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What is a short sale?
A short sale occurs when the net proceeds (what would be your equity amount) from the sale of a home are not enough to cover your mortgage balance and closing costs. And you are unwilling or unable to cover the difference.
Some – although by no means all – short sellers may also be in default on their mortgage loans/s (behind in payments) and headed for foreclosure. However, home owners who bought at the top of the market or who took out large amounts of equity with a refinance and who now need to sell because of divorce or job transfer may also find themselves “upside down”, owing more than the home is currently worth when closing costs are factored in.
Sellers need to understand though that a lender is not going to simply let them walk away from a short sale or foreclosure if they have other assets, such as stocks or a high – salaried job, without signing a note to repay what they owe.
We will help you determine what your home is currently worth in today’s market, what your costs will be, and how much if any you will be “short” at closing. We will also contact and work with your bank during this process; there will be paperwork you as the owner/seller will have to complete for the bank, and these need to be taken care of in a timely manner to keep things running smoothly.
Are There Options To A Short Sale?
Thanks to programs such as those proposed by Fannie Mae and Freddie Mac (government lenders) to assist sub prime borrowers, many lenders are more willing to offer loan modification options. This option can extend the term of the loan, add on delinquent payments to the loan principal, and/or reduce the interest rate to make the loan more manageable. Of course this is only a possible option for those that want to stay in their homes and not have to sell.
Another option is a repayment plan that requires homeowners to increase their monthly payments until the loan is current. It may also be possible to refinance an adjustable rate loan with a Federal Housing Authority or conventional fixed loan.
Note that lenders will not postpone a foreclosure just because a property is listed, although they may postpone if you have a reasonable offer in the works. A short sale will negatively impact your credit, but not to the extreme that a foreclosure will.
How Do I Get Started With The Bank Once I Know I Need A Short Sale?
You will need to contact the bank’s “loss mitigation department” rather than the collection or customer service department. Many banks will not offer this to you; you will have to know to ask for this department. The loss mitigation department will be the group to decide whether to accept a short sale on your behalf. Finding the decision maker is often one of the biggest initial challenges in a short sale.
What Information Will The Bank Need From Me?
Your submission package will likely include a request for your current W-2 forms from employers, or a letter explaining you are unemployed and why, bank statements, two years of tax returns, and other financial documents outlining income and debt obligations. The bank will also need comps or a broker’s price opinion from your Realtor, showing your estimate of value.
In addition, you should submit a “hardship letter,” explaining the circumstances that make it impossible for you to pay the full amount of the loan. You need to be able to show true financial hardship.
What Liabilities Will I Have As A Result Of A Short Sale?
Many lenders ask sellers to sign a promissory note for all or part of the difference between the proceeds of the short sale and the debt obligation as a condition to a short sale.
Note: Having a portion of a loan forgiven may have an adverse affect you’re your credit. Some encourage sellers to try and sign a lease on an apartment before credit is further damaged.
One often overlooked aspect of a short sale is that a seller much count any amount forgiven by the lender as income and pay taxes on that income, even if no actual money was received. The IRS requires lenders to submit a Form 1099 stating the forgiven amount. Sellers who meet the IRS definition of insolvency (either in bankruptcy or with debts exceeding assets) will not have to pay taxes on the forgiven amount.
Note: The U.S. House of Representatives has introduced the Mortgage Cancellation Tax Relief Act, which would eliminate taxes on any debt forgiven on a principal residence through either short sale or foreclosure. The National Association of Realtors has been working to support this bill.
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