A short sale is an alternative to foreclosure or bankruptcy for some property owners. A short sale occurs when a property is sold and the lender agrees to accept a discounted payoff, meaning the lender will release the lien that is secured to the property upon receipt of less money than is actually owed. For example if a property has an outstanding loan balance of $200,000 and is sold with the lender's approval for $180,000, the lender is 'short' $20,000 on the loan and the sale is a short sale.

Qualifications for a Short Sale
You have to meet certain criteria before a lender will consider a short sale. These will vary from lender to lender but in general if you cannot satisfy all four requirements, you may not qualify for a short sale.

1. The Home's Market Value Has Dropped
Recent comparable sales must substantiate that the home is worth less than the unpaid balance due the lender. This unpaid balance may include a prepayment penalty.

2. The Mortgage is in Default
A lender will not normally consider a short sale if the payments are current. As long as the lender is receiving timely payments, the lender is satisfied.

3. The Seller Has Fallen on Hard Times
The seller must submit a letter of hardship that explains why the seller can not pay the difference due upon sale, including why the seller has stopped making the monthly payments.

Examples of hardship include:

Unemployment
Divorce
Medical emergency / sudden illness
Bankruptcy
Death

4. The Seller Has No Assets
The lender will probably want to see a copy of the seller's tax returns and / or a financial statement. If the lender discovers assets, the lender may not grant the short sale because the lender will feel that the seller has the ability to pay the shortfall.

For example, if the seller has cash in a savings account, owns other real estate, stocks, bonds or even IRA accounts, the lender will most likely determine that the seller has assets. The short sales that get accepted are those where the seller has no money or assets.

In a short sale the seller neither brings funds to the closing table nor walks away from the closing table with any funds.

Short Sale Consequences
A short sale is dependent on a buyer making an offer to purchase. If you do not receive an offer, you will not qualify for a short sale. So even if you meet all the other criteria, it is possible that no one will buy the short sale. It is also dependent on the lender accepting the buyer's offer. If the lender rejects the offer, a short sale will not take place. Current timelines for lender responses to offers submitted by buyers range from 2-6 months.

Tax Consequences
If the lender agrees to the short sale, the lender has the right to issue you a 1099 for the shorted difference, due to a provision in the IRS code about debt forgiveness. Some situations are exempt from debt forgiveness according to the Mortgage Forgiveness Debt Relief Act of 2007.

You should speak to a tax accountant to determine the amount of short sale tax consequences, and whether you can afford to pay those taxes, if any.

Blemished Credit Report
A short sale will show up on your credit report as a pre-foreclosure that has been redeemed. Short sales affect credit ratings. While the damage to your credit report may not be as severe as would be with foreclosure, for example, some creditors may not make the distinction.

If your mortgage payments are in arrears or are likely to be in arrears in the near future, and you are concerned about possibly losing your home let your real estate associate at McCall GMAC explore the short sale option with you. contact us