What Are Short Sales?

There seems to be a lot of confusion regarding short sales.  This article will help take some of the mystery out of the short sales process, and give you more of an explanation of a short sale in real estate. A short sale is a process for those who can no longer afford their homes and owe more on the property than what it is worth to help them get rid of the property in which the lien holder is willing to take less money than the amount owed.  One might wonder why a lender would be willing to take less money on the amount owed and the reason why most lenders accept a short sale.

When a bank accepts a short sale on a house, they are freeing up their inventory and also eliminating the whole process of having to take in another property into their REO Department (Real Estate Owned).  This is one less headache the bank has to deal with and also helps the banks free up their money so they can lend again on a more profitable loan. Banks are in the lending business and keeping a non-performing asset on their books ends up costing them more money. So it is advantageous for banks to accept a loss on the property and free up their cash so they can lend it into a performing asset.

Short Sale Explained

When a borrower enters a short sale, it is important that the terms of the agreement are reviewed properly and fully understood. Not knowing what’s fully involved could end up haunting many of the unsuspecting. There are many things that can be negotiated in the short sale process to help alleviate some of the financial burden from the homeowner.

For the most part, the bank is willing to take a lesser amount than the amount that is owed. Banks may additionally pick up real estate commissions to sell a property as well as title and attorney fees. At the Law Offices of Jeffrey A. Avny, we work hard to make sure our clients rights are protected as much as possible and work hard to insure our clients fully understand the implications resulting.

Tax Consequences on Short Sales

When the bank agrees to take a loss on the money and the borrower is relieved from liability of the loss, borrowers may be subject to taxation on the monies lost.  The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualify for this relief.  Cancellation of debt income may not be taxable in the case of non-recourse loans.

This provision applies to debt forgiven in calendar years ranging from 2007 through 2016. Homeowners were forgiven money on losses up to $2 million (if filing jointly and $1 million if filing  filing separately). Restrictions may apply. Please speak to your tax adviser or a CPA for questions regarding taxes or you may see the IRS webpage.

In the past, many people avoided short sales because the process took so long. Illinois set a new legislation in 2012 requiring lenders to respond to short sale requests within 90 days or less. The Illinois Mortgage Foreclosure Law was amended to add a new section, Section 15-1401.1, requiring mortgagees in a residential real estate property involved in foreclosure to respond to a mortgagor’s written request for a short sale within 90 days or less after receipt of a bona fide written offer to purchase the subject property in foreclosure to approve the sale  and terms of the offer to purchase.

This makes the whole short sale process much easier on both parties as well as real estate agents.  In the past, many realtor’s would not even take on a listing if it was a short sale due to the complicated process of working with the big banks.  Short sales can still remain a challenge if not handled properly. This is why it is important to have a lawyer and real estate agent who are well versed in the foreclosure process working on your behalf.

How to Get a Short Sale Approved

Navigating the short sale process can be difficult. Even some of the most experienced people in the industry may not have the experience required to properly negotiate the short sales process effectively.  Most banks require homeowners are at least 60 days behind on their mortgage before approving a short sale. Some banks will accept the application for a short sale but most likely will get denied unless the property is delinquent.  

To start the short sales process, a short sale package needs to be completed with a written offer, a short sale letter of hardship along with supporting financials. This is often referred to as a short sales package. As an underwriter from the bank reviews the package, they will generally give their approval and upon approval a closing will be scheduled.

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Short Sale Impact on Credit  

Anytime there are derogatory remarks, late payments, collections, or settlements on a credit report, there will be adverse consequences. While having a short sale on your credit report is obviously not desirable, it is far better than having a foreclosure show up on your credit report. Having a short sale on your credit will not only lower your credit score temporarily, it will also impact the amount of time before you can acquire another mortgage.

Most lenders will lend you money to purchase a home two years after a short sale with re-established credit on an FHA or VA loan. If you are going with a conventional loan, most lenders require four years from the short sale date before giving another loan on a purchase or refinance. Short sales on investment properties are typically impact your credit just as much as on a primary residence.  It is important to note, that the consequences of doing a short sale are far less damaging than that of having a property go into foreclosure.

Is a Short Sale Right for Me?

While everyone’s situation is different, this section here will help you determine if a short sale is right for you. If you are behind on your mortgage and owe more money on your home than what it is worth and you DO NOT want to keep your home, a short sale may be right for you. If you are behind on your mortgage and WANT TO KEEP YOUR HOME, a loan modification may be a more suitable option.

All in all, a short sale is a great way to help financially struggling homeowners who are behind on their mortgage, owe more on their homes than what they are worth and do not want to keep their home. If there is equity in the property and a borrower is behind on their mortgage, a short sale is not needed and borrowers may resort to selling the home outright.

Short Sale Lawyer Chicago Illinois

We hope this has given you a more clearer picture and provided you with the short sale info you were looking for. If you have any further questions or would like to request a consult to discuss if a short sale is right for you, please contact our office by dialing 847-398-4379 or you may click here.