| by Chris Okada
 This is a very common scenario in the current real estate market. It’s becoming a popular option among sellers, banks, and realtors in order to sell property with high loan to values in a declining real estate market. A short sale is an arrangement between the current owner of a home and the bank that lent them the money to buy their home to accept an offer for less than the total amount owed to pay off the home. The “deficiency” is the difference between the amount owed and what the bank collects at the short sale.
- What is not considered a short sale?
- A seller who lowers the listing price and accepts a purchase agreement for less profit.
- A sale under market value
A Bank-owned home in foreclosure Here is an example of a short sale: John & Jane Doe buy a house in 2005 for $500,000 and take out a $450,000 Jumbo (Interest only) mortgage. Now in 2008 they want to sell. They have the house listed for $480,000 but the only offer (Purchase Agreement) from a buyer is $400,000. Not only is this offer less than the mortgage but this is not including the selling expenses (Realtor Commissions, Title, MRT etc). Let’s assume an additional 7 percent off the purchase price of $400,000.
| Bought in 2005: |
$500,000 |
| Current Mortgage: |
$450,000 |
| Purchase Agreement 2008: |
$400,000 |
| Negative Equity: |
-$50,000 |
| + Selling Expenses: |
-$28,000 |
| Total monies owed: |
= $78,000 (Deficiency amount) |
John & Jane Doe are $78,000 “upside down” on the property. They do not have the funds to bring to closing in order to execute this purchase agreement. What are John and Jane to do? They decide to call their mortgage lender to discuss this scenario. The lender agrees to write/charge off this debt in the form of a short sale. This is called a deficiency judgment. Here are some FAQ’s regarding short sales:
- Will the seller have to pay capital gains taxes if they agree to sell the property as a short sale? No. However, the bank can report the deficiency as 1099 income and you will have to pay taxes on that amount.
- How does the realtor get paid? They are paid by the lender in this scenario.
- I owe more than my home is worth. Am I eligible for a short sale? Consult your lender on what options are available. For example: Short sale, deed in lieu of foreclosure, loan modification & foreclosure.
- How does this affect my credit score? If you keep making timely payments you should be able to maintain your current credit score depending on how the lender reports your mortgage being satisfied after closing. If the lender reports a deficiency judgment on your credit report then this will negatively impact your credit score. Obtain in writing the lender’s policy on short sale reporting.
As always, in a situation like this, consult a real estate attorney before agreeing to any purchase agreements or short sale terms from your lender.
For more information, please call or email Wealth Enhancement Mortgage Services.
info@we-mtg.com
800-492-1222 |
