Short Sale Basics for Virginia Homeowners

What is a short sale, and how does it work?

A short sale is when you sell your home for less than you owe on your mortgage. Your lender has to agree to it first. It is one way homeowners who cannot keep up with payments try to avoid foreclosure.

The Mike Webb Team (Mike and Claudia Webb, RE/MAX Allegiance) helps homeowners in Arlington, Northern Virginia, Maryland, and Washington, DC get their homes ready to sell and sold.

This post is general information. It is not legal advice or tax advice. Talk with a Virginia real estate attorney, and a tax professional, before you decide anything.

The lender is owed the money. The Consumer Financial Protection Bureau (CFPB) explains that a short sale is a type of loss mitigation, an alternative to foreclosure, and that it needs your lender or servicer to agree. If you have another loan on the home, such as a home equity loan, that lender has a say too. Source: CFPB, What is a short sale?.

Freddie Mac says a short sale can be considered when a homeowner is behind on payments or owes more than the home is worth. You usually have to show a financial hardship, with papers such as bank statements and bills. Source: My Home by Freddie Mac, What Is a Short Sale.

That means the first job is gathering paper. Before you write to the lender, pull together your recent bank statements, your monthly bills and your latest mortgage statement. A lender reads a hardship request line by line, and a clear folder makes your case easier to follow.

Freddie Mac lists the main steps this way:

1. Send your lender a hardship letter.
2. Hire a real estate agent and list the home.
3. Offers go to your lender. Your lender and any other lienholders negotiate for you, and the lender may turn down an offer you like.
4. Once a price is agreed, you may have to cover the gap between that price and what you still owe.

Freddie Mac gives no set timeline and says the lender's review may take some time. Plan for waiting.

Freddie Mac gives a plain example. If you have $150,000 left on your mortgage and your lender agrees to a short sale at $130,000, you may be required to repay the $20,000 difference. That is the word "may." It is not automatic, and it is exactly the point to settle with the lender before you sign, not after closing.

Notice what that example also shows. In a short sale you do not see any of the sale proceeds, and you give up your say on the sales price. Freddie Mac lists both as drawbacks. The trade is that foreclosure is avoided, and Freddie Mac says a short sale hurts your credit less than a foreclosure does.

The CFPB says that in a state where you can be held responsible for a shortfall, which it calls a deficiency, ask the lender to waive it before you go through with the sale. In some states a lender could sue to collect that amount after a short sale. If the lender waives it, get the waiver in writing and keep a copy. Whether you could owe a leftover balance depends on your loan and your state, so ask a Virginia attorney before you sign anything.

Also ask about three more things:

• Moving. The CFPB says borrowers seeking short sales should also ask about help with relocation costs through private programs sometimes called "cash-for-keys." A HUD-approved housing counselor can help you plan your next steps.
• Credit. Freddie Mac says a short sale hurts your credit, but less than a foreclosure. It also says you may wait two to seven years to qualify for a new mortgage.
• Taxes. Ask a tax professional how any forgiven debt could affect you.

The CFPB points to two places. Its "Find a Counselor" tool lists housing counseling agencies near you that are approved by the U.S. Department of Housing and Urban Development (HUD). You can also call the HOPE Hotline at (888) 995-4673, which the CFPB says is open 24 hours a day, 7 days a week. A counselor can walk through all your options, not only a short sale, so you can compare them before the lender's clock runs down.

Yes. The CFPB says that because a short sale is a sale, you will have to leave your home. If staying is the goal, Freddie Mac also has a page on options to stay in your home when payments are a struggle, and a counselor or your servicer can explain them. Put those options next to a short sale before you choose.

Freddie Mac says the listing agent represents your interests and plays a large part in the sale. In plain terms, the agent prices the home from real sales nearby, markets it, collects the offers and passes them to your lender, then keeps the buyer and the lender talking while the lender reviews. Because the lender decides, the agent's work is mostly about clear paperwork and steady follow-up. We work alongside your attorney and your lender, and we will tell you straight what we see in the market for your home.

A short sale still starts with a clear picture of your home's market. We can talk through what similar homes have sold for. Read Pricing Strategy for Arlington VA Homes and Sell As-Is or Get Ready First? Arlington VA.

Is a short sale the same as a foreclosure?

No. The CFPB calls a short sale an alternative to foreclosure.

Can I stay in the home?

Not after it sells. A short sale is a sale, so you must move.

Who should I call first?

Your mortgage servicer, a HUD-approved housing counselor and a Virginia attorney.

Call or text Claudia at 703-350-3884 or visit claudiawebb.com.

The Mike Webb Team, RE/MAX Allegiance. Arlington, Virginia. Equal Housing Opportunity.