Short Sale of a Home in CA. Confused?

Question

My friend Ellen currently owns a home in Yorba Linda, CA (backyard is the Nixon presidential library). In 2005-06, she purchased the home for about 850K (minimal down payment, interest only....). Due to difficult economic climate and unemployment, she is now considering the sale of her home. However, the neighborhood alreay has 5 foreclosures, all within the same community and of similar floor plan. They are listed at the prices of about 580K.

Ellen just listed the home with a realtor, at the price of 575K...

Would the bank even agree to such a staggering short sale?

What is in it for the bank?

Will Ellen have to make up the huge difference?

Will it affect her credit and future purchase of homes?

Will the bank lay claim to her other assets in order to recover the loss?

My husband and I are very worried for her and don't know what we can do to help her.

Answer 1

First of all I think the first response was very rude. ellen could not foresee loosing her job and we dont know what circumstances got her in the perdicament she is in now.

She has to be late on the mortgage to shortsell, she can try and do what is called deed in lieu of foreclosure but with that much negative she most likely cant, in order to short sell the bank will want her to show many things

2 years tax returns

2 most current paystubs (if she is working)

all assets

Letters of explanation to explain why she is short selling

the bank can or can not take offer it is up to them

Her credit will be ruined for at least 2 years.

The bank can (if they accept shortsale)  send her a 1099 for debt forgiveness which means Ellen will get to pay tax on that money

Ellen most likely will get to file bankruptcy

SOrry ellen will not be happy either way this works out.  SHe is better off trying to do a deed in lieu of than selling in my opinion

Answer 2

Let me see if I can address all your questions...

Would the bank even agree to such a staggering short sale?

-Yes, so they don't have to maintain an REO and sell it for cheaper themselves.

What is in it for the bank?

-Resolving the any monies owed to the bank and getting the loan off its books.

Will Ellen have to make up the huge difference?

-A seller would be responsible for the difference the bank lost as a result of a short sale on their income tax return.

Will it affect her credit and future purchase of homes?

-Only late payments effect her credit, but not a short sale.

Will the bank lay claim to her other assets in order to recover the loss?

-No, that only happens when you can't pay your taxes. The federal government may do that, but not the lender.

You might want to suggest to Ellen if she has a good sized home with 3-4 bedrooms, to rent to rooms to help her make the monthly payments and keep her home.

Answer 3

your friend is getting just what she deserves.  How in the h**l can someone buy a a $850,000 house with minimal down.  The bank is going to get just what they deserve too. They are going have given someone $850,000 and now are going to have a house that they will be lucky to sell for $550,000.  

The bank will not allow the sale unless she comes up with almost $250,000.

Nothing is in it for the bank.  They are losing their shirt on this one.

It will definately affect her credit and she (some bank will give her money) will probably have difficulty buying homes in the future.

Your friend will probably declare bankruptcy and walk away with her stuff.

Answer 4

Some clarifications -

Pres Bush signed the Mortgage Forgiveness Debt Relief Act of 2007, which for the most part means that sellers who sell short need not pay taxes on the loss, provided the house was their primary residence. So Ellen may not have to make up the difference.

Other items to know -

Selling short is not that easy especially if there are many holders of the bank note (loan).  Your friend probably also has at least a second loan, which makes it even more difficult to short sell.  It's also a long process.

Ellen is $300k under.   She might be better off just going through foreclosure.  Refer her to http://www.youwalkaway.com/.  there are others that help people foreclose.  Some are free.

Her credit will be shot and some people will disapprove.  But she has to think what's best for of herself, her family and she might want to just get started on another chapter of her life  Short sales are long and make it difficult to move on.

Monies she's using to pay the interest of a loan can better be saved for a down payment for a house in the future.

Hopefully Ellen is young and can learn and recover.  I have no doubt that  a bank will lend her money for a house if she shows fiscal responsibility and income stability for the next several years.  Saving for down payment will also be required.

Answer 5

"Would the bank even agree to such a staggering short sale?"

The bank has insurance on such losses. That's why Fannie Mae and Freddie Mac are in trouble. They insure the payment of most loans in this country. I'm currently in escrow on a short sale condo in San Diego. The sales price is $202K, but we checked the tax and mortgage history, and $375K is owed on the property, including over $4000 in property taxes. But, the bank approved the $202 purchase price and is only actually getting about $185K from escrow.

"What is in it for the bank?"

Banks aren't in the business of owning properties. Every day they hold that property, they are losing money. They want to sell the property as quickly as possible to get back whatever capital they can for other investments/obligations.

"Will Ellen have to make up the huge difference?"

Not on a short sale. For a short sale, the bank agrees to take less money than what is owed to get that losing investment off their books. Ellen will, however, be 10-99'ed for the difference in what the bank makes on the sale and what she owes as though it were regular income. But, Ellen can negotiate with the IRS to have this reduced or have some kind of repayment plan that will allow her to avoid bankruptcy.

"Will it affect her credit and future purchase of homes?"

I sold in a short sale about 15 years ago. It stayed on my credit for 7 years and did affect my ability to get premium loans for property I purchased about 6 years later. Now my credit score is around 800.

"Will the bank lay claim to her other assets in order to recover the loss?"

No, that only happens for a foreclosure or bankruptcy. Part of the short sale negotiation is that the debt is forgiven.