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. Illinois state law does not prohibit the banks from collection of the deficiency therefore it is necessary to negotiate for the banks to waive the deficiency.
2. How Long Does the Short Sale Process Take to Complete ?
It largely depends on the lender’s and other factors, but in general a short sale can take anywhere between 3-9 months.
3. What Is the Impact of Short Sale on Credit Rating?
After a short sale, the loan will typically show up as “paid” on their credit report, and notated as “settled for less than originally owed” or something along these lines. A short sale is more favorable than a foreclosure or bankruptcy for the homeowners on their credit report. Short sale will affect the credit of the seller for 1-2 years and for as little of 50 points, whereas a foreclosure or bankruptcy will affect the seller’s credit for 7-10 years and a hit of 250 to 300 or more points.
4. Can You Do Short Sale Late in the Pre-Foreclosure Process?
Start early and explore you options as soon as you are behind payments. Try to allow a window of minimum 30 days to effectuate a mortgagee approved pre-foreclosure short sale.
5. Will the Borrower Have to Pay Taxes for the Debt Forgiven in 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 calculated based upon the Mortgage Forgiveness Debt Relief Act of 2007 HR3648. The borrower may not be liable for the taxes at all.
6. Will Mortgage Companies Order for Appraisal on a Possible Short Sale?
All lenders order a BPO or full appraisal of the property before making their decision to accept or reject the short sale offer. This is their only way of assessing the value of the property.
7. Can an Owner Profit from a Short Sale?
The owner/seller cannot profit (monetarily) from a pre-foreclosure short sale. Many banks will offer relocation allowance to help the short sale seller make the move.
8. 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.
9. What Documents Does a Seller Prepare in a Short Sale Package?
Documents depend on the lender as each lender has different requirements. It is typical to require an Third Party Authorization for the Agent and attorney to negotiate the short sale on behalf, a hardship letter, purchase and sales contract, settlement statement (HUD-1), net sheet, pay stubs, bank statements, personal financial sheet (monthly budget), among other things.
10. What Sort of Hardship Would My Lender Consider Legitimate?
To some extent, that will depend upon the mortgage company considering the Short Sale request. Generally, so long as the hardship is real and the mortgage company believes the loan is likely to become delinquent as a result, the Short Sale request will be processed by the Loss Mitigation Department. A big key to getting Loss Mitigation to accept a hardship is to submit a strong hardship letter. The hardship letter sets the tone for the entire file. Below you will find a list of “hardships” that are common and frequently accepted by mortgage lenders.
- Family illness or injury
- Illness or injury in the extended family – particularly if it forces relocation
- Job relocation when the property is equity deficient
- Job loss or significant income loss
- Divorce or split of domestic partners
- Adjustment in mortgage payment or unforeseen increase in living expenses