Short Sales Rescue

A short sale is when you sell the property for less than what you owe and your current mortgage lender accepts those terms. If a homeowner has a balance on their loan for $100,000 and the house sells for $60,000, the lender has agreed to discount or forgive the  $40,000.

Both will affect your credit score, but the impact of a foreclosure on your credit is more likely to be severe.

Every situation is different and every lender has different policies. Whether you are missing payments now or foresee difficulty in making future payments, the bottom line is to avoid losing your house to foreclosure.

A homeowner has to prove they are suffering financial hardship. This can be due to current situations such as loss of employment, wage deduction, divorce or death of a spouse. Any situation that has affected your ability to pay your mortgage on an ongoing basis. The lender will require the following before they review your situation and make a decision:

• Income documentation
• Bank Statements
• W-2 forms
• A hardship letter from the borrower
• Current market value of the home

Originally when a bank accepted a Short Sale, the IRS considered the shortage on the actual amount received verses the principle amount that was due to be "forgiveness of debt". Furthermore, the IRS deemed this "forgiveness of debt" to be taxable income. In order to be in compliance with the IRS rules, banks were required to issue a Form 1099 for the amount of the debt forgiven. Upon successfully closing a short sale, lenders would report a loss to the IRS and issue a 1099. Sellers would have to pay taxes on this amount.

However, the Mortgage Forgiveness Act of 2007 was signed into law on 12-20-07.

Prior to this action, forgiven mortgage debt due to foreclosure, short sale, or deed in lieu of foreclosure, was potentially taxable income to the borrower. 

The new law, however, temporarily waives these taxes for debts forgiven (as high as 35%) from the beginning of 2007 to the end of 2012.  You must qualify and meet certain criteria. Contact me to discuss this in further detail.

Check out the IRS site for further discussion on this topic.

A Short Sale can be reflected on the homeowner's credit report in many different ways. Some verbiage may include "Discounted Payoff, Paid-in-Full". A Short Sale is less damaging to the homeowner's credit than a foreclosure or deed-in-Iieu of foreclosure. Sellers will typically not be allowed a loan for at least 36  months under a short sale. With a foreclosure, it can be 7 years. There are exceptions to every situation. 

Since the seller is requesting a discounted payoff from the lien holder all parties must allow the lien holder to complete an evaluation. This is done to determine the value of the home and determine if the loss is justifiable. The lender wants to mitigate his losses and so the process of evaluation must be completed before approval is granted. This process can delay closing for several months.

The ability to purchase a new home is dependent upon several factors. Credit is only one of the factors. 

• Separation or Divorce.
• Medical Bills.
• Inability to work due to health reasons.
• Business Failure.
• Reduced Income or Unemployment.
• Death of a Spouse.
• Adjustment in mortgage payment or unforeseen increase in your monthly expenses.

Many times the same lender hold the 1st and the 2nd loans. If they are from two different lenders, normally both lenders will cooperate. Some lenders on the second loan will require a note. Every situation is different.

A short sale should be your last resort. Homeowners in trouble should call their lenders first and see if a solution can be derived.

There are several options that a lender may offer:

Yes you can.  The house should be kept orderly and maintained.