Not sure what exactly a short sale is?

A short sale is the sale of real estate when the price at which the property is sold is less than the value of the loan that is attached to the property. This normally occurs when the value of a property decreases. For example, when a borrower purchases a home, the recipient receives a loan for $300,000. The value of the home at the time of purchase was $350,000. As is the current case in real estate, values have plummeted and so the value of the home is now $250,000. For this example, the borrower is now short $50,000 and lost their job so they can’t make the mortgage payments on the home. In this case, they now want to sell the property and the lender would have to take a $50,000 short position.

Why would a lender want to accept a short sale when they lose money?

Most of the time, the lender wants to proceed with a short sale rather than pressing the debtor because the end result may be a foreclosure. If both parties agree to a short sale, than they can avoid a foreclosure, which is good for both parties because the lender can avoid foreclosure fees, and the obstacles of selling the property. A short sale is good for the borrower because they can avoid the major hit to their credit from a foreclosure. The result would be the inability to purchase of home for 7 years after the foreclosure (some areas differ). Make sure to seek legal counsel from an experienced bankruptcy attorney to discuss your options with regards to a short sale. There are tax implications without the filing of a bankruptcy, which I have discussed in earlier posts.

Is the IRS going to tax me if I do a short sale?

So, what do I do about the tax implications for the deficiency?

There are a few options according to the IRS code. You can consult with a bankruptcy attorney, who will go over the options of filing for bankruptcy and absolving the debt without the necessary tax payments. Bankruptcy is a subject that needs to be addressed by a qualified attorney who specializes in the area. Make sure that the attorney has experience, because they have a lot of ways to not only work through your finances, but lessen the stress and anxiety of financial turmoil.

What is a hardship letter and how do I write one?

A hardship letter is written by a homeowner who is unable to pay their mortgage for a number of different reasons, and they need to either modify their loan or do a short sale. This letter is a borrower’s chance to explain their circumstances to the lender. This document is requested by the lender during most short sale negotiations.

This will be your opportunity to give the reasons for your delinquent payments. You’ll want to include your name, address, account number(s), the reason for your financial turmoil, which could include any of the following:

Unemployment

Disability

Divorce

Health Issues

Death of a family member or spouse

Credit card debt

Medical Bills

Increases in interest rates

Damage or destruction to property

Military Service

Incarceration

Job Relocation

Business or personal bankruptcy

Make sure to let the lender know when the difficulties arose and the time line for which it happened. Inform the lender of the reasons for not being able to make the payments currently and what will happen if your not able to modify the loan or do a short sale.

Then you sign it and confirm that the information provided is true to the best of your knowledge.

When submitted the hardship letter with the short sale package, refer to the lenders criteria because each lender has specific requests for the content and documentation needed in a short sale package.

Are you a home buyer looking to find information on tax credits?

There are many credits, rebates, and programs out there to help you with you home buying experience. First, there is the First-Time Home Buyer Credit that has $8,000 of tax credits toward the purchase of your home. It also gives a $6,500 for current home owners. Make sure to research specifics before purchasing a home. There is certain criteria to qualify for the tax credits. You also better hurry. Both programs end on April 30th, 2010. Here is a link to more information:

http://www.realtor.org/home_buyers_and_sellers/2009_first_time_home_buyer_tax_credit

Other tax incentives have to deal with your energy consumption. The federal government is giving tax credits to those who buy more energy efficient appliances, energy saving windows and doors, as well as energy efficient vehicles. More information can be found in the links below:

http://www.energy.gov/taxbreaks.htm

http://www.energystar.gov/index.cfm?c=tax_credits.tx_index

1. Complete a Property Valuation Analysis – Lenders will only approve a short sale if the borrower owes more than the property’s fair market value. And, the lender must be convinced that a short sale will net them more than a foreclosure. So, preparing a property valuation report that demonstrates this is the first step in the process.
2. Contact the Lender for a Short Sale Application – After getting the borrower’s approval in writing (this is essential), you will contact the lender with that approval. Then, it’s best to contact the lender’s loss mitigation department by telephone with the borrower sitting next to you so the borrower can answer any questions the lender may have. This step will also help you start to build a relationship with the lender that will lead to a successful short sale transaction.
3. Help the Borrower Write the Hardship Letter – Rather than an emotional plea, this must be a fact-based description of the borrower’s financial situation–which is heading towards a bankruptcy, a foreclosure, or both–written in the borrower’s own words. The letter must convince the lender that after analyzing the numbers, they will make more money from a short sale than from a foreclosure.
4. Submit the Short Sale Package – Carefully completing the necessary paperwork and submitting the documentation that proves the borrower’s financial hardship (eg. bank statements, bills, pay stubs and tax returns) is critical. Submitting proof that the property is in a condition that would require the lender to spend a bunch of money on repairs in order to sell it they foreclosed (eg. repair estimates) will also help your case!
5. Prepare the Short Sale Purchase Agreement – A properly prepared purchase agreement will ensure that the transaction goes smoothly.
6. Follow Up With the Lender During the Process – Regular calls to the lender’s agent during the process will help the transaction along. You will know right away if they have any questions that need answering or additional documentation that needs to be submitted. And, it will give you chances to charm that agent!
7. Negotiate With the Lender and Close the Sale – Since you’ve established and maintained a good relationship with the loss mitigation agent throughout the process (you charming devil, you!), as well as submitted a thorough, well-prepared short sale package, an approval is practically guaranteed. But, if the agent somehow finds a reason to disagree with your offer, be prepared to defend it with your comps, photos and other evidence that supports your numbers.

Here is a great article explaining why you would want to do a short sale vs. a loan modification!

Is a short sale for you?

The short sale of a home is most appropriate if the home is truly doesn’t make sense to keep, with either unaffordable payments, or significant negative equity. A home bought in San Diego, California in 2005 for $500,000 is only worth $300,000 today. Job loss, reduction of income, illness, divorce, or just a bad loan, are all valid reasons that homeowners are selling today. When the house is worth less than the mortgage balance, the sale of the home will not pay off the existing debt. One of two scenarios must happen: 1) The homeowner comes out of pocket to pay the shortfall amount for the existing debt to be fulfilled/extinguished or 2) The existing mortgage holder (bank) agrees to take a loss on their debt to allow the home to be sold (granting a short payoff).

With the high negative equity situations, banks are electing to grant the short sale to sell the house. The banks are not required to do this -their other choice when homeowners have stopped paying them, is to foreclose. Ultimately if the financial numbers work, it is cheaper for a bank to short sale rather than foreclose.

Why a Short Sale?

1.Enables the sale of the house without money coming out of pocket for closing
2.Allows for financial recovery during the short sale process
3.Releases you from your negative equity (upside down) position
4.Capitalizes on the bank’s current motivation to grant a short sale
5.May forgive taxes owed from the short sale
6.Provides quicker credit recovery
7.May allow you to buy another home at today’s bargain prices!

Closing Short Sales can be tricky – banks don’t make it easy. Most successful short sale are done using a team of real estate experts, but most importantly, a professional bank negotiator should be on the team. Nine out of ten unsuccessful short sales (ending in foreclosure) generally are real estate agents trying to negotiate their own deals.

Here is the link to learn more about loan modifications:

http://www.real-estate-info.org/loan-modification-or-short-sale-%E2%80%93-what-is-best-for-you/

There are number of reasons that a bank would reject a short sale. Brokers run the risk of going through all the work to list the property, advertise, negotiate offers, and put together the paperwork for a short sale package that may not be accepted by the bank. Here are a few of the reasons that the lender might not accept the short sale:

Short Sale Package Incomplete: Inquire as to the exact documents you need in the package. Many lenders may require different documents to complete the short sale.

Short Sale Offer Is Too Low: The lender will want a BPO done on the property to figure out their equity stake. If the buyer’s offer is quite a bit lower than the price opinion, the lender will decide to explore other options and reject the short sale

The Sellers Don’t Qualify: Brokers should investigate a seller’s assets before entering into a listing agreement. They may have other assets (401K, Mutual Funds, Inheritance, etc.) that a lender may look into before decided that this borrower is unable to make payments. This can be addressed in the hardship letter. This letter enable the seller to explain why they want to short sale the property.

The Buyer Doesn’t Qualify: Make sure that when you receive an offer, it includes a pre-approval letter qualifying a buyer for the amount they listed in their offer. A number of factors with a buyer qualifying for a loan and if they don’t have the financial assets for the purchase, the deal will be rejected.

The Bank Sold The Loan: There is a difference between a lender “servicing” a loan, and actually having the loan. If a lender sold your loan on the secondary market, and they are just servicing the loan, than they don’t have the legal authority to accept a short sale. Contact a representative of the loss mitigation/short sale department to confirm status of loan.

It depends on the lender, but here are a few of the documents that are needed:

1. Cover Letter

2. Financial Information Form

3. Hardship Letter (Detailed letter explaining the reason for short sale)

4. Bank Statements (Most recent bank statements for your checking, savings, mutual funds, 401K, etc.)

5. Disability/Unemployment/Retirement/Social Security Statements

6. HUD or Net Sheet Statement (Broker responsibility)

7. Offer/Purchase Agreement/Sales Contract (Broker responsibility)

8. Comparable sales for the property (Broker responsibility)

9. 1st or 2nd Lender may also require a payoff amount (Broker responsibility)

10. Lender may ask for Initial Title Report (Broker responsibility)

11. FHA and VA may have their own requirements that need to be addressed in the short sale (Broker responsibility)

The recession has taken its toll on a lot of Americans. The credit crunch made it almost impossible to get money and the new stipulations with modifying your loan have caused many to file for bankruptcy. Most stick to Chapter 7 because Chapter 13 costs more, is more complicated, and requires certain parameters. Reference a bankruptcy attorney for more information about how you should file.

More and more Americans are looking to get rid of their property in bankruptcy because most are under water. When the bubble burst, real estate values plummeted. A lot of Americans had first, second, and even third, and fourth mortgages on their home. In bankruptcy, a short sale on your property is a great option to get rid of the toxic asset without hurting your credit as much as would be the case in a foreclosure.

First off, most of the time if a homeowner is interested in doing a short sale, that means that they probably have missed a few payments and the lender has begun foreclosure proceedings. Right off the bat, you will have damage to your credit. The good thing about a short sale is that you are able to stop making payments, save that money, and sell the house without having to deal with the repercussions of a foreclosure, which can really hurt your credit.

The initial sting to your credit will begin once you stop making payments, and the lender submits a notice of default. Once everything is done in a short sale, your credit score has taken and average of 80-120 decrease. If you were to walk away, the resulting decrease would be between 180 and 250 in your credit score. Plus, the foreclosure would be on your records for 7 years. This would most likely inhibit you from purchasing another home during that span.

My suggestion, do the work that it takes to get a good short sale specialist who can negotiate with the lender and get the short sale accomplished. Its worth it!