A short sale is when a home is sold for less than the amount owed on the mortgage for the home. This occurs when the bank agrees to take less than the full amount due on the mortgage.
A seller doesn’t have to be behind on a home loan to seek a short sale. If sellers wish to pursue a short sale, they must owe more than what the home is worth, demonstrate the house can’t be sold for the amount owed, and suffer from a legitimate financial hardship that makes the mortgage unaffordable.
The next step in the short sale process is to assemble a short sale package. This package will include such things as a financial statement showing monthly expenses, income documentation, bank statements, tax returns, a listing agreement, purchase agreement, an estimated HUD statement and a financial hardship letter.
If the home is sold as part of a short sale, there will be a difference between the amount owed and what the bank collects. This is called the shortage or the deficiency. Sometimes this deficiency may be negotiable. Some banks will seek a promissory note for the deficiency, meaning that the seller may be responsible to pay the difference between what the home sold for and what is owed to the lender.
Some lenders might choose to file a collection or a judgment for the amount owed. The seller should be certain that any amount of debt, or release from debt, is received in writing. If the deficiency is forgiven, the lender can write off the shortage with the Internal Revenue Service, which means the seller may be responsible for paying taxes on the amount of the deficiency. However, the Mortgage Debt Relief Act of 2007 generally allows taxpayers the potential for relief from tax on mortgage debt forgiveness.
A short sale will affect the seller’s credit score. To minimize the effect on a credit score, sellers should avoid making late payments on their mortgage and work with the bank to report the sale in the best possible manner.
— Craig Greene is a senior loan officer at Prospect Mortgage, 3916 State St., Suite 100, Santa Barbara 93105. He can be reached at craig.greene@prospectmtg.com or 805.898.4211.