Owe more than the house is worth?

What a short sale is

A short sale is a sale where the house sells for less than what's owed on the mortgage, and the lender agrees to accept the lower amount to release its lien. It's called "short" because the sale proceeds fall short of the loan balance.

Short sales usually happen when a homeowner needs to sell, often because of financial hardship, but the house is worth less than the mortgage. Without the lender's agreement, the homeowner would need to bring cash to closing to cover the gap. In a short sale, the lender agrees to take a loss instead, usually because it expects to recover more that way than through foreclosure.

This page explains how short sales generally work, what to watch out for, and how we buy short sale houses. We're not attorneys or tax advisors. A short sale has legal and tax consequences, so please get professional advice before you sign anything.

When a short sale makes sense

• You owe more on the house than it's worth
• You're facing a hardship such as job loss, illness, divorce, or a death in the family
• You can't afford to keep making payments, or you're already behind
• A loan modification isn't possible or won't solve the problem
• You'd rather sell than go through foreclosure

If you have equity, meaning the house is worth more than you owe, you don't need a short sale. A regular sale will pay off the loan, and you'll keep the difference.

How a short sale works, step by step

1. Talk to an attorney or short sale negotiator. Short sales involve a lot of paperwork and back-and-forth with the lender. Having someone experienced on your side helps.
2. Contact the lender. Let them know you want to pursue a short sale and ask for their requirements.
3. Prepare a hardship package. Lenders usually require a hardship letter explaining your situation, along with financial documents like bank statements, pay stubs, tax returns, and a list of monthly expenses.
4. Get a purchase offer. The lender needs to see a real offer from a real buyer. That's where we come in.
5. Submit everything to the lender. Your attorney or negotiator sends the offer and the hardship package.
6. The lender reviews it. The lender usually orders its own valuation, often a broker price opinion or appraisal, to decide whether the offer is reasonable.
7. Negotiation. The lender may accept, reject, or counter with a higher price or other conditions.
8. Approval. If the lender approves, it issues a short sale approval letter with specific terms and a deadline to close.
9. Closing. The sale closes, the lender receives the agreed amount, and it releases the mortgage.

How long does a short sale take?

Longer than a regular sale. Lender reviews can take weeks or months, especially if there's more than one loan on the property, or if the loan is owned by an investor that has its own approval process. A cash buyer can't speed up the lender's review, but it can eliminate the delays on the buyer's side, like appraisals and loan approval.

Two lenders, two approvals

If you have a first mortgage and a second mortgage or home equity line, both lenders need to agree. The second lender is often in a difficult position, because in a short sale it may receive very little. Negotiating with both lenders is one of the trickiest parts of a short sale and another reason to have experienced help.

What happens to the remaining balance?

This is one of the most important questions in any short sale. After the sale, there may still be a gap between what you owed and what the lender received. That gap is called a deficiency.

Whether the lender can pursue you for that deficiency depends on the lender's approval terms and the law. New York has rules that may limit a lender's ability to seek a deficiency after a short sale of a residence, but those rules have specifics and exceptions. Ask your attorney to review the lender's approval letter carefully, and make sure any waiver of the deficiency is clearly in writing before you close.

Tax consequences

When a lender forgives part of a debt, the forgiven amount can sometimes be treated as taxable income. There have been federal tax provisions in the past that excluded forgiven mortgage debt on a primary residence from income, but those provisions have changed over time and have specific limits. Other exceptions, like insolvency, may also apply. Talk to a tax professional about your situation before closing.

Short sale vs. foreclosure

A short sale and a foreclosure both end with you leaving the house, but they're different in important ways:

• In a short sale, you're involved in the process and can influence the timing.
• A short sale is generally viewed as less damaging to credit than a completed foreclosure, though both have an impact.
• A short sale may resolve the deficiency question more clearly, depending on the approval terms.
• A foreclosure is a court process that can take a long time in New York, during which fees and interest keep growing.

A HUD-approved housing counselor can walk you through how each option might affect your situation.

Short sales during foreclosure

You can often pursue a short sale even after a foreclosure case has been filed. Many lenders will consider short sales as an alternative to finishing the foreclosure. If you're in that situation, act quickly and keep your attorney involved, because court deadlines don't stop just because a short sale is being reviewed.

Why a cash offer helps a short sale

Lenders want certainty. When they approve a short sale, they're agreeing to take a loss, and they want to know the sale will actually close. A buyer who needs a mortgage adds risk: the appraisal could come in low, the loan could be denied, or the buyer could walk away. A cash buyer removes those risks.

We also buy as-is. Many short sale houses haven't been maintained during a period of financial stress, and they may need significant work. We price that in from the start.

What we need from you

• The property address and a general description of its condition
• The approximate balance of each mortgage or lien
• Whether you're current or behind on payments
• Whether a foreclosure case has been filed
• Contact information for your attorney or negotiator, if you have one

How we work on short sales

1. We visit the house and make a written cash offer.
2. Your attorney or negotiator submits it to the lender with your hardship package.
3. We stay patient through the review and respond quickly to any lender requests.
4. If the lender counters, we'll tell you honestly whether we can meet their number.
5. Once approved, we close within the lender's deadline.

Be careful with short sale scams

Unfortunately, homeowners in financial distress are targets for scams. Be cautious of anyone who asks for large upfront fees to negotiate a short sale, tells you to stop paying your mortgage and pay them instead, asks you to sign over your deed, or promises a guaranteed result. Work with a licensed attorney you've chosen and checked yourself.

Is a short sale right for you?

It depends on your finances, your goals, and your lender. If you have equity, a regular sale is simpler. If you can afford to stay and the hardship is temporary, a modification or forbearance might be better. If you need to sell and you owe more than the house is worth, a short sale is often a reasonable path. We'll give you an offer either way so you have a real number to work with.

Questions to ask the lender

• What documents do you need for a short sale review?
• How long does your review usually take?
• Will you waive the deficiency balance in writing?
• Will any foreclosure sale date be postponed while you review?
• Is there any relocation assistance available?

Some lenders and loan programs have offered relocation assistance to homeowners who complete a short sale. It's always worth asking.

How lenders decide whether to approve

Lenders look at a few key questions. Is the homeowner experiencing a real hardship? Is the offer close to the property's current market value? Would the lender recover more through the short sale than through foreclosure, after accounting for legal costs, time, and the expense of holding and reselling the property? Are there other liens that need to be settled? A clear hardship package and a realistic offer give a short sale the best chance.

Staying current with your attorney and the lender

Short sales often stall because documents expire or requests go unanswered. Lenders may ask for updated bank statements or pay stubs during a long review. Respond quickly to every request, keep copies of everything you send, and stay in close contact with your attorney or negotiator.

Short sales and condition

Houses in a short sale are often in rough shape. When homeowners are struggling financially, repairs get put off. Roofs leak, boilers fail, and cosmetic issues pile up. Lenders consider condition when they evaluate an offer, and they often order their own valuation. A buyer who can document the repairs needed, with a clear estimate, can help the lender understand why the offer is what it is. Our written offer includes that breakdown, which can support the approval process.

If the lender says no

Sometimes a lender rejects a short sale or counters at a price no buyer will pay. If that happens, your attorney may be able to resubmit with more information, request a review, or pursue other options like a deed in lieu of foreclosure, where you voluntarily transfer the house to the lender. Each option has different consequences, so get advice before choosing.

Start with a conversation

If you are not sure whether a short sale fits, call us. We will help you think it through.

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