MiOaklandCounty.com is happy to welcome back mortgage guru, Ken Mascia, the President of Oxford Financial.
This is just a little follow up of the piece I wrote earlier this month I Owe More Than My House is Worth! There have been a number of questions about Short Sales and I have a few answers.
The definition of a Short Sale is when you owe more on a property than it can be sold for and your lender agrees to accept less money than they are owed in an effort to keep the home from going into foreclosure. No lender wants to foreclose on anyone. It’s a lot of work and nobody wins.
What Steps Do I Need to Take for a Short Sale? Well, the first thing is to verify the value of the property. In order for a lender to consider a short sale they will first want to appraise the home. They will have to justify why they took less than they were owed on the loan.
Next, you want to add up all of the costs of selling the property. These will include real estate commissions, transfer taxes, closing costs and title fees.
Then get the balances of all loans owed on the home. Don’t forget, the principal balance is not the payoff. The payoff will include accrued interest and any unpaid late fees, etc.
Add all of these things up and the total is the amount needed to walk away from the home even money. If these costs total more than the value of the property the difference is the “Short Sale†amount. This is the amount the lender stands to lose if it accepts the sale.
How Does the Short Sale Affect the Owners Credit Rating? This is somewhat of a gray area. It doesn’t have to have any negative impact on the owners credit score as long as the owner continues to make the mortgage payments on time. If you miss payments at anytime during the loan term these will show up on your credit report and can lower your credit score dramatically. Of course, one of the main factors in evaluating a loan application is the borrowers past history with making payments on time. So, keep those payments on schedule! The short sale, if handled correctly, should not result in a major black mark on your credit.
For more current information on Michigan Short Sales, be sure to look at some of our newer article:
From the Mailbag: A Short Sale Question
Short Sales: The New Frontier for Bank Fraud
11 Things About Buying a Short Sale in Michigan
The Foreclosure Process in Michigan
When you need assistance with financing your next home purchase or refinancing your existing home, please call Ken Mascia directly at 248.644.1200. Other finance and mortgage articles by Ken Mascia.
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Written by Maureen Francis
SKBK Sotheby's International Realty, 248.430.4450
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Kristal Kraft 10.17.06 at 11:29 am
Thanks for the great article. I’ve blogged back to you from TheDenver.Blogs
Maureen Francis 10.17.06 at 11:41 am
Kristal, we love a good blogback from Denver.
kkraft 10.17.06 at 1:26 pm
My dear mm, I added it last night! Once again great minds think alike.
Tj 01.09.07 at 4:26 pm
Do you need to have a real estate agent to assit with short sale? Will they help you find a buyer? Are there any in my area?
Brian Brady 01.16.07 at 8:17 pm
This information is quite useful. Most sellers think they will be ruined if they are affected by a short sale. Negotiating with a lender in good faith and continuing to make payments can protect your credit rating.
Denise 05.03.07 at 8:09 pm
This information is not fully correct. The amount that is negotiated off of the balance WILL be reported on your credit. The bank may take you to court and file for a judgement which means they can place a judgement for the deficiency on your credit. This is known as a deficiency judgement. It may also be reported as forgiven debt to the IRS and you will have to pay INCOME TAXES on that forgiven amount. You will receive a 1099 for the amount not paid back. Sometimes this can be 50-100 thousand dollars! Also, you have several options when in this situation and one of them is to take on an unsecured note for the amount of the unpaid balance. The drawback to this is you will be making payments that may have the same terms as your old loan, and with some Adjustable Rate Mortgages, this can be as high as 9 or 10 percent! The terms of this unsecured note probably won’t be as easy as a 30 year time to pay this money back, too. The other part is, if you are in a major financial hardship, how can you afford to pay this money back when you have nothing? The second major flaw in this article is that the banks will not speak to you about working out a short sale most of the time until you already are on the brink of foreclosure with at least two payments not paid.
Speak to a Realtor that is experienced in negotiating short sales and has done their homework. A short sale may not be the best route for you to go, but I would recommend that you call your bank before you do anything, then consult with a knowledgeable person in your area.
Sandy 07.12.07 at 6:31 pm
I have taken a series of Short Slae course for the Austin, Tx areas and have found with a system a short sale can be smooth and clean. The banks are more willing to help when the agent is educated with short sales.
Steve 08.14.07 at 9:48 pm
I am currently in the process of trying to negotiate a short sale with the bank. The house that we have was orginally our primary home but we had since moved out of state 4 years ago and had been renting it out. Because of my bad judgement on a adjustable rate mortgage on both the first and second mortgage, I was no longer able to afford my mortgage payments and had put the home up for sale a year ago while my renter was still in it. The renter left in February which really put me in a bind. I had no other recourse but to continue to try and sell it. I tried to be pro-active and negotiate with the bank in holding off on payments, but they said they wouldn’t help until I was several months behind. (Regardless of what they tell you, I feel they want you to fail). I finally did get their attention when I stopped making payments. It took about three months of threatening phone calls from the bank. I talked along with letter writing asking for them to take the home back because I coudn’t sell the home for what I owed. It wasn’t the home or the area, it was the economy. I asked several times in writing and talking about a short sale but couldn’t get anyone to listen. After I was five months late on payments, the bank asked me about a short sale. The price was lowered $30,000 then we got an offer at $40,000 less than what was owed. All the paper work was submitted and is still tied up with getting an answer. This has been nearly a month and the buyers are thretening to back out. This is not an easy thing to accomplish, at least with Chase bank. If you thought our government is screwed up, try dealing with banks. They apparently don’t have any quality control department. Nobody knows what’s going on. In the meantime, the first mortgage holder (also Chase) has put the home in forclosure even though I spoke and sent them the short sale purchase offer agreement. I say good luck!
Sandy 08.14.07 at 10:06 pm
Man Steve, I must say I agree with you 100%. Some bank don’t work with you and some bank get you to the finish line make you jump through hoops then pull the rug from under you. There is usually only a 75% success rate, sometimes less!!! All I can say is get a realtor!!!! Let them do the leg work, let them take the stress, let them negotiate with the banks! I have lost some deals I have won some deals, it is part of the game. BUT the sellers who I won, ended in a better spot, the ones that lost are no worst off than they started! ALSO, I have worked with banks on multiple deals and they are never the same!!! I ask myself many times why am I doing this???????????????????? There are many reason, the obvious if I succeed I get paid by the banks, the other is I have been where some of these sellers are and it sucks having no one to lean on and no one to get true help from, usually when your struggling with finances even more real estate the people with money in their pockets prey on the little guy! I hope all works out!
Brian Holden 08.23.07 at 1:32 am
I would advise anyone facing foreclosure to discuss their situation with an experienced Realtor. Short Sales are not a part of real estate basic training but there are a number of educational seminars a Realtor can take to get up to speed. Lenders will pay a reasonable selling commission so Realtors have an incentive to get involved in Short Sale situations.
The basic requirements for a Short Sale are a Listing Agreement with a Realtor and a Sales Contract from a Buyer which are submitted to the Lender along with a Hardship Letter from the Seller explaining why they cannot continue to pay the mortgage and supporting documents such as tax returns, bank statements, information and photos of the home and the Comps, or comparative home prices supporting the offer. The way mortgages are sold, the mortgage holder can be anywhere and certainly not aware of local real estate conditions.
If the package is complete, the Lender will order a BPO, or Broker’s Price Opinion, from an independent Realtor. Ths BPO is the key to the whole process. If it is too high, the Lender will not accept a low offer. Your Realtor can meet with the Agent doing the BPO and offer information supporting the offer, such as the average time on market of comparable homes, recent selling prices and point out any defects in the home. Most Lenders will accept an offer lower than the BPO, but usually not much more than 10% lower, though that will vary depending on the company.
The sales contract should specifically state that the offer is contingent on the Lender accepting the purchase price in full and forgiving the Seller the deficiency on the mortgage. Yes, there can be tax consequences. The Seller does receive a 1099 on the forgiven part of the mortgage, but there are provisions in the tax code for the offset of the phantom income due to insolvency. Most Short Sellers will satisfy the insolvency requirements or the Lender would not be allowing the Short Sale in the first place. Be aware too that if the home goes to foreclosure, a 1099 is received for the FULL amount of the mortgage, plus late fees, legal fees etc. Obviously every individual situation is different so a CPA or tax attorney should be consulted.
The process does all take time and Lenders are swamped, expect at least 2-3 months before a sale can be finalized, even if the Lender accepts the first offer. If they do not, the price can be negotiated.
I am a Realtor, a Broker Associate and I am involved in Short Sales. It is a detailed but fairly straightforward process that can work to benefit Buyer, Seller and even the Lender. The Buyer gets a good price on a home, the Seller gets to avoid the disruption and credit hit of a foreclosure and the Lender avoids the delay and expense of foreclosing on a property they don’t want to own and that would negatively impact their ability to make more loans.
Maureen Francis 08.23.07 at 5:45 am
Brian,
In the future, please avoid spam comments on my blog. You have cut and pasted this comment and are using it other places. If you came here to genuinely engage in some dialogue that is fine, but I do not provide a free advertising forum for your site. I have removed the links to your site from your comment. In the future, if you have something original to say, please feel free to comment.
Robert Aldana 08.30.07 at 4:46 am
I invite you to view my interview with CPA Manuel Alvarez on my television show “Let’s Talk Real Estate!” as we discuss the tax consequences of a Short Sale and Foreclosure. You can view the show online at:
http://www.letstalkrealestate.com/ltretelevision.htm
It is also available in Spanish. Best of luck!
Robert Aldana
REALTOR and Host of TV & Radio’s “Let’s Talk Real Estate!”
http://www.letstalkrealestate.com
Alan Bennington 09.16.07 at 2:54 pm
Ken,
I believe you are really doing your readers a disservice when discussing short sales. You say that if handled correctly the homeowner should not suffer a major black mark on their record. This could not be further from the truth.
First off, you don’t mention this, but the lender won’t entertain a short sale until the loan is in default…why would they discount a performing note? If the homeowner is in default their credit is already damaged. Default is defined as 60 days late.
The short sale benefits everyone. The bank loses less than if they went to auction…the homeowner benefits by not having a foreclosure and/or a bankruptcy…the debt is gone…the lenders seldom go after a deficiency judgment; so, only the issuance of a 1099 C remains (forgiveness of debt ). If you are insolvent at the time , and you most likely are, you’ll file an IRS form 944 or 982 to remove the tax burden.
There are less points deducted from a credit file with a short sale or a deed-in lieu. A full foreclosure will subtract a minimum of 200 points…a devastating reduction and will remain on a credit file for ten years unless removed.
The end buyer…a retail buyer or an investor either saves money or makes money on this transaction.
Andrea 10.29.07 at 10:29 pm
Well, I am basicly here to find out some answers to my question. My husband and I are first time home buyers. We purchased a home a yr ago.We have dumped almost $4000 into the main bathroom with updates. I during this time had my hours cut from 40 down to 5 a week. its killing us. We have fell 4 payments behind on our mortgage and was told by our Lender we need to look into doing a Short Sale on the property before it is foreclosed on. I don’t even know where to being??? I am so over whelmed with friends/family telling us that we need to just let it be foreclosed on since we have no savings or any assets the bank cant get blood from a turn-up. Yet, on the other hand I am told to do a short sale all because it looks better on our credit as at least we tried even though we will get hit with all the Taxes on the difference in the long run. Although I am not sure with the way the economy in Michigan looks at this point that our house will even sell before it is foreclosed on.
What do I do? where do I begin? who do I believe? Who is a good realtor in Michigan to even begin this process with?
Steve 10.30.07 at 9:23 am
Andrea,
I’m the one with the short sale horror story posted back in August. Please read it again. The one thing I left out was that we have been working with an experienced Realtor, which is contrary to what Sandy suggested.
To update what has been going on, the one month offer sitting on the table stretched into two months. On the day the the people with the offer walked, the
bank agreed to a short sale. Trying to get the people back didn’t work because they felt that there was something fishy going on. We also received a cash offer for 20,000 less than the original short sale offer. It has taken them a month so far without a decission. My case is a little different than allot of people because there is a first and second note on the home. The first can be satisfied without any problem. But the second is the one that has been holding up the deal.
I don’t know what part of Michigan you’re in, but this is taking place in Royal Oak. I live out of state now.
Maureen Francis 10.30.07 at 9:32 am
Andrea,
I am sorry to hear you are in this situation. Feel free to give me a call and I will see if we can help you with some of your questions.
Maureen
248.430.4450
Erin 10.30.07 at 9:32 pm
Do you have any advice about what to do when you have already closed and the title has been transferred but the bank won’t forgive the difference or even make a settlement?? Now they’ve charged it off and sent it to a collections agency.
We got in over our heads thanks to a bad refinance deal (fairly sure we had an inflated appraisal and some other predatory lending stuff with it). We managed to get the bank (HSBC who bought the loan right after the refinance) to agree to a short sale but the difference was over $37,000 less than we owed. Mistake on our part was to not put that they would forgive the difference into the sales contract because at closing the letter they issued informed us we would be responsible for it. That with all our other debt means we are looking at filing for bankruptcy. We would be able to pay off all our other debt w/o bankruptcy but this doubles it and is completely unmanageable for us.
We are in western Michigan but if you have any suggestions of what to do or a referral to a lawyer or someone who might be able to help us, I would appreciate it.
I can find lots of info on how to “buy a short sale” or what a short sale is but nothing that helps those of us stuck in the fallout.
Erin 10.30.07 at 9:35 pm
I’m looking for advice (I wrote a comment but it doesn’t seem to have posted?)
If you have any suggestions on what to do when the bank refused to “forgive” the difference after a short sale and you have no way of paying that sum of money (or even making any payments)….
We are in west Michigan.
Feel free to e-mail me if you want or need more details.
Alan Bennington 10.30.07 at 10:24 pm
Erin,
I don’t know your email? Call me EST 770-897-9070
I don’t know all of your details?
Read a post of mine up a few from yours.
Alan
Erin 10.31.07 at 9:14 pm
Erg, I guess the first post posted after all….
So that is a little more detail.
If you want to e-mail for more: you can reach me to momtowidget at gmail.com
Nikki 11.07.07 at 10:00 pm
I am thinking about entering into a short sale. Should I retain an attorney or would an experienced short sale realtor be able to handle everything. I don’t want to spend money on a lawyer if i don’t have to.
Tim 11.08.07 at 1:23 am
Good information about Short Sale and Foreclosure Effects on Credit
http://homebuying.about.com/od/4closureshortsales/qt/060907SScredit.htm
Tim 11.08.07 at 1:31 am
How Short Sale will affect me if I have private mortgage insurance ?
Will I have debt ? If yes, will I pay taxes ?
Kwabena 03.29.08 at 11:50 pm
When I Realtor arrange a short sale with the bank, can that same realtor be the listing or selling agent, and does the realtor that start the short sale, if he is not the same person to list or be the seller’s agent, does he get paid and how.
Maureen Francis 03.30.08 at 8:22 am
Kwabena,
Yes, the same Realtor (in Michigan) can represent the buyer and the seller.
I am not sure what you mean by the Realtor who starts the short sale? Is that the buyer’s agent? If he is the buyer’s agent, he gets paid if it closes. He gets paid from the commission the bank is willing to pay. Most banks will pay a commission to Realtors on short sales and it is split between the listing broker and the selling broker.
Susan Milner 04.29.08 at 3:27 pm
Great post. We’ve been handling short sales here and it is so difficult to gauge exactly how much they are truly affecting credit. There are many factors to consider.
1) How long have they missed previous payments
2) How are they handling their other debts
3) How were the negotiations handled - what the bank is reporting.
I’ve read many misleading articles of advice out there. Some say a short sale is as bad as a foreclosure - NO WAY. Some say a short sale won’t affect credit at all - Um I think not.
But depending upon each individual case the outcome will be different.
Alan Bennington 04.29.08 at 10:23 pm
Susan,
You are certainly correct about reading “bad” articles.
A short sale, foreclosure and a DIL ( deed-in -lieu) are all treated the same in credit reporting… a code 22. Paid less than agreed or settled for less than agreed…it’s a
100-200 point FICO score drop on average.
Janil Peguero 10.06.08 at 9:45 pm
Distress is something that many people are going through at this moment. However, I am an experienced realtor in the state of Florida and I am designated aa Certified Distress Property Expert.
ann 10.28.08 at 11:10 am
I am thinking of doing a short sale on my home. The house needs alot of repairs in order to sell if for what it is worth. So therefore the short sale. I am now 3 months behind, and you DO have to be behind in order for the bank to accept the short sale. But I was wondering if you can advise me, if this is a bad time to do a short sall,and if I do end up doing the short sale, will it have any affect on my trying to buy something else say in a couple of years or so. Please advise ASAP. Thanks.
Maureen Francis 10.28.08 at 11:28 am
Ann,
Your credit will start to get better with time. In terms of this being a good time to do a short sale, I don’t know what you mean. People should ask for a short sale when they are no longer able to make their payments and the home is worth less than the mortgage. If you are able to make your payments then it is a bad time to do a short sale. I don’t think a short sale is something you can time to chose a better time to do it than a worse time. What am I missing?
Jason 08.28.09 at 12:26 am
I will try to lay this out nice and easy if I lose you contact me with question I really need help don’t we all. I wanted to purchase a home in 2006 butt had no income fresh out of the ARMY home from Iraq. My wife’s mom purchased the home for us and did a quick claim deed and putts me on it (butt I’m not on the loan paper work just the title). The house was 140,000 and is on an arm that has expired a year ago my wife and I are the ones writing the checks to the Moorgate company HSBC we are now 40 days behind and are having trouble paying. The payment went up $390.00 a month which we cant afford other then getting a divorce and screwing over my mother in law I don’t know what to do. That was a bad joke I would never leave my wife I love her to much butt seriously I feel like I have no options at all. Four other houses on our street have been bank sold in the past year the last one only went four 60,000 and it has slightly less square footage then my house. HSBC tells me that there not taking on any more loans and say they don’t participate in any support programs that Obama has passed just try to sell it is all they say.
My email Jasonsosnowski2003@yahoo.com
P.S If any one has any constructive advice please contact me thank you in advance
Anthony 12.08.09 at 1:06 pm
Article states: “So, keep those payments on schedule! The short sale, if handled correctly, should not result in a major black mark on your credit.”
My experience: If you have the money to keep those payments on schedule, the lender won’t allow you to do a short sale.
Question: Why the term black mark? Why not white, yellow, red, green, mark?
This article is an oxymoron and the writer/editor is (using their preferred terminology) a “black mark” on the web.