Disclaimer
For the lastest advisory from the Arizona Association of Realtors visit:
www.aaronline.com/documents/ssseller_advisory.pdf
Short Sale Seller Advisory
A short sale is a real estate transaction in which the sales price is insufficient
to pay the loan(s) encumbering the property in addition to the costs of sale and
the seller is unable to pay the difference. A short sale involves numerous
issues as well as legal and financial risks. This Advisory is designed to address
some of these issues and risks, but does not purport to be comprehensive.
Before Proceeding with a Short Sale
Understand a Lender’s Options upon Loan Default
There are many types of loans that are secured by real property. These may be purchase
loans, refinanced loans, home-equity loans, or one of the various other types of
loans. The type of loan and type of property will determine what remedies a lender
may have if the homeowner fails to make the agreed upon payments. The available
remedies, the homeowner’s overall current or potential future financial strength,
the lender’s cost in acquiring the loan and any sharedloss or similar agreement
if the loan was acquired by purchase or merger, are some of the many factors that
the lender may consider in deciding how to proceed when a loan is in default. For
an overview of these issues, go to www.aaronline.com/AZR/Dec/09LoanDefaults.aspx
Be Aware of Predatory "Rescue" Scams & Short Sale Fraud
Homeowners worried about
foreclosure may be susceptible to predatory "rescue"
scams which may cost you money with no results, result in the loss of your home
entirely, or involve you in a fraudulent scheme. For more information, go to:
www.efanniemae.com/utility/legal/pdf/fraudnews/mortgagefraudnews0709.pdf
"Red Flags" of fraudulent schemes include:
- Guarantees to stop the foreclosure
- Large upfront fees
- Instructions not to contact the lender
- Transfer of title or lease of the property
- The proposed buyer is an LLC
- Requests that the homeowner execute a power of attorney
- The proposed buyer, at the buyer’s sole expense, retains a third party to negotiate
the short sale for the seller’s benefit.
Report suspected scams to the Department of Financial Institutions at
fraudline@azdfi.gov; the
Attorney General’s Office or
NeighborWorks©
Contact a Free HUD-Approved Housing Counselor or Contact Your Lender Directly
Utilize Free Services Available to Arizona Residents
- Contact the Arizona Foreclosure Helpline at (877)-448-1211 or visit
- Review the Arizona Foreclosure Prevention Task Force Workbook . This book will help you evaluate your options and provide
you with tools to take action. Additional resources are available at: .
Obtain Legal Advice
Obtain Tax Advice
Be Aware of the Consequences of Committing "Waste"
Damaging the property or removing fixtures such as sinks, toilets, cabinets, air
conditioners, and water heaters may result in liability to the lender for "waste."
In other words, the lender may be able to sue you for damages if you have physically
abused, damaged or destroyed any part of the property.
Options Other than Short Sale
Consider All Options
A short sale may not be your best course of action. Consider all your options
before making a decision.
Loan Workout
- Reinstatement: Paying the total amount owed by a specific date in exchange for the
lender agreeing not to foreclose.
- Forbearance: An agreement to reduce or suspend payments for a short period of time.
- Repayment Plan: An agreement to resume making monthly payments with a portion of
the past due payments each month until they are caught up.
- Claim Advance/Partial Claim: If the loan is insured, a homeowner may qualify for
an interest-free loan from the mortgage guarantor to bring the account current.
Loan Modification
The lender may agree to change the terms of the original loan to make the payments
more affordable. For example, missed payments can be added to the existing loan
balance, the interest rate may be modified or the loan term extended. Loan modification
resources include:
Refinance
If the lender will not agree to a loan workout or modification, the homeowner may
be able to refinance the loan with another lender. The HOPE for Homeowners program
will refinance mortgages for homeowners that can afford a new loan insured by HUD's
Federal Housing Administration. Learn more at www.hud.gov/hopeforhomeowners/index.cfm
Deed-in-Lieu of Foreclosure The lender may allow a homeowner to "give back"
the property. This option may not be available if there are other liens recorded
against the property. Review the HUD requirements at .
Work Out Sale
The lender may allow a specific amount of time for the home to be sold and the loan
to be paid off. The lender may also allow a buyer to assume the loan to purchase
the property even if the loan is non-assumable.
Bankruptcy
If you are considering bankruptcy as an option, consult with an attorney who specializes
in bankruptcy cases: www.azbar.org/LegalResources/findspecialist.cfm. Access
the Arizona Bankruptcy Court self help information by calling 866-553-0893 or visit
www.azb.uscourts.gov/default.aspx?PID=78#866.
Foreclosure
Allowing the lender to foreclose is another option. The counselors at the
Arizona Foreclosure Help Line can explain the foreclosure process, call: 1-877-
448-1211. Ultimately, only you and your attorney can decide if foreclosure
is the best option for you. Attorneys who are State Bar Real Estate Law Certified
Specialists can be located at www.azbar.org/LegalResources/findspecialist.cfm. Ask your
attorney about the possibility of a deficiency lawsuit after foreclosure.
Assuming all statutory requirements are met, the Arizona anti-deficiency statutes
may limit the lender’s remedy to foreclosure, even if the amount due to the
lender exceeds the value of the property. Also, seek professional tax advice about
the consequences of a foreclosure and review the IRS information at www.irs.gov/individuals/article/0,,id=179414,00.html.
Short Sale Considerations
If you decide to pursue a short sale, consider taking the following actions.
Contact a Qualified Real Estate Professional
Interview several real estate professionals and ask about their experience in short
sales, the number of
short sale transactions that they have handled, and
their education and training in
short sales.
Investigate Documentation and Eligibility Documentation and eligibility criteria
for short sales vary depending on specific lender and investor guidelines.
Generally, you must prove that you are financially incapable of paying the loan
and the lender is convinced that it will fare better by agreeing to a sale for less
than the outstanding loan amount than foreclosing.
Determine the Amount Owed on the Property
All debt and costs must be factored in before determining whether a short sale
is feasible. Consider the delinquent loan, home equity loan or other loans recorded
against the property, past due homeowner’s association fees, unpaid property taxes
and the costs of a sale, such as closing costs, escrow fees and brokerage commissions.
If you have more than one loan on the property, be aware that a short sale
will generally require the approval of all lenders.
Determine the Estimated Fair Market Value of the Property
You must prove to the lender that the home is worth less than the unpaid loan balance.
Consult a real estate professional or an appraiser for assistance in estimating
the value of the property.
Consult Legal Counsel
The importance of competent legal counsel to help you determine whether a short
sale is the best option and to advise you during the short sale process cannot
be over emphasized. See the legal resources listed above or visit www.azbar.org.
Understand that a Short Sale May not Discharge the Debt
Even if a lender agrees to a short sale, the lender, the VA, or the FHA may
not agree to forgive the debt entirely and may require you to pay the difference
as a personal obligation. This outstanding personal obligation could result in a
subsequent collection action. For example, a lender may accept the short sale
purchase price to "release the lien" on the property as opposed to agreeing to accept
the purchase price as "full and final settlement of the debt" on the property. Therefore,
be certain of the terms of any short sale before making a decision, consult
an attorney regarding whether the lender is entitled to pursue a deficiency judgment
and obtain any debt forgiveness agreements with the lender in writing.
Obtain Tax Advice
A short sale in which the debt is forgiven is a relief of debt and may be
treated as income for tax purposes. The Mortgage Forgiveness Debt Relief Act of
2007 created a limited exemption to allow homeowners to pay no taxes on debt forgiveness;
however, only cancelled debt used to buy, build or improve a principal residence
or refinance debt incurred for those purposes qualifies for this tax exemption.
For more information on the tax consequences of debt relief seek professional tax
advice and go to www.irs.gov/individuals/article/0,,id=179414,00.html
Be Aware of the Impact on Your Credit Score
The impact of a short sale on your credit score depends upon a variety of factors,
including late or missed payments. A short sale may appear on your credit
report as "pre-foreclosure redemption," "paid in full for less than full balance"
or other similar term.
Understand That There May Be a Waiting Period Before You Can Buy another Home
Your ability to qualify for a loan to purchase another home after a short sale
will likely be affected and there may be a waiting period before you can purchase
another home.
Review the Arizona Association of REALTORS® (AAR) Short Sale Forms
AAR has developed a Short Sale Addendum to the Listing Agreement, www.aaronline.com/documents/SSAListing.pdf, and a Short
Sale Addendum to the Residential Resale Real Estate Purchase Contract www.aaronline.com/documents/SSARPC.pdf, to assist in a short
sale transaction. Review these contract forms and any other forms you are asked
to sign so that you thoroughly understand your rights and obligations.
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