Here are facts and questions on short sales for you:

WHAT EXACTLY IS A SHORT SALE?

A short sale is when a property is sold for less than the sum of all liens on the property.  The lender often agrees to forgive the unpaid amount and releasing the borrower from any remaining obligations.  Remember that you may have to pay income tax on amount forgiven.

WHAT CONDITIONS MUST EXIST FOR A LENDER/SERVICE COMPANY TO CONSIDER A SHORE SALE?

The borrower must be able to demonstrate the inability to pay their mortgage and currently be experiencing a hardship.  Many servising companies and lenders will require that the borrower first attempt to do a loan modification before they will allow a short sale.

WHAT ARE CONSIDERED ACCEPTABLE HARDSHIPS BY THE SERVICERS/LENDERS? 

Hardships generally fall into 5 categories.

DEATH
DYING-SICKNESS OF A BORROWER AFFECTING THEIR ABILITY TO EARN AND PAY THEIR DEBT
DESTITUTE-AN INVOLUNTARY LOSS OF INCOME
DIVORCE-IN THIS CASE, WHEN ONE OF THE OCCUPANTS LEAVE AND IT AFFECTS THE INCOME OF THE HOUSE IT CAN BE DEEMED AN ACCEPTABLE HARDSHIP.
DISASTERS-IN THE CASE OF NATURAL DISASTERS

WHAT IF A HOMEOWNER IS CURRENT ON THEIR MORTGAGE?

It is not necesssary for a borrower to be late on their mortgage in order to engage in a short sale.  What is important is being able to demonstrate the inability to pay the monthly mortgage debt.  Even if the payment is being made now but documentation proves a foreseeable default, this is acceptable.

WHAT WILL HAPPEN TO THE CREDIT SCORE OF A BORROWER WHO COMPLETES A SHORE SALE?

The effects on credit will vary depending on payment history and the payments of other debts.  Assuming the borrower is current on their mortgage upon completion of a short sale, they will see point reductions in their credit score.  Foreclosure on the other hand can lower your score even more.

HOW WILL THE SHORT SALE SHOW UP ON A CREDIT REPORT?

It can show up in several different ways but generally speaking it will say something along the lines of: “paid in full; settled for less than originally agreed.”

IF A BORROWER WANTS TO DO A SHORT SALE, CAN THE PROPERTY BE SOLD TO A FAMILY MEMBER?

NO!  It is a requirement of the short sale agreement that the sale is an arms length transaction.  This means in no way can the seller and buyer be related in family or business.  The buyer will also be required to include laguage in the sales contract that they will not sell the property for at least 90 days and a statement affirming the arms length transaction.

Further Questions?  Feel free to ask!