WHAT IS A SHORT SALE?
A Short Sale is
when a bank or mortgage lender agrees to discount a loan balance due to an
economic hardship on the part of the mortgagor. The home owner/debtor sells the
mortgaged property for less than the outstanding balance of the loan, and turns
over the proceeds of the sale to the lender in full satisfaction of the debt.
In such instances, the lender would have the right to approve or disapprove of
a proposed sale.
Extenuating circumstances influence whether or not banks
will discount a loan balance. These circumstances are usually related to the
current real estate market climate and the individual borrower's financial
situation. A short sale typically is executed to prevent a home foreclosure.
Often a bank will choose to allow a short sale if they believe that it will
result in a smaller financial loss than foreclosing. For the home owner, the
advantages include avoidance of having a foreclosure on their credit history.
Additionally, a short sale is typically faster and less expensive than a
foreclosure.
In short, a short sale is nothing more than negotiating
with lien holders a payoff for less than what they are owed, or rather a sale
of a debt, generally on a piece of real estate, short of the full debt amount.
Lenders have a department (typically called a loss
mitigation department) which processes potential short sale transactions.
Typically, lenders do not accept short sale offers or requests for short sales
until a Notice of Default has been issued or recorded with the locality where
the property is located. Lenders have to approve of any buyer's or listing agent's
commission in advance, a primary reason for non-brokered short sales with a
specialist or facilitator to save on the margin. Many of these facilitators work with a private
lending party for their financing, such as a partner or syndicate.
Lenders have a varying tolerance for short sales and mitigated
losses. The majority of lenders have a pre-determined criteria for such
transactions. Other distressed lenders may allow any reasonable offer subject
to a loss mitigator's approval. "Red tape" is very common in short
sales, similar to REO and HUD (Housing and Urban Development) properties,
requiring potentially multiple levels of approvals and conditions. Junior
liens, such as second morgagees, HELOC lenders, and HOA (special assessment liens), may need to
approve of the short sale. Frequent objectors to short sales include tax
lieners (income, estate or corporate franchise tax - as opposed to real
property taxes, which have priority even unrecorded) and mechanic's lien
holders. It is possible for junior lien holders to prevent the short sale.
While it is frequent if not common for a lender to forgive
the balance of the loan in question, it is unlikely that a lien holder that is
not a mortgagee will forgive any of their balance. Further, it is common for a
lender to omit updating the zero balance and settlement option on the
mortgagor's credit report, or even flat refuse to do so "due to their
financial loss."
The Mortgage Forgiveness Debt Relief Act of
2007
When the lender decides to forgive all or a portion of a
borrower's debt and accept less, the forgiven amount is considered as income
for the borrower and is liable to be taxed.
However, after the signing of The Mortgage Forgiveness
Debt Relief Act of 2007 by President Bush, amendments have been made to remove
such tax liability and allow the borrower and lender to work freely together to
find a common solution that is beneficial to both parties. This protection is
limited to primary residences so consultation with a tax advisor is necessary
ensure that a borrower qualifies.