I have a friend who's selling her home in California to move near me to care for her aging parents. As I understand it she has to move and since housing costs have come down so much her home loan is more than the house is worth in this market....
So what happens when it sells for less than she owes the bank? Does she still have to pay off the remainder of the loan? Does the bank just realize that this house is going to lose them money and forgive it? Why does it take months to go through all this process? She signed papers on it today but doesn't expect to hear if she is done until the middle of the summer....
I just want to be able to understand what she's going through so I don't sound stupid when we talk about the process. Thanks.
They knew for some time that her father's health was deteriorating and they'd have to move to take care of him. They stayed this long in hopes the housing market would improve. BUT they owe more on the house than the current appraisal. She didn't say how much more.
So they go to the bank and tell them that they have to move to another state to care for an older parent. They tell the back they've tried and tried to wait but it's getting to a point they need to go. There is family land at home that they'll live on the rest of their lives so they don't need the house in CA anymore....
The market has not improved. So the bank can accept this offer or not, right? Why don't they just say "Sorry, that's not enough money for this property" and be done with it....too bad they make everyone wait for months and months.
Thanks everyone, I understand it a lot better.
It is not forgiven but they don't go after it either. It is like a bankruptcy the bank can't collect it but it is still owed. The difference between the loan value and sale value is taxable as ordinary income but there is a temporary law in place that makes that non taxable.
Unfortunately, we have lots of experience with this, and we live in California. It's the same as a foreclosure, basically. The bank, IF they choose to accept the offered purchase price, will charge off the difference. For instance, let's say the loan on the house is $200,000. Your friend has a buyer for her house who has offered $150,000. The bank will charge off the $50,000 difference, and your friend will take a ~200 point hit on her credit report. It will show up as a charge-off on a real estate loan on her credit report. She does NOT owe the money to the bank - to be perfectly clear, the mortgage documents she signed when she purchased the home indicated that the house was the collateral on the loan, and the bank agrees to accept the sale price as payment in full for the loan. They can't come back after her for the difference if there is only one loan on the property.
Two things to note:
1) If she has a second mortgage, or has ever refinanced the house, she needs to see a lawyer right now. There are some intricacies to the law that could make life very difficult for her - and she needs to make sure she is protected legally. If the second mortgage was used as purchase money when the home was first bought, she's fine and doesn't need to worry (the second "dies" with the house sale, even in a short sale, as does the primary mortgage) - but if she took out a second mortgage later on, or refinanced the first, the lender can and probably will come back after her for the loan. Different states have different statutes of limitations on that - in any event, she needs to get out in front of it and talk to a lawyer if she has a second mortgage, or has ever refinanced the initial mortgage.
2) If she is still able to make the payments on the house, it's very unlikely that the lender will approve the short sale. They really have no incentive to do so. At that point, your friend can do one of two things: 1) plan to hold onto the house, and rent it out, or 2) stop making the payments and allow the bank to foreclose. Foreclosure is the same thing on her credit report as a short sale, so it really makes no difference one way or the other to her. If she hopes to get a home loan in California, she'll have to wait 3 years before she will qualify for an FHA loan. So the option of renting out the house may be more attractive to her.
Good luck.
This is a tough situation. I'm sorry she is in it.
I would either rent out the home or have her father come live with her. Therefore her husband (if she is married, you say "They") can keep his job (if he has one) and she won't have to worry about a short sale.
Short Sales mean different things - it all depends upon their situation, whether they are behind on the mortgage, underwater (owe more than the house is worth) or behind on payments.
It is up to the mortgage company who owns the loan to accept the price offered and whether or not they will forgive the balance, etc. She may end up having to claim the balance as "income" on her taxes. She will need to talk to a foreclosure (as really, this is what it is) attorney to find out everything she needs to know and the laws for California mortgages....
why does it take so long? Because the lender has to get approvals from many different departments, have their own analysis done to verify appraisal/worth, loan amount to forgive (if they forgive it), etc.
I wish your friend luck!
I see you've gotten answers already, but wanted to add.
We did a short sale on our house a few years ago, because my husband had been laid off. It was already on the market and had been for MONTHS before he lost his job.
We were going to take it off the market but our agent recommended we keep it there to see if they'd allow us to short sale. They could've said no. But at the time the housing market was taking a HUGE hit, people we were walking away from their homes letting them get foreclosed on, and many people were TRASHING their houses before they left. We kept current on all payments and took very good care of the home. The house appraised for 40k less then it had 2 years prior.
They could have told us no. But due to circumstances they allowed it. Your friends may or may not be granted the choice. It all depends.
If it doesn't go through, may they could rent the house out or try for sale by owner? Good luck to them!
Also, we did not have to pay the difference back. We were very very fortunate! That was over 4 years ago, so I am not sure how laws have changed.
From my understanding, and I could be wrong...but a short sale is when a house is almost in foreclosure. You are still able to sell the house yourself, since you are the owner. And if you get a bid from someone who wants to buy the house, and the bid is lower than you owe the bank, then you need to get the bank's approval on that, before you can agree to the terms of that sale. I don't know how many months behind in your house payment you have to be, before you are able to short sale your home. And I'm sure it is different in every state.
A short sale is when the lender agrees to take less than what is owed on the home. This process takes so long because it goes through so many different departments at the bank for final approval. There are times when the home owner will have to pay the difference but there is paper work that can be filled out so the home owner will not be responsible.
The time process can vary depending on the bank, here in Florida some go through within 45 days and some take up to six months to close once an offer is made.
She should ask if they can get an approved price now that may help it go through faster. I see some on the market that are "short sale bank approved price". That means they already went through the departments and agreed on the price before listing.
California home owners do not need to pay back the loan once it is forgiven and currently this year they do not need to pay taxes on the difference for state or federal. Example they have a loan for $500K it sales for $300K (the bank will lose $200K give or take depending on realtor fees and such). Some states require that this $200K count as income and the owners will need to pay the tax on it. Next year they could be liable for the federal tax (California will most likely keep status quo). They need to make sure they are with in the guide lines (rentals do not count the same way).
The bank has to approve the short sale (the sellers need to prove they can not afford it and the bank sets the rules. Dead of spouse, Divorce, major health issues (not sure what exactly), or laid off from work are some examples. The banks take their time. We tried to buy a short sale and we gave up (I was worried rates and prices would go up and I wanted to move before my son started school). The owners could also have a 2nd mortgage that needs to be agreed on too. Not sure if CA allows people who have HELOC qualify for a short sale. I notice my 'dream short sale house' took 9 months the sellers were denied (I figure and my realtor said there is not way to know when/if we will get it for the price we offered even though the owners accepted our offer, the bank might want more). The owners were still paying on it because in California you can pay and be accepted for a short sale. The logic is to save your credit. Being zero days behind is a lot better than 120 days behind.
She should talk to a lawyer because every case is a little different. Could she rent the home and wait for the market to improve? Price are starting to go up in my area of CA.
In CA she needs to make sure the bank approves it as FULLY Satisfied.
http://www.california-shortsale.com/common-questions/what...
Ask her if she has asked her accountant if she is going to have to pay taxes on the amount she doesn't pay back for that house, taxes counted as earned income. She needs to know that and be prepared for the bad news...
Dawn
Can she rent the house out until the prices rebound?
She might need a property manager to handle it for her (because being a long distance landlord is a pain in the behind) but if she can rent it out for enough to cover the mortgage payments, then she can hold off on selling it for awhile.
Our 1st home is paid for but we can't sell it yet for enough to wipe out the mortgage on our current home.
The prices are rebounding slowly and we hope to be able to sell it in a few more years.
In the meantime we have it rented out and that rent covers the property taxes and just about covers our current mortgage payments.
Short sale agreements do not necessarily release borrowers from their obligations to repay any deficiencies of the loans, unless specifically agreed to between the parties. However, in California, legislation was passed to preclude deficiencies after a short sale is approved. The same is true of lenders on first loans and lenders on second loans — once the short sale is approved, no deficiencies are permitted after the short sale.
