Short Sale & Foreclosure FAQ

Listen to attorney Mark Adamczyk on local radio discussing short sale rules

What is a short sale?

A short sale is a real estate transaction where the proceeds from the sale of a property will not cover the amounts owed to creditors secured by liens on the property (such as a mortgage). Essentially, a bank or other lien holder agrees to accept less than the full amount owed on the loan. The difference between the full amount owed and the amount accepted by the bank or lienholder is known as a deficiency. The seller can sometimes still be held liable for that deficiency unless the parties specifically agree to waive the deficiency.

What is a deed-in-lieu of foreclosure?

A deed-in-lieu of foreclosure is a transaction where a borrower conveys the interest in the property to a lender to satisfy the debt instead of the lender pursuing foreclosure proceedings. Deed-in-lieu of foreclosures are generally only available to properties with first lien holders. Therefore, if you have a second mortgage, a large outstanding balance to your homeowner’s association or are behind in your property taxes you may not be eligible for a Deed-in-lieu of foreclosure.

Do all lenders offer short sales?

Although they are not required to offer short sales, most lenders will consider a short sale offer. Whether or not they accept it depends on a number of variables including but not limited to your financial position. Thus short sales are negotiated on a case-by-case basis.

Is it possible to do a short sale of investment property?

Yes. However, every lender is different in their analysis of short sales. Also, there may be tax implications for short sales on investment property as the IRS will treat the deficiency as income. Please consult a tax professional for further advice on the effects of a short sale.

Do I have to be behind on my mortgage in order to do a short sale?

Not necessarily. If a homeowner can prove that continuing to make their payments will cause extreme hardship, the lender will usually consider a short sale as an option.

Do I ask the lender about doing a short sale before I have a buyer or do I need to wait for a buyer?

Check with your lender. Each lender is different. However, in most cases it is a good idea to get started even before you have a contract as the bank can begin reviewing your financial position and may even be able to tell you what amount they would required to release you from your obligation. At the very least, contact your lender to let them know of your intention to complete a short sale and start gathering all the documentation the bank will need so that you are ready when you get an offer.

Do I have to use a real estate agent to do a short sale?

No, you do not have to use a real estate agent to do a short sale. However, a real estate agent’s expertise can be very helpful in the short sale process. Specifically, they can help you accurately price your property so that you can get a contract that is acceptable to the bank in the shortest time frame possible. Also, their ability to market the property could result in obtaining an offer more quickly.

How will my real estate agent know what to list the property for in a short sale?

Your real estate agent will do a comparative market analysis to determine the approximate value of your property and list it at a comparable price to similar properties in your area.

What constitutes a ‘hardship’ in the eyes of short sale lenders and do I need to have a true ‘hardship’ to short sell?

A hardship is a circumstance beyond your control, that forced you into a position where you can no longer afford your loan payments. The hardship requirements for a short sale are less stringent than for a modification. It’s important to have a hardship but even if your hardship is minimal you can often enter into a short sale. However, the bank may require you to contribute some money or refuse to waive the deficiency balance. Potential hardships include but are not limited to unemployment or loss of income, inability to work due to a health issue, divorce and failure of a business.

Should I run up my credit cards to make my financial situation look worse?

No. If you do that and the bank does not approve a short sale or the buyer of your property backs out of the transaction, then you will be left with credit card debt you cannot afford to pay which will only further damage your financial position.

I have some savings set aside, should I move that money to a family member or somewhere else before I do a short sale?

No. That could be considered fraud. It is important to be as truthful as possible to the bank regarding your financial position.

What is a short sale deficiency and what does it mean to ‘waive deficiency rights’?

A short sale deficiency is the difference between the amount of money you owe for your loan and the amount accepted by the bank. If the bank “waives deficiency rights” they are agreeing not pursue a judgment against you for the amount of the deficiency. They are accepting the amount of the short sale offer and releasing you from any further obligations under the loan.

If a lender approves a short sale, will the deficiency automatically be written off by the lender?

No. Every lender is different and each short sale depends a lot on your financial position and whether the property was your primary residence. You will not know if the lender will waive the deficiency until you receive the short sale approval letter.

What does it mean when people say Florida is a ‘recourse state’?

Florida is a recourse state which means that even if your property value falls below what you owe the bank, you are still liable for the full amount of your loan. Therefore, if the bank forecloses or the bank accepts a short sale, it is not obligated to waive the deficiency balance and can pursue you for the amount between what they accepted and what you actually owed.

If a lender does not agree to write of the deficiency in a short sale, what happens?

A number of things can happen. The bank can pursue a judgment against you and once recorded, they can attempt to collect on that judgment including garnishing your wages and bank accounts. Although this is not likely it can happen. Please consult a lawyer in your area for further advice should you be faced with a deficiency balance.

If a lender won't waive its short sale deficiency rights without my contribution at closing, do I let them foreclose?

In this situation, even if the lender forecloses you may still be held liable for the deficiency and your credit would be damaged as a result of the foreclosure so it might be best to proceed with the short sale to avoid having a foreclosure on your credit report.

What does a lender need to see to consider me for a short sale?

Although every lender is different, most lenders require documents that will reflect your financial position. These include but are not limited to a letter explaining your financial hardship, your most recent bank statements, your most recent paystubs or a profit and loss statements (if self-employed), your last 2 years of tax returns, and a list of your income and expenses. Additionally, the bank will need documents related to the transaction including the listing agreement (if applicable), the contract, a pre-HUD1 settlement statement showing how much the bank will receive from the transaction and the Buyer’s pre-qualification for financing or proof of funds (if cash transaction).

What factors does a lender consider when analyzing my application for a short sale?

The lender will analyze a number of factors including but not limited to the current value of your property, the amount of money owed for the loan, your financial hardship, and your income and expenses.

I bought the house when single but now am married; is my spouse's income relevant to a short sale?

Some lenders will want to consider your spouse’s income while others do not. This is especially true if you have joint bank accounts and share in the household expenses. While your wife did not borrow the money, if she is helping pay some of your household expenses the bank may want to review her income. It’s best to submit only your income and let the bank request additional documentation as to her income if that is something they require.

My wife and I are on the mortgage, but only I signed the note. Will a short sale or foreclosure hurt my wife's credit?

Only your credit should be affected. The note is the document that you defaulted on by failing to make a payment so when you are late only your credit is affected. Similarly, with a short sale or foreclosure your credit will be the only one affected as you were the only one who borrowed the money and failed to pay it back.

How long does a short sale take?

Every lender is different. A short sale can take anywhere from a few weeks to several months in order to get approved by the bank. It is important to stay in constant communication with your lender about what documents they need and how the process is going. Make sure to promptly respond to any document requests from the bank.

Will a short sale also take care of my past due association dues?

Most banks will approve some amount to pay off past due balances to associations. Often the association may be willing to waive interest and/or late fees to reduce your balance and make the short sale transaction work for all parties involved. If the amount approved by the bank is insufficient to cover all amounts owed to the association, try negotiating with your association for a reduced payoff. Also, you can negotiate with your broker to reduce his/her commission to help satisfy the past due amounts owed to the association.

I have already been served foreclosure papers, is there time to do a short sale?

If you have been served with foreclosure papers it is in your best interest to contact an attorney in your area to discuss your options. You should have sufficient time to complete a short sale, but it is important to timely respond to the foreclosure complaint and let the bank know of your intentions to complete a short sale. A lot of lenders will work with borrowers in foreclosure and may even put the foreclosure on hold if a borrower has a short sale offer and a true financial hardship.