UP COMING SIMINAR
SHORT SALE SIMINAR
March 7 2007 6- 9 pm
Effect On Borrowers of Short Sales
Q 7. Does a short sale adversely affect a defaulting borrower's credit rating?
A Yes. Lenders will report the short sale as being settled for less than the full balance. This would show up on the borrower’s credit report as a negative mark for seven years. (Cal. Civ. Code § 1785.13.)
Q 8. Suppose the borrower is late with his/her mortgage payments, causing the lender to begin the foreclosure process by filing a notice of default. Before the foreclosure sale occurs, the borrower pays the lender what is owed on the note. Could these activities appear on the borrower's credit report?
A Yes. The lender can report to a credit bureau receipt of any payments made 30, 60, 90 or more days after their due date. This may appear on a borrower's credit report as a "foreclosure in process," "foreclosure proceedings," "current was 30," or in some other way. Any such terms, or other similar reporting comments, harm that individual's overall credit rating.
Q 9. Is the method by which lenders report a short sale a negotiable item?
A Typically, no. The short sale is usually reported to credit reporting agencies as settled for less than the full balance. However, a borrower may try to negotiate this at the time the short sale is being arranged.
III. Disclosure Requirements in Short Sales
Q 10. Must a real estate transfer disclosure statement be given to a buyer in a short sale transaction?
A Yes, if the property being sold is a residential 1-4 unit dwelling and the transaction doesn't fall into one of the regular TDS exemption categories. No exemption exists for a short sale transaction in which the borrower sells the property to an outside buyer, using the sale proceeds to pay off the lender. See Question 3 of the legal article, Transfer Disclosure Statement Law, for a list of all the exemptions from the TDS requirement.
Q 11. Must other disclosures be given to a buyer (or seller) pursuant to a short sale?
A Yes. Short sales are treated just like any other sales transaction. See C.A.R. legal article, Sales Disclosure Chart for REALTORS®, for a summary of the disclosure requirements.
Q 12. Suppose a distressed seller enters into a contract to sell his/her home to a buyer pursuant to a short sale. Should the listing agent inform the lender if and when other offers are made on the property?
A Probably. Although the lender is technically not a party to the real estate contract, lender approval is nearly always a contingency of the agreement. Therefore, REALTORS® should obtain the client’s permission to keep the lender apprised of any relevant developments, including the presentation of other offers.
Q 13. Should a listing agent working with a distressed seller attempt to negotiate a future listing agreement with the lender?
A No. Listing agents working with distressed sellers owe them a fiduciary duty. Since in a short sale situation a lender could choose to foreclose on the seller, the lender's interests are potentially adverse to the seller's interests. Attempting to negotiate a future listing agreement with the lender raises the issues of "to whom is the agent's loyalty devoted" and "has the agent violated the fiduciary duty he/she owes the seller." The safer practice is to avoid putting oneself in such a position.
Q 14. Are there any tax effects of a short sale?
A Yes. The tax implications for the borrower could be so significant that a short sale would not be in the borrower’s best interest. Before a short sale is contemplated, it is strongly recommended that the borrower seek the advice of a professional tax advisor.
Generally speaking, any relief of indebtedness is included in gross income. There are, however, some exceptions to this rule that may benefit a taxpayer involved in a short sale. For more information on the tax implications of short sales, see the CAR legal article, How Short Payoffs and Foreclosures are Taxed.”
Q 15. What is the process for applying for a short sale?
A It is always in the best interest of the borrower to keep the lender informed. If the borrower is in default of the loan and is contemplating a short sale, it would be best for the borrower to let the lender know before the foreclosure proceedings are well under way. The lender may or may not grant more time to the borrower to find a buyer. In general, the process goes as follows:
- First, the borrower must find a buyer for the property.
- Second, the borrower must prepare all the necessary documents. See question 16.
- Third, the borrower must submit all documents to the lender.
- Fourth, the lender will send out their own appraiser to make sure that the buyer’s offer is at fair market value.
- Fifth, the lender will make a determination on whether or not to agree to the short sale.
Q 16. What documentation will a lender typically require?
A Lenders will typically require a distressed borrower to furnish a variety of documents, which could include the following:
- Written explanation (and proof) of the hardship the borrower is experiencing;
- Copy of the purchase contract signed by both the buyer and seller (borrower);
- Copy of the TDS;
- Proof of the buyer's ability to purchase the property, i.e., a completed loan application, pre-approval by another lender, or evidence of cash on hand (bank statement);
- Copy of the certified escrow instructions;
- Preliminary title report;
- Estimated net/closing statement certified by an escrow officer acceptable to the lender;
- Completed and signed IRS Form 4506, "Request for Copy of Tax Form;"
- Completed and signed personal financial worksheet;
- Previous two years tax returns;
- Employment paycheck stubs for the past two months;
- Profit and loss statement (if the borrower is self-employed);
- Past three months' bank statements.
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