The number of properties going into foreclosure and the number of homeowners whose homes are at risk is staggering.
In many cases, a short sale solution can save a homeowner from having a foreclosure on their credit and not having to deal with the foreclosure process. Payment of outstanding property taxes and any delinquent HOA fees are typically paid from the proceeds of the sales.
Considering a Short Sale?
A short sale is used to prevent a home from foreclosure. Often a bank will allow a short sale if they believe that is will result in a smaller financial loss for them than foreclosing.
A bank will typically determine the amount of equity (or lack of) by determining the probable selling price from a Broker Price Opinion or through a valuation of an appraisal.
A short sale is typically faster and less expensive than a foreclosure. A short sale is nothing more than negotiating with lien holders for a payoff less than what they are owed. For the homeowner, the main advantage would be avoidance of a foreclosure on their credit history.
What are the benefits?
- A short sale greatly reduces the damage done to your credit.
A short sale results in the paid-off mortgage noted on a credit report as “settled” or “satisfied in full” or something similar. It is not a negative factor, however, your credit score will fall due to the missed mortgage payments. This is not serious and your credit score can be repaired after several months of paying on time on 2-3 other credit accounts.
- You avoid having a “Foreclosure” recorded on your credit report.
A foreclosure is a judgment recorded in the Public Records. It stays on the credit report for 10 years and can be renewed for additional 10 years at the lender’s request. The judgment amount will include not only the difference between what was owed on the mortgage and what was received but also all the expenses incurred such as attorney’s fees, court costs, and holding costs if the property is not sold at auction. A bankruptcy does not erase a foreclosure. It is an event recorded in the public records, however, it is not a judgment. In terms of credit “hits”, a foreclosure is the most damaging.
- There is no cost to you.
The Realtors commissions and processing fee charged by Short Sale Operations, LLC are paid by the lender at the time of sale.
- You won’t have to go through the foreclosure process with the Foreclosure For Sale signs and public notices.
- Past due property taxes are settled by the lender at the time of the short sale.
What are the consequences?
- Possible issuance of a “1099-C” by the lender.
If the property is your primary residence (homesteaded) then the lender cannot issue a 1099-C. On December 20, 2007, President Bush signed H.R. 3648 “The Mortgage Forgiveness Debt Relief Act of 2007”. This benefits homeowners who participate in a short sale or foreclosure of their primary residence. Under the current law, if the value of a property declines and a bank or lender forgives a portion of the mortgage, the tax code treats the amount forgiven as income that can be taxed. This new bill creates a three-year window for homeowners to pay no taxes on any debt forgiveness they receive.
- Another uncommon but possible consequence is a Deficiency Judgment.
The lender has the option of issuing either a 1099-C or a Deficiency Judgment but not both. A deficiency judgment is a judgment filed in the public records for the difference between what was owed and what was received by the lender.
If the property is not your primary residence, the lender can issue a “1099-C” for the difference between what was owed to them and what they received. (This can happen with a foreclosure as well). It will be income to you from cancellation of a debt but is only taxable if assets exceed liabilities at the time of the sale. That generally isn’t the case or the bank won’t approve the short sale anyway.
To address this issue, IRS Form 982 can be used when filing taxes to exclude the amount of discharged indebtness from the homeowner’s income resulting from the issuance of a 1099-C. There is also an IRS publication entitled “Questions and Answers on Home Foreclosure and Debt Cancellation”. We suggest that you consult with your accountant or tax attorney and if he/she is not aware of Form 982 then give him/her a copy for review.
Are YOU a candidate for a Short Sale?
Before considering a short sale, the lenders will evaluate both the homeowner and the property. They will request documents to review that will allow them to determine whether to accept, reject, or counter the short sale offer. The following outlines what the lender will be asking while reviewing the short sale package.
Borrower (Homeowner) Profile
Does the homeowner have sufficient monthly income to make the monthly mortgage payments after reasonable living expenses?
- Does the homeowner have assets that can be used to make the mortgage payments? Do liabilities exceed assets?
- What has happened to cause the homeowner to no longer be able to afford to pay the mortgage?
Remember, before being approved for the mortgage you had to prove you could afford to pay the mortgage!
- Does the homeowner understand that they will not receive any money at closing? If the lender is taking a loss on the property, you, the homeowner, are certainly not going to benefit monetarily.
- Does the homeowner understand there is no guarantee? (However, you Realtor will be working diligently on your behalf).
- Does the property have any equity? If yes, you can sell the property without a short sale.
- Does the property require any repairs?
How do I get started?
- All lenders require that your property be listed with a Realtor. Choose a Realtor experienced with the short sale process to ensure the best chance of success.
- Sign the documents provided by your Realtor.
- Gather together the remaining documents in the Required Documents Checklist.
- Your Realtor will begin processing your short sale.
For more information and to discuss short sales please contact Bill Roe or Kelley Desoto, (386) 428-0975.