How to Do a California Short Sale
Question: How to Do a California Short Sale
A reader asks: "I've been told that a California short sale is different from other short sales, but I don't know why. I think it has something to do with how the banks can't go after you and that they have to forgive all of the money you owe them. Does that expire at the end of the year? We have a home in the Napa Valley that we need to unload in a short sale, but I don't want to end up owing anybody after the whole thing is said and done. Do I need a lawyer? How do I do a California short sale?"
Answer: Doing a California short sale is very similar to the way short sales are handled in other states with a few exceptions. These are very big exceptions, special to California. A California short sale restricts how much money a seller can be forced to pay as a condition of approval and carries an exemption from state income taxes under certain circumstances.
First Steps in a California Short Sale
To get started, you need to plan your strategy and answer a few questions. There are many different types of short sales. You don't need know all of the types of short sales as long as you can answer the following questions:
- Who is your lender? Not only is your lender important, because it determines how your short sale is processed, but you need to find out whether the lender is the servicer or the investor. It's the investor who will ultimately approve your short sale unless your lender has designated authority.
- Do you have a financial hardship? If so, you will need to write a hardship letter. If you do not have a financial hardship, then you better hope your lender is Bank of America and that you will qualify for a Cooperative Short Sale or the HIN Incentive. Most lenders in California want to see a seller can document a financial hardship. An exception is often made with Fannie Mae if a seller is delinquent a certain number of days, coupled with a low FICO score.
- Is your loan a government loan? Government loans include loans which are owned by a government sponsored entity (GSE) such as Fannie Mae or Freddie Mac. The rules are different for a GSE loan. If your loan is FHA or VA, these types of loans take longer to process and are approved in a two-step process.
- Do you qualify for a HAFA short sale? Some types of HAFA short sales such as those through Bank of America can take a very long time. The timeframes handed down by the government are rarely followed. I've had Bank of America HAFA short sales take, on average, from 6 months to 12 months to process. The only advantage to a HAFA short sale in California is the $3,000 a seller will receive at closing, but a seller will only receive that money if the seller resides in the property.
If you want to do a HAFA short sale, realize the process is different for a Fannie Mae HAFA short sale and a Freddie Mac HAFA short sale over a regular short sale because, again, these are government-sponsored entities. There is no ARASS for a Freddie Mac HAFA short sale, which means you must get preapproved before submitting an offer.
Not any agent can handle a HAFA short sale. You should work only with a certified and experienced HAFA short sale agent, if you decide to pursue a HAFA short sale.
Get a Release of Liability for a California Short Sale
There are drawbacks and positive aspects to the passing in July 2011 of California SB 458. In some ways, the restrictions have made some second lenders more reluctant to approve a short sale. However, on the plus side, the law prevents a bank from demanding that a seller from make a contribution as a condition of short sale approval.
SB 458 amends California Civil Code 580 by adding paragraph e. California Civil Code 580e says a bank must release a seller from personal liability, if the bank approves a short sale. It doesn't matter if the:
- Home is a personal residence or a rental
- Loan is hard money or purchase money
- Loan is in first, second or third position
Makes no difference at all. Any lender who approves a short sale for 1 to 4 units in California must release the seller for liability and cannot pursue a deficiency judgment.
Of course, laws can change. So, it is wise to obtain a short sale approval letter that contains specific verbiage waiving the deficiency or releasing the seller.
Taxes on a California Short Sale
If the loan is a refinance, sellers should obtain tax advice from a qualified tax professional. That's because a refinance for rate and term is handled differently for tax purposes than a refinance that is a cash-out refinance. That free money at the time of a refinance can become taxable upon sale, even upon a short sale, subject to certain conditions.
The Mortgage Forgiveness Debt Relief Act of 2007 is a federal law. It exempts personal residences up to a certain maximum amount from taxation. It is not a California law. For years, California state law has mirrored the federal law. Whether California law will exempt a seller from state income taxes for mortgage debt relief is an answer best answered by a tax accountant. That's because even if a seller is disqualified, there are other exemptions that might apply.
Moreover, mortgage letters issued in 2013 release sellers of 1 to 4 units in California from taxation on both a federal and state level.
If you desire legal and tax advice for a California short sale, please consult an entity licensed and qualified to give you that advice. Real estate agents cannot provide legal and tax advice.