeowner – the homeowner must pass the lender’s “hardship test.” Some examples:
- Divorce or death
- Serious illness of homeowner or member of immediate family
- Active military duty
- Lack of employment as verified by local economic conditions
- Job related relocation and homeowner cannont sell or rent property
- Conditions of the property – does it need significant repairs to be marketable?
- Conditions in the local real estate economy
- The transaction must be ” arms length” – purchaser cannot be family member
- Homeowner cannot receive any proceeds from the sale of the property
- Miscellaneous considerations:
- Effect on Sellers credit – the short sale will likely be reported as “paid settled for lass than originally owed.” This is better than reporting a foreclosure.
- The amount of the debt that is forgiven by the lender is taxable as “ordinary income” and will be reported by the lender on Form 1099. Congress has temporarily eliminated this negative tax treatment.
