Top 5 Short Seller Do’s | Top 5 Short Seller Don’ts | Short Seller FAQ
Short Seller’s Checklist
Below are just some of the questions to ask yourself as you consider a short sale. As an experienced San Jose real estate agent, I can help you with many of these questions, but it’s important to consult your tax adviser and a real estate attorney if your situation has some of the red flags below.
Is your house worth less than the loan balance of all your mortgages?
Sellers usually turn to a short sale when their house is “underwater” as a way to avoid foreclosure. If your house is worth less than the balance on your 1st mortgage, you’re in a position for a short sale. If your house is worth more than the balance of your 1st, but less than the balance of your 1st and 2nd (or home equity line) mortgages, you can still do a short sale, but you’ll be negotiating with your 2nd mortgage servicer to get acceptance for the sale. As long as you can fully payoff the 1st mortgage at closing, you don’t need to get that bank involved to approve the sale.
If your home value is greater than your mortgage balances (after you deduct all costs of selling your house!), you don’t need permission from the bank to do a short sale, you can just sell the house to pay off your mortgages.
Also, it’s important to note that a lender won’t typically approve a short sale until you find a buyer.
Are you currently delinquent on your first mortgage loan? Second mortgage loan? If yes for either, when did you make the last payment on each loan?
If you are delinquent on loan payments, you are at risk of having the mortgage holders foreclose on your home and you may need to move quickly to get bank approval for a short sale and to delay any foreclosure proceedings. Keep in mind that if you have a 2nd mortgage, there are 2 banks that might foreclose on you and you need to work with both to get a short sale approved.
Have you consulted a financial advisor, tax advisor, and/or attorney?
Multiple sources of qualified advice are always useful when reviewing your options. Real estate agents are prohibited by law from giving legal or tax advice and a reputable agent will ask you to take law and tax questions to the appropriate professional.
Have you considered the alternatives to a short sale, such as foreclosure, loan modification, refinance, deed-in-lieu of foreclosure, or bankruptcy?
Each of these options could make better financial sense than a short sale depending on your situation. Make sure you have evaluated each option to make sure a short sale is right for you. Make sure to review HAMP and to talk with a HUD certified credit counselor to get a clear picture of your options.
Have you considered the alternatives to a short sale, such as foreclosure, loan modification, refinance, deed-in-lieu of foreclosure, or bankruptcy?
Each of these options could make better financial sense than a short sale depending on your situation. Make sure you have evaluated each option to make sure a short sale is right for you. Make sure to review HAMP and to talk with a HUD certified credit counselor to get a clear picture of your options.
Have you re-financed your house?
If you have not re-financed your house, under California law, your San Jose mortgage is considered non-recourse and you will not have an obligation to pay back the remaining mortgage balance if you short sell. In a quirk of California law, your mortgage is considered a recourse loan if you have refinanced. With a recourse loan, the lender has the right to make you repay the remaining loan balance after a short sale, basically meaning that you continue payments for years after you leave the house. Often repayment is negotiable and it’s well worth your money to consult a real estate attorney about your situation before you start the conversation with the bank so that you have a strategy to minimize your obligation after the short sale.
Do you understand the tax consequences (if any) of a short sale?
In some situations, the IRS or California can still tax the amount the lender lost during the short sale transaction—which means you, the seller, will be liable for taxes on the debt forgiven. Under the Mortgage Forgiveness Debt Relief Act of 2007, the forgiven debt may be excluded from income when calculating the federal taxes you owe, but it still must be reported on your federal tax return. Recent California tax law changes may also allow you to shelter your forgiven debt from state taxes for short sales in 2009 thru 2012. Both state and federal tax codes are complicated and have limits and exclusions. Make sure you consult with an accountant to make sure you don’t have a tax surprise in April!
Do you have a stable job, cash, properties, or other assets that a lender may want to use to satisfy the mortgage debt owed?
You may be able to convince your lender to accept other compensation in the form of properties and various assets to make up the debt you owe instead of participating in a short sale. This is where working with a financial advisor can be extremely helpful to determining your financial worth.
Have you made any misrepresentations to the lender when you originally applied and obtained your existing loan?
Any hiccup in your loan review can cause your lender to decline the option to short sale. It’s best to be upfront about everything involving your original loan; but keep in mind that revealed misrepresentations can lead to legal action taken against you. Most banks will not pursue legal action, but if there are questions about how you obtained the loan it’s wise to consult an attorney before applying for a short sale.
Do you currently occupy the property as your principal residence?
Vacation and investment properties are sometimes more difficult to get into short sale, but it’s still worth talking to your mortgage holder(s) to see if they will accept a short sale. Keep in mind that the house will only sell for market value and that a short sale is cheaper for the bank than a foreclosure.
Are you willing to do maintenance and repairs to improve the marketability of the property (e.g., clean house, remove clutter, do yard work, or paint)?
Anything that will convince your lender that you are making efforts to improve your situation will help your chances to short sale, so try your best to do what you can. In addition, improving the curb appeal through the improvements recommended by your real estate agent will help you get a more attractive offer for your home, giving you a better shot at lender approval.
Are you open to participating in the short sale process?
If you aren’t willing to disclose your financial situation openly to the third parties or don’t have the time and attention to detail needed for a successful short sale transaction, you may want to consider other options.
Are there any other actual or threatened property tax liens, assessment liens, delinquent HOA dues, judgment liens, income tax liens, child support liens, lawsuits, or other encumbrances that may affect title to the property?
If there are additional liens on the property, lien-holders may need to approve the short sale before you can move forward, so find out ahead of time to ensure the short sale process goes smoothly and does not last longer than necessary. A buyer will not go through with the deal unless all liens are removed from the house – if that doesn’t happen, they are effectively taking over responsibility to pay. Your leverage with lien holders is that they will get nothing in a foreclosure. Many lien holders understand this and are willing to accept payment plans or balance reductions to at least get some money.