What is a short sale? A short sale is when a homeowner has a mortgage balance greater than the fair market value of their home. In other words, the homeowner is “upside down” on the mortgage.
A homeowner should know that short sales are common place; most if not all mortgage companies are doing them.
However, the mortgage company DOES NOT have to agree to the short sale and if they refuse, you should seek legal advice as to your rights and options. Also, the entire transaction has to be approved by the homeowner’s mortgage lender; therefore make sure you hire a REALTOR© that is knowledgeable and experienced in listing and selling short sales. There is a lot of paperwork required (tax returns, bank statements, 401(k) statements, pay check stubs, etc.) for the seller of the property; having an expert is imperative to a successful short sale transaction. Also, before the homeowner closes, ALL the terms from the bank will be spelled out in an official approval letter from the bank. This letter will tell you if the bank has approved your transaction without a deficiency judgement or if they are requiring you to pay part of the short in a promissory note.
How do Short Sales come about?
Short sales can occur from many reasons. A homeowner can experience the loss of a job (therefore they are unable to pay the mortgage), death of a spouse, relocation due to a job, or the homeowner overpaid for the home during the initial purchase and the value just isn’t there anymore. In any scenario, in order for a homeowner to sell their home in a short sale, the balance on the mortgage, plus the fees and costs incurred with selling the home, have to be more than the house will sell for at fair market value. In most cases, a homeowner will not have to make any repairs to the property and will have little to no out-of-pocket costs for a short sale. Most mortgage companies require the homeowner to hire a REALTOR© to list the property for sale. Some REALTORS© enlist the aid of an attorney and negotiate their fees into the transaction and some negotiate the transaction themselves with the bank. The end goal is to make sure that the homeowner does not have a deficiency judgement issued against them, and does not have to sign a promissory note for any portion of the balance that is not recouped in the sale of the property. A deficiency judgement can be issued by the bank for any or all of the shortage from the transaction.
IMPORTANT: The IRS looks at the shortage amount as income (I can’t explain why they do, just THAT they do) and you will receive a 1099 at the end of the year for the amount the bank took as a loss in your short sale.
Angelia Williams Graves, REALTOR©, CDPE
Certified Distressed Property Expert
For more detailed information click on resources for direct contact to Angelia Williams Graves.