Lenders have a varying tolerance for short sales and mitigated losses. The majority of lenders have a pre-determined criteria for such transactions. Other distressed lenders may allow any reasonable offer subject to a loss mitigator's approval. "Red tape" is very common in short sales, similar to real estate owned (REO) and HUD properties, requiring potentially multiple levels of approvals and conditions. Junior liens - such as second mortgages, HELOC lenders, and HOA (special assessment liens) - may need to approve of the short sale. Frequent objectors to short sales include tax lieners (income, estate or corporate franchise tax - as opposed to real property taxes, which have priority even when unrecorded) and mechanic's lien holders. It is possible for junior lien holders to prevent the short sale.

Mortgage Forgiveness Debt Relief Act of 2007

When the lender decides to forgive all or a portion of a borrower's debt and accept less, the forgiven amount is considered as income for the borrower and is liable to be taxed.

However, after the signing of The Mortgage Forgiveness Debt Relief Act of 2007 by President Bush, amendments have been made to remove such tax liability and allow the borrower and lender to work freely together to find a common solution that is beneficial to both parties. This protection is limited to primary residences so consultation with a tax advisor is necessary ensure that a borrower qualifies.

Credit reporting:

A short sale does not adversely affect a person's credit report beyond documenting the short sale as "foreclosure proceedings started". But it does count against a person's credit to about the same degree as a foreclosure by similarly remaining on the report for 7 to 10 years^{[citation needed]} and, most often, prevents the issuance of any mortgages for a number of years.^{[citation needed]}

While it is frequent if not common for a lender to forgive the balance of the loan in question, it is unlikely that a lien holder that is not a mortgagee will forgive any of their balance. Further, it is common for a lender to omit updating the zero balance and settlement option on the mortgagor's credit report, or even flat refuse to do so "due to their financial loss."

Answers to Questions you may have about Short Sales:

Homes Sell "As Is".

If a mortgage company agrees to a short sale, it is most likely also paying the closing costs in the transaction. Lenders ask buyers to purchase the home in its present condition. Lenders typically will refuse to pay for:

• Suggested repairs disclosed on a home inspection.
• Pest inspections or work necessary to issue a clear pest report.
• Roof certifications or roof repairs.
• Home protection plans for the buyer.
• Deferred maintenance.

Length of Time to Close

Depending on when the Notice of Default was filed, the lender's back-log of foreclosures and how much paperwork the seller has already submitted, it could take anywhere from two weeks to two months to get a response on a purchase offer from a lender. In addition, if two lenders are involved because there are two loans secured to the property, it could take longer to satisfy the demands of the second lender.

Lenders Can Change Conditions

Some lenders reserve the right to renegotiate the terms of the short sale at the last minute. If the market changes, new laws pass or new information crosses the lender's desk, the lender can attempt to change the terms of the contract. Lenders generally have lawyers at their disposal, and ordinary buyers do not.

Lose Control of Transaction

If you need to close escrow by a specific date, lots of luck with that. A short sale home closing process takes an indefinite amount of time. The seller's lender calls the shots, not the buyer nor the buyer's lender. If you are trying to close escrow concurrently with the sale of your home, it might not happen.

Homes Sell at Market Value

Lenders aren't naive or unaware of the value of a home. Lenders will insist on a comparative market analysis, known as a CMA, or broker price opinion, known as a BPO. If a lender believes a better price can be obtained by taking the property back in foreclosure over a short-sale offer, the lender may hold out for a higher price. That price will be close to market value. Lenders accept short sales when the home is worth the short-sale price, which means market value.

Inexperienced or unethical real estate agents might push a seller into considering a short sale when the seller does not qualify for a short sale. Sellers must prove a hardship and submit evidence of the hardship to the lender for approval. Some agents list homes as short sales without ever talking to the lenders or pre-qualifying the sellers.

New short sale rules impact buyers

• Bankrate.com

Highlights

HAFA rules mainly affect sellers and lenders, but also impact buyers. Short sale properties typically are in better shape than foreclosures. Don't assume all short sale homes have been approved for sale.


New short sale rules are impacting homebuyers as well as sellers and lenders.
Recently, the federal government instituted the Home Affordable Foreclosure Alternatives program, or HAFA, which is intended to streamline the short sale process, at least for transactions in which the home sellers have mortgages owned or guaranteed by Fannie Mae or Freddie Mac.
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"Buyers of short sales have had to wait months and months and still not always have their offer approved for a short sale," says Lisa Matykiewicz, a Realtor and Certified Distressed Property Expert in Gilbert, Ariz. "Now there will be defined parameters as to what the lenders will accept and a timeline for when the contract needs to be approved or denied."
While most HAFA rules affect only the home sellers and their lender, a few of the streamlined rules impact buyers. They include:
Buyers must present documentation of funds or a preapproval letter from a lender with their offer for a short sale; sellers need to present this to their lender within three days of receiving the offer.Lenders must approve or deny the offer for the home within 10 business days of receiving the offer.Settlement must take place within a reasonable period of time after the offer is made, but the lender cannot require a closing earlier than 45 days from the date of the sales contract unless the home seller agrees.Buyers cannot sell the property again for 90 days. This is meant to prevent investors from "flipping" homes by purchasing at a low price and selling at a quickly inflated price.Short sale transactions through HAFA must take place at "arm's length," meaning the home sellers cannot sell the property to a relative or anyone else with whom they have a closer personal or business relationship.Matykiewicz anticipates fewer foreclosures in 2010 and more short sales due to the streamlined short sales rules.
"I think more short sales will be available in 2010 than in 2009 because everyone is cooperating to avoid adding more foreclosures to the market, from the government to the lenders to the homeowners," says Matt Martin, CEO of Matt Martin Real Estate Management in Vienna, Va.
Better bet?Homebuyers may find that short sales are not necessarily opportunities for bargain hunting. "In reality, short sale properties are priced at what the market will bear because the bank wants to recoup as much as possible of the loan value," says David Liniger, Re/Max International chairman and co-founder.
Still, shoppers may find a short sale a better bet than buying a foreclosure, he says.
"Short sales are usually in much better condition than a foreclosure because they have an actively involved seller who is living in the property," Liniger says. "Most people would prefer to buy a home in good condition at a reasonable price as opposed to a property in bad condition which will require considerable time and money to make livable."
Not all short sales fall under the HAFA program. Homeowners with loans owned by lenders other than Fannie Mae or Freddie Mac will need to negotiate short sales on an individual basis.
"One problem that will continue even with the streamlined short sale process is that homebuyers do not know where the homeowner stands in terms of approval for the short sale," says Martin. "Some real estate agents go ahead and list a home as a short sale even before the lender has approved one."
If, on the other hand, the home sellers have been preapproved by HAFA for a short sale, "the process should work better," Martin says.