In a short sale, the bank or mortgage lender agrees to accept a reduced payoff – an amount less than what the borrower owes on his or her mortgage due to an economic or financial hardship on the part of the borrower. Typical economic hardships are: loss of employment, divorce and reduction in income, medical bills, even employment relocation.

Simple economics: a short sale can be mutually beneficial to the borrower and the lender. As a result of the sale, the lender suffers reduced financial loss while the borrower disposes of his or her unaffordable asset. Most times, the lender recognizes that a short sale is a faster and less expensive alternative to foreclosure. It also allows borrowers to mitigate damage to their credit history and partially control their financial liabilities.

To initiate the short sale process, the lender is presented with a written request for a short sale. Lenders usually have loss mitigation departments that evaluate short sale transactions. The written request for short sale is accompanied by data related to the borrower’s financial hardship and includes paystubs, tax returns and a hardship letter. Once the lender receives the required documents, the file is assigned to a negotiator for review. The negotiator will ultimately determine if the borrower is eligible for a short sale. It should be noted that most banks will not review a short sale package until a buyer presents a contract for sale.

Maybe. If you have a viable contract for the purchase of your home, most lenders will stop the foreclosure process to allow time for the lender to review the short sale. However, the lender is not required to stop the foreclosure sale. If you are facing a foreclosure sale date, you must contact an attorney right away to determine what options are available to you to stop the foreclosure.

The bank will typically review the following in making an approval determination:

• The value of the property – the bank will use what is called a “Broker Price Opinion” (BPO) to determine the amount of equity (or lack thereof) in the property. This value can be rebutted by an appraisal if the borrower disagrees with the lender’s value. The actual value of the property is often the source of dispute between the lender and the borrower.
• The borrower’s financial hardship – the bank will review the borrower’s financial condition to determine if, in the bank’s opinion, the borrower will be unable to manage the payments on the property.
• The cost of foreclosure vs. short sale – banks have internal guidelines and analyze, based upon value and hardship of borrower, whether it makes more sense to foreclose on the property and resell through the bank REO department, or accept the short sale. Each lender has different criteria.

A short sale often gets complicated when there are multiple lenders. During the recent mortgage boom, many borrowers purchased their homes with first and second mortgages. Multiple mortgages create multiple levels of approvals and conditions. In fact, each of the first and second mortgage holders must independently agree to the terms of the short sale for the transaction to proceed. This is sometimes a difficult negotiation but can certainly be done.

An HOA lien is a junior lien that must be satisfied at the short sale closing. Typically, the first lien holder will be required to make a contribution to the HOA lien from the proceeds of the sale. If the first lien holder is unwilling to cooperate, the seller may be required to satisfy the lien. It should be noted that the HAFA programs (See below) specifically prohibits the lien holders from requiring the seller to satisfy the HOA or any other junior lien. The lien holders must work it out if there is to be a closing.

Lenders often purchase mortgage insurance to insure against borrower default, especially second mortgage holders. In the event of borrower default, the insurer pays off the mortgage. If there is lender required mortgage insurance on your loan, and there will likely be a loss, the insurer will need to be a party to the negotiations. Sometimes, the mortgage insurer requires the seller to sign an unsecured promissory note at closing for the loss that was paid by the insurer to the lender. This requirement can sometimes be waived, but requires negotiation.

Short sales are different from foreclosures in that a foreclosure is forced by a lender, whereas both lender and borrower consent to a short sale. Additionally, in a short sale, the property never proceeds to a public auction. In essence, the foreclosure is dismissed and the lender agrees to a “private” transaction between itself, the borrower and the new buyer. It is important to note, however, that this consent may be revoked at any time as short sales are entirely voluntary transactions for all parties.

The borrower may decide to remain in the property and attempt a refinance or modification of their mortgage loan. In addition, the borrower may decide to pursue a Chapter 7, 11, or 13 bankruptcy. The other option would be a deed in lieu of foreclosure. Each of these loss mitigation strategies have their pros and cons and must be considered carefully and discussed with your attorney.

Short sale tax implications can be tricky, so it is important for anyone pursuing a short sale to obtain the advice of a CPA or tax attorney. Some tax consequences could include income tax due on the forgiven debt by the lender. The tax consequences may also depend on whether the forgiven debt was on a primary residence versus a second home or investment property, and whether it was “purchase money” or simply “money loaned” on the property.

Short sales are a type of settlement, and they adversely affect a person’s credit report. The negative impact may be less than a foreclosure, but in some cases the effect is the same. Short sales do show up on the borrower’s credit report, and can remain on your credit report for 7-10 years. Although difficult to predict with any accuracy, some people are able to obtain credit again within 18 months or so and, depending upon other credit information, may be able to obtain another mortgage 1–7 years after a short sale.

By nature, all short sales will have a deficiency balance. A deficiency balance is the difference between the total amount due the lender and what the lender actually receives. Lenders generally have the right to pursue a borrower for the deficiency balance, although there are exceptions. If you are concerned about deficiency balances, it is best to speak with an attorney. This will most certainly be a point of negotiation with the lender.

In the event a waiver of the deficiency balance cannot be negotiated in the short sale, bankruptcy may be an option. This is an advanced loss mitigation strategy and must be done by an attorney. It is possible, however, for the borrower to get complete relief from the deficiency in bankruptcy.

In 2009, the U.S. Treasury Department introduced the Home Affordable Foreclosure Alternative Program (HAFA). Under the HAFA program, those borrowers who are unable to keep their homes through the Home Affordable Modification Program (HAMP) (See the loan modification section of this website) can short sell their homes. The HAFA program took effect on April 5, 2010 and sunsets on December 31, 2012.

Yes. You can click here to see a list of loan servicers participating in HAMP (including HAFA).

• It complements HAMP by providing a viable alternative for borrowers (the current homeowners) who are HAMP eligible but nevertheless unable to keep their home.
• It uses borrower financial and hardship information already collected in connection with consideration of a loan modification through HAMP. (See Loan Modification Section of this website)
• It allows borrowers to receive pre-approved short sales terms before listing the property (including the minimum acceptable net proceeds).
• It requires borrowers to be fully released from future liability for the first mortgage debt (no cash contribution, promissory note, or deficiency judgment is allowed).
• It uses standard processes, documents, and timeframes/deadlines.
• It requires all servicers participating in HAMP to implement HAFA in accordance with their own written policy, consistent with investor guidelines. The policy may include factors such as the severity of the potential loss, local markets, timing of pending foreclosure actions, and borrower motivation and cooperation.

HAFA provides the following financial incentives:

• $3,000 for borrower relocation assistance.
• $1,500 for servicers to cover administrative and processing costs.
• Up to $2,000 for lender who allow a total of up to $6,000 in short sale proceeds to be distributed to subordinate lien holders (i.e. second mortgages), on a one-for-three matching basis.

Yes. You must retain a licensed real estate agent in order to participate in the HAFA program. If you need any assistance with locating a licensed agent, please contact us.

Yes. The borrower can be in bankruptcy or in foreclosure at the time the application for short sale is made. However, in a bankruptcy, the trustee will likely have to approve the terms of the sale in addition to the lender. In a foreclosure situation, the lender will likely have to agree to postpone the foreclosure sale to allow time for the short sale approval. Most lenders will agree to do that if you have a viable contract in hand. You will need the assistance of an attorney to get approval in this situation.

You can get the help you need to apply for a short sale through The SOS Law Group. Our process is designed to take you step-by-step through the process. We help you complete the lender’s short sale package, along with the hardship letter and the financial statements. We then put the entire short sale package together and submit it to the lender and negotiate the terms of the short sale on your behalf. We can even help you find a licensed real estate agent specializing in distressed properties.