Short Sales FAQ

FAQs - Short Sales

1. What is a Short Sale?

A short sale is a transaction that allows the sale of a property for an amount less than the amount owed to the bank. The bank in return accepts the proceeds as settlement of the debt. 

2. How long does it take to close a Short Sale?

It depends on the property location, the lender’s and other factors, but in general a short sale can take anywhere between 3-6 months.

3. What happens to the seller’s credit rating when they short sell their property?

Typically the loan will show up as "paid" on their credit report; however there will be a notation that says "settled for less than originally owed" or something along these lines. It is more favorable for a homeowner to short sell than to have a foreclosure or bankruptcy on their credit report. A short sale will affect the credit of the seller for 1-2 years where a foreclosure or bankruptcy will affect the seller’s credit for 7-10 years.

4. What documents does a seller include in a Short Sale package?

Documents depend on the lender. Each lender has different requirements. It is typical to require an Authorization to Discuss for the Agents, a hardship letter, purchase and sales contract, settlement statement (HUD 1), pay stubs, bank statements, personal financial sheet (monthly budget), amongst other things.

5. Are there differences if the property is Vacant or Occupied?

A primary residence may receive a Relocation Allowance, a vacant home is not eligible for the Relocation Allowance.

6. How late in the pre-foreclosure process can you start a short sale?

Most lenders require to have a COMPLETE package to them at least 30-45 days prior to a scheduled foreclosure date for them to consider the short sale option.

7. Will the borrower have to pay taxes for a Short Sale?

The borrower may pay extra income tax if the bank sends a 1099 for the deficiency. If the subject property is the borrowers Primary Residence then the taxes on the 1099 will be calulated based upon the Mortgage Forgiveness Debt Relief Act of 2007 HR3648.

8. How Does the lender determine the property value?

It is allot like an Appraisal only not as extensive and is performed by a Real Estate Agent. An Appraisal is performed by a licensed Appraiser. Some banks just order a BPO (BPO stands for Broker’s Price Opinion). Others will just order an Appraisal. Sometimes both are ordered. It varies depending on your lender or the type of mortgage you have.

9. Can an owner profit from a Short Sale?

The seller cannot profit (monetarily) from a pre-foreclosure short sale.

10. How do bankruptcies affect the possibility of doing a short sale?

Most mortgagees won't consider a short sale if the homeowner is in bankruptcy...why? Because negotiating a short sale payoff is considered a collection activity. Collection activities are prohibited in bankruptcy.

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