What should my short sale approval letter say?

In Illinois, if you obtain a short sale approval on your home, what should you be looking for in the letter? There are 4 main items to look for, tax, personal, and credit liabilities and seller incentives. Outside of the letter, there are some other items to consider as well.

1. Personal Liability: Most people will obtain a short sale approval that relieves them of any outstanding balance, this is sometimes called a deficiency waiver--this waives your personal liability to repay the bank for the shortage, but it does trigger tax implication. If the bank will not relieve you from personal liability, it does not trigger a tax implication.
   
2. Tax Liability: If the bank waives personal liability or the remaining ("deficiency") balance, it triggers a tax liability question. Most people qualify for a tax shield under the insolvency portion of the tax code and do not pay any taxes on a short sale. Another way to avoid tax liability has been through a homeowner's tax shield utilized from time to time, sometimes even retroactively. As always, on tax implications, please consult with your tax accountant or attorney.
   
3. Credit Liability: If your deficiency is waived, the Short Sale lender will report that the loan was paid off for less than the full balance or that the loan was settled. In 2015, this means you will not qualify for traditional financing to buy another home for 3-4 years after closing, although some lenders have programs where you qualify immediately or sooner after closing on a short sale. If the deficiency was not waived, then the loan will remain open--if you do not pay on the open balance, it could turn into a collection on your account.
   
4. Seller Incentive: Sometimes, but not always, and at the Short Sale Lenders choice, sellers are given a seller incentive or cash at close, it varies from 750.00 to as much as 40,000.00, average is between 3,000.00 and 10,000.00. If you have liens or judgments against you personally, sometimes the bank allows the incentive to be applied towards these. If you do have judgments or liens that exceed the cost of the incentive, it may be possible to close if you waive the incentive or were not awarded an incentive.
   
5. Other Considerations: Prior to issuance of the approval letter, you need to know where will you live immediately after the short sale has closed (you will have 15-40 days from short sale approval issuance and closing to move out) and then can you stay there while credit repairs? Do you have money set aside to pay for expenses the bank will not cover, like water bills, assessments, etc., or will bank or buyer reconsider and pay it? Also, make sure to monitor your credit to make sure that the short sale was reported properly, you should see a change in reporting in 3 to 6 months or sooner.

For more information on short sales or buying or selling your home, please give us a call at 773-539-5970, thank you.