WHAT IS A SHORT SALE?


 A short sale occurs when a seller needs to sell their property for less then is owed on the mortgage (s) and the lender allows a release of lien from the property. In most cases the homeowner needs to show a HARDSHIP of either financial, medical, job related, such as a job relocation to approve a short sale. Often the balance from the short sale is forgiven by the lender or the balance is negotiated as part of the short sale. Each short sale scenario is different, as the lenders decision depends on the sellers financial picture, market value of the property in relation to the purchase offer price, the lenders investors requirements and their own Foreclosure ratios.

 

Why would a lender accept a short sale?


A short sale has a better return on investment to the lender than a foreclosure.  They are able to cash out of the loan faster than a foreclosure process. Plus they do not have the legal fees which are normally attached to a foreclosure.

 

As a homeowner, why would I choose to attempt a short sale?


Let’s face it. Bad things happen to good people.

There are many reasons why homeowners find themselves in a position of default…change in mortgage payments, loss of job, health issues, etc. When you get behind on your mortgage payments, the lender will start the foreclosure process, no exceptions. If the foreclosure takes place, you have ruined your credit for a period of up to 10 years. You can expect your credit score to go down about 200 points* or more, making it impossible to make any future purchases using credit. A foreclosure is usually a required disclosure you must make on any credit or job application.

The lender may also file a deficiency judgment against you. A deficiency judgment can arise if the lender sells your home at auction for less than the mortgage debt. The lender then holds you responsible for the unpaid portion of the loan. The lender may take legal action to pursue payment, such as garnishing your wages.

A short sale is usually listed as settled debt, and is much less harmful to your credit. You can expect a decrease in your credit score of approximately 50 - 75 points*. The loan may be forgiven, and no deficiency judgment will be placed against you.

 

Is it true I will be given a 1099-C by the IRS, and will owe taxes on the unpaid loan amount?


In  a short sale for a  residential property,  there is forgiveness  of the debt, the  shortfall.  The forgiveness of debt may be taxable or tax exempt. (The forgiveness is the difference of the mortgage owed and the amount the mortgage holder receives due to a reduced sale price),  A 1099C will be issued to you from the mortgage holder, and you must report the forgiveness of debt on your personal tax return in the year of the sale.  The tax return will report to IRS whether the debt forgiveness is taxable or not.

If the residential property is your primary residence, and you used the mortgage to acquire,construct, or improve the property, then the forgiveness of debt is excluded from income for all sales through the year ended 2012.  ( Mortgage Forgiveness Debt Relief Act (HR 3648), and extended by the Emergency Economic Stabilization Act of 2008).  But,  If you refinanced to withdraw equity prior to the short sale, that portion of additional debt does not qualify for exempt debt forgiveness. 

Keep in mind that debt forgiveness can also be exempt from income if you are insolvent.

Terry Santini, CPA  from Santini & Sedawie, PA

 

Who should handle our short sale?


The most important thing to consider when deciding to work out a short sale with your lender is to use a qualified professional to handle the process and negotiations. If the processor is not experienced in the short sale process, the deal can be over before it begins.

A professional Real Estate agent will need to list your home on the market as the first step. Be sure they are aware you are attempting a short sale, and that they have experience working with short sales or experience working with a licensed loss mitigator. The best scenario is to let the real estate agent handle the marketing of your home, and allow the loss mitigator to handle the short sale.

 

What is the short sale process?


The loss mitigation representative will explain the process and prepare your hardship package. They know upfront exactly what the lender will require when submitting your offer, and will be prepared fully to negotiate on your behalf.

Your home is listed by an experienced short sale real estate agent, who prices the home according to market value yet being aggressive in price reductions if no offers are submitted by buyers. Remember, the goal is to bring in a quick offer and to prevent you from going into foreclosure.

Once an offer is received, an entire package is presented to the lender, and the negotiations begin.

 

Will the lender always accept a short sale offer?


Unfortunately, not always. However, the more complete and detailed the short sale package submitted to the lender, the better the chances of getting an approval. Our company currently has a 95% success rate on all submitted short sales. The key is a good Short Sale Realtor listing the property, a qualified and very experienced short sale negotiator with a team of experts to handle each and every obstacle which could be encountered. 

                                  

* Estimate based on online data available

doing a short sale is always a better solution than a Foreclosure