Short Sales… Cutting Through the Myths

July 10, 2011



There are many myths and rumors, as well as much valuable information available about one of the hottest topics in real estate – Short Sales. It is the intention of this article to cut through the myths and rumors and provide the homeowner with the information they need to understand a Short Sale and the process.

I have written this article with the specific goal of answering important questions about Short Sales while helping the homeowner avoid common and potentially costly pitfalls. It is comprised of excerpts from my comprehensive report “Insider Short Sale Secrets”.

If you are currently behind on your mortgage payments, if you are borrowing from Peter to pay Paul, if the stress of keeping your home afloat is killing you, then please read this information immediately. Whether you hire someone, or try to do it yourself, take action now! Time is not your friend, but there is light at the end of the tunnel!

Maurice Thomas

Our Disclaimer:

The information in this work is believed reliable but is not warranted or guaranteed, and before any reliance or use, should be independently verified. Suggestions, advice, strategies and all other like information are general in nature, are not based on knowledge of your specific circumstances, and should be used only after your own independent verification of reliability, application of independent business judgment and due consultation with your tax, technical, legal, real estate, investment, accounting and/or other professional advisors.

What is a Short Sale?

Everybody’s talking about Short Sales as a way to prevent foreclosure, but not everybody understands exactly what a Short Sale is. You’ve may have heard about them, and may be looking for a definition. Simply put, a real estate Short Sale is when a homeowner sells their property for less than is owed on the existing mortgage balance. To accomplish this, the homeowner or a third party negotiates a discount on the payoff amount due to the bank or mortgage company.

When a homeowner owes more on their mortgage balance than the current value of the property they have negative equity, commonly referred to as being “underwater” or “upside down.” In order to sell a property that is “upside down”, the bank must agree to accept less than what is currently owed. Mortgage companies take big losses when they foreclose on a home and will many times try hard to avoid it. A Short Sale is a viable alternative to taking the house back in a foreclosure. The lender agrees that selling the property at a moderate loss is better than pressing the current debtor. Both parties consent to the Short Sale process, because it allows them to avoid foreclosure, which involves hefty fees for the bank and poorer credit report outcomes for the borrower.

Is a Sort Sale a questionable practice?
The Short Sale of real estate is not a questionable practice in today’s softening real estate market it may in fact be a necessity. The Short Sale transaction is a legal and a much more beneficial alternative to foreclosure or even bankruptcy and is often the most economical solution to a problem. The short sale of your home can result in the best solution for all parties involved. A few of the benefits of a Short Sale are:

Homeowner: The Short Sale helps you get out of a financial predicament and regain peace of mind. Your family is relieved of the constant pressure and stress of being pursued by creditors. Your property is saved from foreclosure, which can help save your credit rating. Allowing your home to proceed into foreclosure may adversely affect your credit for up to 7 years. (How will a Short Sale impact my credit below:)

Lender: The lender avoids timely and costly foreclosure proceedings which could lead to an even more costly expense of ownership of the real estate by the by the bank.
Buyer: The buyer of your property gets a solid property at a good market value.

How do I know if I might qualify for a Short Sale?
If the market value of your home is less than what you owe on your current mortgage, you may qualify for a legal, lender approved Short Sale.

What are my chances of getting a short sale approved?
Your chances of getting your short sale approved will vary greatly depending on:
– Your individual circumstances and how they are presented
– The quality and completeness of the package put together,
– The ability and experience of the negotiator handling your package,
– Whether or not you have a contract from a qualified buyer for the property and if there are contingencies in the contact
– Whether the buyer for your property is paying cash with proof of funds or needs to qualify for a loan
Understanding the process, making sure your package is complete, having a qualified buyer with a contract and minimal contingencies, are critical in presenting a Short Sale offer that will be considered and approved by your lender.

Do I have to be behind in my payments?
The answer to this is; it depends.
Lenders often have loss mitigation departments that evaluate potential short sale transactions. The majority have a pre-determined criteria for such transactions, but they may be open to offers, and their willingness varies greatly.

A Short Sale can be used as an exit strategy for a homeowner who is not delinquent but rather just staying afloat and anticipating a delinquency. It can be more difficult when a homeowner is not behind in their payments, but recently banks are taking the potential for default into consideration.

Given the unprecedented and overwhelming number of losses that mortgage lenders have suffered currently, they are now more willing to accept short sales than ever before. This presents an opportunity for “upside down” borrowers who owe more on their mortgage than their property is worth and are having trouble selling to avoid foreclosure.

How will a Short Sale impact my credit? This is one of the most asked questions about a Short Sale. Unfortunately the answer is, yes. Lenders and servicers have different methods of reporting short payoffs. Short Sales are a type of settlement, and they adversely affect a person’s credit report.

The general consensus is that a Short Sale will show up on your credit report as a “settlement”, “settlement for less than owed” or a “pre-foreclosure in redemption”. While these are not good things on a credit report, it is usually possible to get them off of your report within a few years or less. the negative impact is most often significantly less than that of foreclosure or bankruptcy. A short sale can drop your credit score. by 80 – 100 points. A foreclosure on your credit report can take 7 years to remove and can cost your credit rating up to 200 – 280 points, a very big hit.

Philosophical input:
If you are borrowing from your 401K, IRA, friends and family, just to keep making your payments trying to keep your “upside down” property afloat, or if you are behind in your payments and facing foreclosure, you should pursue a Short Sale aggressively. Burning through your liquid assets and doing nothing is not a good plan.

Can I still owe the bank for money forgiven?

STOP! This is a very important question!

The answer is yes, if you are not careful. PLEASE READ THE FOLLOWING

In a Short Sale a home is sold for less than the actual mortgage balance owed. The lender’s loss or “deficiency” is the difference between what the lender nets from the sale and the actual balance owed. According to the terms of most mortgages you are liable for that deficiency!

There are two ways a bank can attempt to recoup this loss, one is by a promissory note, and the other is by a deficiency judgment.

A promissory note has to be agreed upon by the lender and the borrower (homeowner). It will usually consist of the amount of the deficiency (which can include attorney’s fees and other costs) or a reduced amount agreed to by the parties. The borrower agrees to pay the note according to the agreed upon schedule. If the no agreement for a promissory note is reached in advance, the lender in most states has the option of seeking a judgment for the loss called a deficiency judgment. They can then come after the former homeowner for their loss.

To add insult to injury historically any amount of a mortgage that was forgiven by a lender was considered income, and taxes had to be paid on that amount!

Are there ways to avoid owing additional money after the sale?

The good news is: YES! – if you are careful and plan ahead. This will be easier to negotiate if the borrower has ongoing financial hardship and harder to negotiate if the borrower has assets. Negotiate with the lender in advance to eliminate either the lender requiring a promissory note or coming after the borrower with a deficiency judgment. This is essential! Philosophical input: You can negotiate these elements yourself but it is often difficult when you have no experience and are thrust into an adversarial relationship with your lender. We recommend using an experience professional.

Is there a way to avoid owing the IRS taxes on the forgiven amount? Yes! Good news! Under a temporary measure passed in 2007, the Mortgage Forgiveness Debt Relief Act and Debt Cancellation Act, homeowners can exclude debt forgiveness on their federal tax returns from income for loans discharged in calendar years 2007 through 2012. This special exemption only applies to personal residences and there are some limitations. For more information,  talk to your tax professional.

Will I receive any proceeds from the sale of my house? The short answer to this is: No. Since the lender is taking a large loss from the sale of the property, they do not allow the homeowner to leave the closing with any proceeds. The sales price will go first to cover any expenses of sale, than the balance will go to a “short” payoff of your mortgage.

Does the sales price of my home matter? Yes and No. The sales price will definitely influence your ability to move the property quickly, and to hopefully find a cash buyer with the ability to close. Unlike a normal sale, you are not looking to get the highest sales price possible. Since you are receiving no sales proceeds, and if good negotiations have removed the threat of a deficiency judgment, you will actually be interested in the lowest sales price possible. The lower the sales price the quicker you can achieve a sale to a cash or highly qualified buyer.

Of course the lender will want to minimize their loss and is therefore interested in the highest sales price possible, so a reasonable compromise will need to be reached

I hope you found my article helpful.

If you would like my comprehensive report “Insider Short Sale Secrets” which has a great deal of information about the nuts and bolts of how to do a short sale, simply visit my website [] and you can download it for free!

Maurice Thomas

eRealty Pro

Palm Creek Realty, LLC

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