Whats A Short Sale

Home sellers should consider a Short Sale when the value of their home is LESS than the amount of their outstanding loans. For example, if your home is worth $250,000 but you have a loan of $260,000 then a short sale is a consideration. Obviously, if you do not have to sell your home, you could wait out the market and hope for a turnaround in real estate values.

However, if you do have to sell your home you basically have three options. First, you can bring cash to the table. In the example above you would sell your home for $250,000 and pay another $10,000 to the lender out of your pocket to pay off the loan on your property. Second, you could let the home go into foreclosure. The lender will go through the foreclosure process, force you out of your home and then auction it off to the highest bidder at a foreclosure or Trustee’s auction. The third option is to pursue a short sale. You contact the lender, and you list the property with a REALTOR explain the circumstances and your REALTOR will negotiate with the bank and convince them to take less than full value of their loan.

In the case above you may tell them you have a buyer for $250,000 and it’s very unlikely there will be a buyer at a higher price. If they will accept $250,000 for their $260,000 loan then you can proceed with a short sale. Sometimes the lender will consider a short sale before you have a buyer and you can market your property and, if you find a buyer, take their offer to the lender for consideration. The lender may or may not accept the offer.

Will my lender accept a short sale?

While most lenders will not be thrilled at the prospect of a short sale they are acutely aware that a foreclosure is usually a far more time consuming and costly option. In a real estate market where housing values are going down it is in the best interests of the lender to liquidate their problem loans as quickly as possible.

With a short sale a property can be sold and the loan taken off their books fairly quickly. If they pursue a foreclosure they run the risk of the process taking a substantial amount of time during which the value of the property is depreciating. Also, buyers will tend to write low ball offers when they know that a bank or lending institution owns the property. The property will also be left vacant which can result in vandalism and deterioration. Some owners will even gut the house just before the foreclosure sale as a way to ‘get back’ at the lender. This is illegal but nonetheless happens on occasion. So, you can see why a lender might want to go the short sale route and get the loan off of their books with minimal hassle.

What are the steps in the short sale process?

Short sales are not necessarily complicated but do require some work on your part and your agent’s part if one is involved.

• Figure out the true value of your property. Many times a real estate agent can provide a market analysis and give you a good idea of the value of your home. If the market is moving down keep in mind that your homes value may be moving down as well and estimated valuations may be valid for only a short time.
• You also need to have your REALTOR calculate your estimated closing costs. Items such as a title report, escrow, appraisal, attorney fees, agent commissions, unpaid property taxes etc. may add up to a substantial amount of money.
• You’ll need to know how much you owe on your property. Include all loans on the property in your calculation.
• Calculate your equity. Normally the value of your home is more than the total of the loans and closing costs. If your closing cost estimate plus your loan amounts are higher than the value of your property then a short sale is a possibility.
• You’ll need to contact your lender and explain your situation. Be sure you talk to someone who has the authority to make the required decisions. Usually lenders have a loss mitigation department that you can contact. Lenders are under no obligation to accept a short sale but many times it is in their best interests to do so. Some lenders will not consider a short sale until you have missed a payment or two. Some will not accept short sales at all. You’ll need to know where your lender stands with regard to short sales so contact them as soon as possible. A REALTOR can assist you in this process as well.
• Consider your tax obligations! Do not underestimate this! Many times there can be a substantial tax obligation after a short sale has occurred. Be sure to talk with an accountant or tax attorney to figure out how much money you may owe the IRS if you proceed with a short sale.
• Find a buyer and sell your property. The lender will still have to approve the buyer’s offer but once they do you can sell your property.

What documents will be required of me? 

The Short Sale Package

All of the documentation needed to start a short sale is commonly called a “Short Sale Package” and is usually submitted by the investor interested in the property, the agent representing the seller, or the seller of the property. The package usually includes the following items:

Sample Short Sale Package (items may vary depending upon the lender):

• Cover Letter
• Authorization to Release Information
• Sellers Hardship Letter
• Seller’s Financial information
• 2 years w2′s
• 2 months pay stubs
• 2 months bank statements
• Supporting Hardship Info – HOA liens, medical/disability statements etc.
• Repair Estimate for the property
• Comparable sales for the property
• Contract
• Net Sheet
• First mortgage holder may ask for a payoff amount from the 2nd
• Second mortgage holder may ask for a payoff amount from the 1st
• Lender may ask for an Initial Title Report
• FHA and VA may have their own forms and special requirements as well

Mortgage Debt Relief Act of 2009

Here is the press relase from one of the Senators that is sponsoring the Mortgage Relief Act that may provide some relief for homeowners that are in a short sale position and may owe the IRS taxes on debt relief.

U.S. Senator Debbie Stabenow (D-MI) today announced that President Bush will include the Mortgage Relief Act in his initiative to assist homeowners damaged by troubled mortgages. The Mortgage Relief Act, introduced in May by Senator Stabenow, would change current law that forces individuals to pay an income tax when they have had a part of their mortgage loan forgiven or have been forced to foreclose because of their inability to pay their mortgage. The bill is also sponsored by Senator Carl Levin (D-MI), George Voinovich (R-OH) and John Kerry (D-MA).

“People in Michigan and across America are suffering, and it is wrong to unfairly tax families when they are faced with the prospect of losing their home,” said Stabenow. “I look forward to working with the President and my colleagues to prevent additional, unfair economic hardship in the lives of those who find themselves in truly unfortunate circumstances. We need to make it easier, not harder, for Americans to keep their homes. ”

Declining home prices and rising foreclosure rates have left some families having to sell their homes for less than they paid for them, and sometimes for less than the outstanding debt. The IRS currently taxes any loan forgiveness as ‘income’. The Mortgage Relief Act will relieve families of a tax burden when their lender forgives part of the mortgage on a principal residence.

Under current law there are a number of situations in which homeowners are unfairly taxed when trying to responsibly address their inability to meet their mortgage. For instance, if a family owns a home with a $100,000 mortgage and can’t afford to make their payments the bank can step in and refinance the house at a lower value to better reflect the decreased market value. Under current law, if the bank values the home at $80,000 the family would have to pay taxes on the $20,000 difference between the new and the original mortgages.

In addition, the President’s plan will urge Congress to reform current laws to make it easier for the Federal Housing Administration to offer aid to mortgage holders with subprime mortgages. His proposal will also include an increased effort to enforce predatory lending laws and strengthen lending practices.

From 2005 to 2006, the Detroit metropolitan area had the highest percentage of households in foreclosure in the 150 largest metropolitan areas, with an average of more than 10,000 foreclosures in each quarter. The foreclosures affected 1 out of every 21 households, nearly five times the national average. Over the first quarter of 2007, Michigan had over 29,000 foreclosures and Detroit was on pace to record 11,000 for that same time period. The Mortgage Relief Act, is companion legislation to H.R. 1876 introduced in the House by Rep. Rob Andrews (D-NJ) and Ron Lewis (R-KY).

Ten Facts about Mortgage Debt Forgiveness

IRS Tax Tip 2010-44If your mortgage debt is partly or entirely forgiven during tax years 2007 through 2012, you may be able to claim special tax relief and exclude the debt forgiven from your income. Here are 10 facts the IRS wants you to know about Mortgage Debt Forgiveness.

1. Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence.
2. The limit is $1 million for a married person filing a separate return.
3. You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.
4. To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.
5. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.
6. Proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion.
7. If you qualify, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.
8. Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the tax relief provision. In some cases, however, other tax relief provisions – such as insolvency – may be applicable. IRS Form 982 provides more details about these provisions.
9. If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed.
10. Examine the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7.  For more information about the Mortgage Forgiveness Debt Relief Act of 2007, visit IRS.gov. A good resource is IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments. Taxpayers may obtain a copy of this publication and Form 982 either by downloading them from IRS.gov or by calling 800-TAX-FORM (800-829-3676).

The credit consequences of a short sale and foreclosure vary slightly. The general consensus is that a short sale will show up on your credit report as a ‘settlement’, ‘settlement for less than owed’ or a “pre-foreclosure in redemption”. Also, since most lenders will not consider allowing a short sale until a few payments have actually been missed you may also have a few ‘lates’ on your credit report. Neither of these marks is a good thing to have but it’s possible to get them off of your credit report within a few years or less. A short sale can drop your credit score by 80-100 points. There is also the possibility that through negotiation with the lender you can avoid having the short sale reported to a credit agency.

A foreclosure on your credit report can take 7-10 years to remove and can cost your credit rating (FICO) up to 200-280 points which is a very big hit.

So, if you have no better alternatives, pursue a short sale aggressively and avoid foreclosure.

I have negotiated many successful short sale transactions, and I have also become A “Certified Short Sale and Foreclosure Resource” I also continue to train in the negotiation of short sales, and stay current on the changes that are continually taking place.

Please do not hesitate to contact me with any questions you may have…