A short sale is when the lender will accept payment that is less then what is owed on the loan. So let’s say you owe $300,000 on your home and it’s worth $275,000. You would place your home on the market at fair market value and then when you receive an offer you present it to your lenders short sale department along with a HUD (estimated total closing costs) and they then accept or counter based on the appraisal that they do on the property. Which is kept secret and the offer they will accept is kept secret.
In reality the bank is the one calling the shots and not the homeowner as in a traditional sale or real estate.
Short sales are what I feel a last ditch effort to save someones home. Many real estate agents are quick to recommend a short sale because they profit from selling your home. In actuality trying to get a loan workout to modify your loan is the first step if you want to save your home. But if that doesn’t work out then I recommend going the short sale route to save your credit.
Having a foreclosure on your credit will affect you for years and even renting can be very difficult. I have seen people that make over $100,000 a year not be able to rent an apartment because of a foreclosure.
Avoiding foreclosure with a short sale is the next best thing to a loan modification. Saving your home should be your first goal and saving your credit, should be your next.
{ 29 comments… read them below or add one }
In order to get a short sale do you have to be behind in your payments? My ARM keeps adjusting and I’ve kept up with the payments, however, I don’t know how long I can do this. I want to put my house on the market but it won’t sell for full value due to the down turn in the market. All the post I’ve read make it sound like I have to be behind in my payment to be considered for a ’short sale’. Is this accurate??
You do not have to be late to negotiate a short sale. You just need a good agent to handle it for you that can deal with your lender. Make sure they have a track record doing this.
Good luck!
Moe, why will a lender do this? Aren’t they buried now with those that are delinquent and or in default? It seems to me the borrowers would still have to prove insolvency otherwise how will a “a good agent…handle it…that can deal with your lender”?
Lenders will cooperate in short sales. The cooperation is hit and miss and there is NO guarantee. There is no uniformity, rhyme or reason with any loss mit department. A good agent can act as a go between to handle the difficult task of negotiating a short sale. However, I feel ALL homeowners should seek proper legal representation before they do anything. Often, the attorney can use the law to assist a homeowner, when an agent might not be able to or be aware of the laws that protect homeowners.
Hi Moe,
I’m in the opposite boat right now with regard to a short sale. I have been working with Countrywide since April 20th trying to purchase a home as a short sale.
I made a committment to a friend that I would do this because he was walking away from the home. At the time I faxed my offer the auction date on the house was only 10 days away. I thought the situation would resolved in only a matter of a few days or weeks.
Now after two postponed auctions, one cancelled auction, 2 appraisals and seven months, Countrywide is saying they want the full amount owed, (which covers the 1st and 2nd mortgage and attorney fees). The full amount owed is more than $200k above the appraised value of the house.
Should I get an attorney? I thought we were almost there but the counter-offer they want is something no-one will pay.
I am a broker and multipe home owner. I have done a short sale and I wouldn’t recommend it for two reasons. The difference between what your home is sold for and what the true balance is …… is taxable income and you will have to pay income tax on it just as you worked for that money, and in today’s market it is usually 50,000 plus which is a HUGE hit!! Also a short sale will still be questioned on future loans when you try to buy a house just as a foreclosure would, and its about the same hit on your credit score as a foreclosure.
That is not necessarily true.
I have helped dozens of borrowers arrange short-sales, all over the country, and it is very rare for a lender to even report it as income to the IRS.
Even if they do report it, there are guidelines set up by the IRS just for this situation, so that you do not have to pay tax on a forgiven debt during an insolvency.
I am not a tax accountant or lawyer, but I have seen this play out many times.
Does anyone know for certain what effects a short sale has on your credit if you have remained current until the sale and what effect a foreclosure has on your credit
Actually, I believe the IRS just recently changed the tax laws and you no longer need pay income tax on the deficiency.
As well, I have negotiated 4 short sales in the past 5 months. Two with Countrywide. Each with Countrywide has taken at least 10-12 weeks for approval. Make sure your buys and sellers are prepared for this.
Cheers
PJ, I don’t know exactly what a short sale looks like on credit however I will in about 30 days or so. I had a client, 778 mid score who just completed a short sale and he has agreed to let me take a look at his credit in a month or so to see the effects. I’ll post my findings if someone hasn’t responded by then.
PJ – as far as the scoring I’m not sure but the lender code on credit will show up as settled for less than amount owed. It doesn’t show lates or anything and doesn’t report as a collection, but we ( underwriters) know what that is and even though it’s not an actual foreclosure, we still look at is as a loss because the full amount was not recovered…also goes with looking at the borrowers “demonstrating a willingness to pay”. As an underwriter if it reported in the last 3 years ( basic foreclosure rules ) I would most likely find another reason not to do the loan. There isn’t a guideline that I know of that addresses short sales, like there is for foreclosures and forebearance agreements ( which by the way are looked at in the subprime world as BK’s) so the loan couldn’t be turned down for having a short sale showing up on credit. Hope that helps!
I have had experience with a short sale ( two in one year, one in Jan 2007 and the other in Aug 2007). Basically, I think the missed payments made a good argument for Short sale request along with the other circumstances (mostly divorce) and market conditions. I had excellent credit 720 (summer 2006) prior to my real estate deboggle and divorce. As of Jan 2008, I have 620 median. All other A1 creditors (Plat AMEX, Citibank, for ex) all continued to be paid on time and in Jan 08 mediam was 640….and I anticipate once credit cards are pd off soon credit score will be 715 by the end of the year, Dec 2008. Countrywide home loans told me i could be approved for another home loan at 18 month, reasonable interest rate (under 7%) , if NO CC bills, with income @ 90,000, 10-20 down, no lates, and a savings cushion—money being put away for atleast 9 months. So, really, I think score goes down about 100 points…but, if everything continues to be pd on time and no inquiries and no accumulation of debts…..things would look very positive. AND BEST OF ALL —NOW NO TAX IMPLICATIONS well until 2010! I hope this helps
Anyone have success with HSBC working short sells and having them forgive the balance debt.
I am not sure if this is the best blog to try but I will try anything at this point. My husband and I are both active duty military and being transferred (against our will) to Hawaii. Our house is currently on the market as a short sale, with no offers in this market. Plus I do not think our realtor is doing everything he can to get our house sold. Our issue is not that we cannot make the payment, our issue is that we cannot live in Hawaii and make a house payment here in CA. I have been hearing things about loan modifications to get your payments lower, if you are NOT facing foreclosure will the banks still talk to you about a modification?
Allison,
I’m in the same boat, try the homeowners forum at http://www.loansafe.org
There are plenty of folks there that can help you – read over some of the threads and find a case much like your own, or just post your own story. Much will depend on the terms and type of your loan and how far off you are from covering the mortgage via collected rents. If you’re in about the same position as I am – that isn’t practical. But the mods, etc. are worth looking into if you qualify.
Best of luck to you.
Tom
I did a short sell on my house back in May of 2006 which the house was financed with a FHA Loan,,now I am trying to purchase another house and the only thing my credit score will qualify me for is a FHA Loan but, FHA has a red tag on my SSN # meaning I cannot be approved for a FHA loan that I will have to let my score build up to a 650-680 to be approved for a 100 percent loan, do anyone know how long FHA will have a alert on me (RED FLAG) for me to later try for another FHA loan. Every lender I have tried turned me down not cause of my credit score but because FHA shows I did a Short Sale…
Now probably isn’t the best time to get a 100% home loan. If I were a lender, I wouldn’t approve it – just being honest. Not sure of the specific requirement though, you can try the homeowner’s forum at http://www.loansafe.org – you may be able to get some direction from the folks there.
what gets me is what is the point of doing the short sale if the punishment is same as walking away from the loan (foreclosure). Short sales are not for the faint of heart and they are alot of work.
Can you do a short sale to yourself?
you will have to negotiate with the bank to get approved for a short sale.
when I found an agent to attempt to represent me on a short sale I was informed that I would have to pay, up front, a non-refundable short sale fee of $275 plus a remodification fee (whatever that means) of $350. This means a layout of $625, non-refundable, for a best-efforts job. Is this an industry standard, or is it reasonable? Obviously this is a lot of money for someone to pay when he is also in a foreclosure situation.
I am moving out of state and so our house is up for a short sale. Our realtor who specializes in short sales told us that his fees are paid by the bank, so I wouldn’t trust anyone who makes you pay them. Obviously you are in a hard situation, if you can’t pay your mortgage, how can you pay a company to do a short sale.
Funny part is our lender FREEMONT LOAN AND INVESTMENT knew we were going to do a short sale and they just sold our loan. How easy for them.
Anyways, if we get no offers soon, we are just going to file bankruptcy and put this behind us.
And NO, they can not report the difference between a short sale to the IRS as income. Bush just passed a law this year that prohibts them from doing it. He says you are already going to face a foreclosure or banko how can the federal government hit you now with more fees that you can’t pay. I thnk this was only good until 2009 so better get on it!
I had a real estate agent, but, I was not changed any fees like the one stated above. I worked out the short sale and the money issues with the two lien holders myself. Then the senior agent on the deal came in at the last minute to influence the deal and finalize all numbers. So, I don’t think you should have to pay for fees to do the short sale.
ditto…to the note on tax implications. You will not have to pay money on the shorted amount. Yes, you should try to find a real estate agent who specializes in short sales and who is well versed in the area. You can inform yourself by doing your research via internet. Just remember: The BPO drives the banks decision to accept the short sale.
I was just curious if Michael or anyone had an update on how bad your credit get hurt by doing a short sale when you have not missed any payments and are current up until the sale? Michael blogged about a client that had a 778 score in January and was going to follow up. I was curious. My score is around 790 and I just had a short sale accepted on one of my investment properties and have been told by credit repair specialists I can expect a 10-50 point drop and the bank tells me about a 100-150 point drop. I have no debt, make good money, and no lates ever. Any thoughts?
Kim:
You can expect about 80-90 point drop. I had two short sales one in Jan 2007 other in August 2007. My mid score was around 690/700 and mid dropped to low 580. Currently mid at 680. Hope this helps. BUT, DURING SHORT NEGOTIATIONS EVERYTHING EXCEPT MORTGAGE WAS PAID ON-TIME.
Hello, I have been trying to work with country wide for quite sometime now for some sort of help in modifying my first loan. I am in a sub-prime 80/20 loan at this time with my first at the point of adjusting July 2008. They give me the runaround and say value is too low….nothing thay can do. On both of my loans I am current. Someone suggested a short sale. I was told to stop making the payments and start the procedure. My question is: Is it better to stop making payments, or to continue?
Cynthia,
First & foremost you are NOT alone !!!!
There are many in your same situation, I highly recommend that you check out http://www.loansafe.org
but exactly: http://www.loansafe.org/forum/countrywide-home-loans-tell-us-your-countrywide-story/
These are people like you and me that have dealt with or are dealing with CountryWide.
GOOD LUCK !!!!!!!
I was not dealing with Countrywide. But, the fact that payments were starting to be late, I think helped my case. Although, I know people say you can broker the deal even with on-time payments, my mortgage company would not listen to anything until payments started to be late and I had a contract in hand. I got really lucky set my own price and got a contract within 7 days after having house on market for 1 year.