California Short Sale Information
If a building is sold because its mortgage balance is greater than its value, the owner can't pay the difference and the lender agrees to accept less than what is owed, it is called a short sale. Commonly, mortgages and homes in this situation are said to be "underwater" or "upside down." Short sales are an alternative to foreclosure as well as to hunkering down and waiting the recession out. They have become commonplace in California.
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Statistics
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According to a 2010 real estate industry report on the California housing market, almost half of all California home sales in 2009 were short sales and foreclosures. In some cities, like Sacramento, short sales outnumber both regular sales and foreclosures handily.
Conditions
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Banks do not let everyone with an underwater loan participate in a short sale. If they did, they fear, everyone with a home worth less than a mortgage might want to do one; they would risk losing money on every underwater loan. With more than 15 million mortgages estimated to be underwater in the United States in 2009, that's a lot to risk. Lenders therefore require that homeowners prove they have suffered a hardship, such as job loss, and that they are financially unable to keep up with mortgage payments.
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Challenges
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Although lenders have gotten better at processing short sales, especially in states like California where there have been so many, short sales still take a lot longer than a regular sale---in some cases months longer. This is because both the seller and the lender have to approve the sale. The lender will be looking at not only the price, which they want to verify is at or near market value, but also reviewing the financial data from the sellers to make sure they meet the hardship condition and are truly unable to keep up with the mortgage payments. It is not uncommon for buyers to get tired of waiting for a ratified sales contract and walk out of the deal.
Tax Implications
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Previously, the difference between what the lender received in the short sale proceeds and the loan balance was taxable income. It was considered income because the sellers borrowed the money but didn't pay it back---much like a gift. The Mortgage Forgiveness Debt Relief Act of 2007 eliminates federal tax on this difference. California passed a similar law that forgives sellers from state tax on the difference as well.
Special Programs
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The Home Affordable Foreclosure Alternatives Program (HAFA) was introduced in 2009 to streamline and provide lender and borrower incentives for short sales. It allows borrowers to get hardship approvals and any sales conditions up front from the lender, before the home is listed. It also provides cash for moving expenses to borrowers and to make up for some of the difference in sales price and loan balance for lenders. A number of lenders in California, such as Wells Fargo Bank and Bank of America, participate in this program.
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References
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