Short Sale Addendums are becoming more apparent in the current market as we see the effects of ARMS and investors homes on the market. To educate both Buyers and Sellers about Short Sales, we have included information that will help both understand the procedure of buying or selling a home with one of these Addendums in place.

A short sale occurs when the lender that owns the mortgage on a property is shorted on the sale. In other words, they agree to take less  than the total amount that is due on the note from the borrower. For example  If your mortgage is $200,000, but your home in your current market is worth $190,000, you would be looking at  $10,000 short. This would not include your  costs to close the sale such as real estate commissions and  title and escrow charges.

In the current market with may sub prime loans foreclosing, the bank may  authorize a short sale to avoid going through the cost of foreclosure especially if the homeowners are in a pre foreclosure status.

The following steps would be taken to list your home as a short sale:

Seller would sign a listing agreement  with a real estate agent  and it would be subject to selling  the home as a short sale with third-party approval. IE the bank. 

The agent  would then find  a buyer who would make a offer on the home that is less than the amount of the mortgage.

The  Sellers lender then accepts the buyer’s offer to purchase the home.

The Transaction closes when the buyer delivers the funds to close on the home. The  lender then  releases the lien on the home,  and the seller delivers the deed  to the buyer.

There are however consequences to a short sale the are important to remember.

There has to be certain criteria met to qualify for a short sale. If you are unable to answer yes then you may not qualify.

1.The home value has dropped.

2. There must be hard comparables to show the home is worth less than the unpaid balance due to the lender. This balance also may include a prepayment penalty

3. The mortgage must be in default.

4. The Seller must delver a letter of hardship explaining why they cannot pay the difference due upon sale, and including why the seller has stopped making monthly payments. Hardship examples are: Unemployment, Divorce, Medical emergency /sudden illness, Bankruptcy, Death, or lack fo Financial Assets.

The lender will review  a copy of the seller’s tax returns and / or a financial statement.

If the review discovers assets, the short sale may not occur as the lender feels that the seller has the ability to pay the shorted difference with their own assets.

For example,  if the seller has any cash in a savings account, owns stocks, bonds, or has an IRA,  and /or other real estate, the lender will most likely determine that the seller has assets. The short sales that get accepted are usually those where the seller has no money or assets.

Short Sales have Consequences

In order for a short sale to happen there has to be an offer to purchase, and also the lender has to accept the offer.

I If the lender agrees the lender has the right to issue you  a 1099 for the shorted difference, due to a provision in the IRS code about debt forgiveness.

You should  consult with a real estate lawyer and a tax accountant to determine the amount of short sale taxes and whether you can afford to pay that tax.

A short sale will show up on your credit report as a pre-foreclosure that has been redeemed.  The damage to your credit report may not be as  bad as a foreclosure, for example, some creditors may not make the distinction they still affect your credit score.

You should always seek legal counsel before attempting to pursue a short sale. A real estate agents , we cannot give you any legal advice.