Short Sale Basics for Sellers

 1.  What is a short sale?  A short sale is when the lender agrees to accept less than the amount owed against the home because the property has experienced a loss in value.  The seller must typically demonstrate some type of hardship (increased payments, loss in income, need to move, etc.).  It is also important to know that because there is a hardship, the seller does NOT come out of pocket for any of the closing expenses. 

 2.  How much will it cost me to sell via short sale?  When there is a hardship situation, the seller does not have the available funds to pay for the typical closing costs.  These costs will be negotiated by your agent to come out of the gross proceeds of the sale.  Therefore, it will not cost you anything to complete the sale.  

3.  How could a short sale affect my credit and ability to buy in the future?   If you are already more than 60 days late (or it’s inevitable), then your credit likely has already suffered a significant drop in your FICO scores.  What is important to realize is that Fannie Mae guidelines (used for federally backed loans) award those sellers that successfully short sale as apposed to losing their home to foreclosure.  Even if you are more than 60 days past due, you could potentially buy within 24 months of completing your short sale if you are in a financial position to do so at that time.  Also, the Fannie Mae guidelines allow for a seller that is current, or less than 60 days past due, to apply for a loan to purchase right away following a short sale. 

4.  What is a deficiency judgment and will I still owe anything after I sell?  Depending on the type of loan(s) you currently have and the circumstances surrounding those loans, the lender may have a right to pursue the debt. In California, purchase money loans are not subject to deficiency judgment and the lender does not have an option to collect. 

In addition, if the property is an investment property (you have not lived there 2 of the last 5 years), you could be taxed on the debt that is forgiven by the bank.  This would be considered income by the IRS and state tax board.

It is important to have an experienced agent, and possibly a real estate attorney, examine your specific financial situation to help you determine your eligibility and the possible recourses of a short sale option.