Short Sales and Foreclosure


Do I qualify for a short sale? 

The qualifications for a short sale include any or all of the following:


• Financial Hardship – There is a situation causing you to have trouble affording your mortgage.

• Monthly Income Shortfall – “You have more month than money.” A lender will want to see that you cannot afford, or soon will not be able to afford your mortgage.

• Insolvency – The lender will want to see that you do not have significant liquid assets that would allow you to pay down your mortgage.

• This process can allow borrowers to stay in their property when they can no longer afford their current mortgage payments.



What is a mortgage modification? 

A mortgage modification is a process through which your mortgage lender changes any or all of the following:


• Your interest rate

• Your principal balance (through a reduction)

• Your loan terms (example: from an adjustable to a fixed rate)

• This process can allow borrowers to stay in their property when they can no longer afford their current mortgage payments.



Why would a lender modify my mortgage? 

Lenders have realized that in some cases it is better for them to work with current borrowers to lower payments or possibly improve terms in order to keep homeowners in their properties. The average foreclosure can cost a lender from 35-50% of the value of a property, so keeping borrowers in their homes is a good option for everyone.



What do I need to qualify for a mortgage modification? 

According to the Making Home Affordable Web site (, you will need the following information for your lender to consider a modification:


• Information about your first mortgage, such as your monthly mortgage statement

• Information about any second mortgage or home equity line of credit on the house

• Account balances and minimum  monthly payments due on all of your credit cards

• Account balances and monthly payments on all your other debts such as student loans and car loans

• Your most recent income tax return

• Information about your savings and other assets

• Information about the monthly gross (before tax) income of your household, including recent pay stubs if you receive them or documentation of income you receive from other sources


If applicable, it may also be helpful to have a letter describing any circumstances that caused your income reduce or expenses to increase (job loss, divorce, illness, etc.)



How do I qualify for a mortgage modification? 

The first call you make should be to your lender, have the information above ready to discuss with them and call your customer service line to ask them what options you have available. If the person you speak with does not understand what you are asking, you can  ask to be referred to one of the following departments (different  lenders have different names for these departments):


• Loss Mitigation

• Mortgage Modification

• H.O.P.E.


Prior to contacting your mortgage lender you can quickly complete an eligibility test at This test will let you know if you are eligible for a modification through the government-sponsored Home Affordability and Stability Program (HASP).



What is a Home Affordable Refinance? 

If Fannie Mae or Freddie Mac owns your mortgage, you may be eligible for a Home Affordable Refinance. This will allow you to refinance your home and often lower your payments.



What if I don’t qualify, cannot afford my home, and owe more than it’s worth? 

You are not alone and foreclosure is not the only option. If your mortgage lender or servicer will not work with you to reduce your payment, you may want to consider a short sale. Agents with the Certified Distressed Property Expert® Designation have undergone extensive training in how to process and negotiate short sales.
A short sale allows you to sell your home for less than what you owe and avoid foreclosure. Speak to your market expert to see if you may qualify.



What are the qualifications for a Home Affordable Refinance? 

According to the resources released by the government, following are a list of qualifications:


• You are the owner occupant of a one- to four-unit home

• # The loan on your property is owned or securitized by Fannie Mae or Freddie Mac (see Useful Links)

• At the time you apply, you are current on your mortgage payments (you haven’t been more than 30 days late on your mortgage payment in the last 12 months, or if you have had the loan for less than 12 months, you have never missed a payment)

• You believe that the amount you owe on your first mortgage is about the same or slightly less than the current value of your house

• You have income sufficient to support the new mortgage payments, and the refinance improves the long-term affordability or stability of your loan




How soon after a foreclosure or a short sale can I buy another home?

With a foreclosure, it can be 5-7 years or longer until you can qualify at a reasonable interest rate. However interest rates will invariably be higher (potentially permanently) with a foreclosure on your record. With a short sale, you’d need at least 2 years if you rehabilitate your overall credit rating during the period after a doing a short sale (assuming you missed mortgage and/or other payments).



What is the credit impact of a short sale vs. foreclosure? 

A foreclosure stays on your credit report for 7 years, and is on your permanent record. A short sale will affect your credit more so if you have missed payments. Missing mortgage payments roll off your credit report after a period of time, potentially as soon as 12 months, and are not a permanent part of your record. If you do not miss a mortgage payment, it is possible to complete a short sale with very little impact on your credit, depending on how the bank records the payment of the debt – “paid off” or “paid as agreed/negotiated”. Either way, a short sale’s impact on your credit is contained and much shorter than a foreclosure.



What are the tax consequences of a short sale? 

If the lender agrees to the short sale, the lender may possess the right to issue you a IRS form 1099 for the difference, (called debt forgiveness, which is income, by the IRS). This also applies in a foreclosure situation. Many situations are exempt from debt forgiveness, according to the Mortgage Forgiveness Debt Relief Act of 2007. It may be possible to negotiate with the bank during a short sale to avoid the 1099 entirely, but not in a foreclosure where you have no standing to negotiate with the lender. As always, you should speak to a real estate lawyer and a tax accountant to determine the amount of short sale tax consequences, and whether you can afford to pay those taxes, if any.



What are the qualifications of a short sale? 

There are three qualifications:

FIRST: You need a hardship: You must submit a letter of hardship that explains why the you can not pay the difference due upon sale, including why the seller has or will stop making the monthly payments.


These are NOT hardships:


• The value of the home has dropped. The market price of your home’s decline is not a hardship.

• Buying another home. A need to relocate for more space, amenities is not a hardship.

• Pregnancy or expanding family

• Lifestyle changes requiring a smaller or larger home.


Examples of hardship:


• Unemployment

• Forced relocation by employer to keep your job

• Need to relocate to find a job

• Divorce

• Medical emergency / sudden illness

• Bankruptcy

• Death


SECOND: You cannot have substantial assets.

If you have substantial cash in a savings account, own other real estate with substantial equity, stocks, bonds or even IRA accounts, the lender may determine that you have assets to pay back the mortgage. If you have a true hardship but have assets, this alone may not disqualify you – its possible the lender may still discount the amount they want you to pay back.


THIRD: You need a monthly shortfall.

The lender wants to see you don’t have enough cash coming in every month to easily make the mortgage payment.


The lender wants to see you don’t have enough cash coming in every month to easily make the mortgage payment.



This information is provided so that you can understand not only the ramifications of a foreclosure, but also that there are options available. There is hope for a better outcome! Contact us today for a consultation.



Successful Short Sale

Future Fannie Mae Loan – Primary Residence 

A homeowner who loses a home to Foreclosure is ineligible for a Fannie Mae backed mortgage for a period of 5 years.

A homeowner who successfully negotiates and closes a short sale will be eligible for a Fannie Mae backed mortgage after only 2 years.

Future Fannie Mae Loan – Non Primary

An Investor who allows a property to go to Foreclosure is ineligible for a Fannie Mae backed investment mortgage for a period of 7 years.

An investor who successfully negotiates and closes a short sale will be eligible for a Fannie Mae backed investment mortgage after only 2 years.

Future Loan with any Mortgage Company

On any future 1003 application, a prospective borrower will have to answer YES to question C in Section VIII of the standard 1003 that asks “Have you had property foreclosed upon or given title or deed in lieu thereof in the last 7 years?” this will affect future rates.

There is no similar declaration or question regarding a short sale.

Credit Score

Score may be lowered anywhere from 250 to over 300 points. Typically will affect score for over 3 years.

In some cases only late payments on mortgage will show and after sale mortgage will be reported as paid or negotiated. This will lower the score as little as 50 points if all other payments are being made. In some states default can be reported as a foreclosures however the time a short sale instead of a foreclosure will affect a borrow is much less. A short sale’s affect can be a brief as 12 to 18 months.

Credit History

Foreclosure will remain as a public record on a person’s credit history for 10 years or more.

A Short Sale is not reported on a persons credit history. There is no specific reporting item for ‘short sale’. In most cases a loan is typically reported ‘paid in full, settled’ or ‘paid as negotiated’.

Security Clearances

Foreclosure is the most challenging issue against a security clearance outside of a conviction of a serious misdemeanor or felony. If a client has a foreclosure and is a police officer, in the military, in the CIA, Security, or any other position that requires a security clearance in almost all cases clearance will be revoked and position will be terminated.

A Short Sale on its own does not challenge most security clearances.

Current Employment

Employers have the right and are actively checking the credit regularly of all employees who are in sensitive positions. A foreclosure in many cases is ground for immediate reassignment or termination.

A short sale is not reported on a credit report and is therefore not a challenge to employment.

Future Employment

Many employers are requiring credit checks on all job applicants. A foreclosure is one of the most detrimental credit items an applicant can have and in most cases will challenge employment.

A short sale is not reported on a credit report and is therefore not a challenge to employment.

Deficiency Judgment

In 100% of foreclosures (except in those states where there is no deficiency) the bank has the right to pursue a deficiency judgment.

In some successful short sales it is possible to convince the lender to give up the right to pursuit a deficiency judgment against the homeowner.

Deficiency Judgment (amount)

In a foreclosure the home will have to go through an REO process if it does not sell at auction. In most cases this will result in a lower sales price and longer time to sale in a declining market. This will result in a higher possible deficiency judgment.

In a properly managed short sale the home is sold at a price that should be close to market value and in almost all cases will be better than an REO sale resulting in a lower deficiency.

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