Short Sale Expectations for a homeowner

Short sales allow homeowners to sell their homes when more is owed than the home is worth. The lender agrees to accept the net proceeds of the sale as payment and releases the lien to close the escrow. Many lenders would prefer to approve a short sale instead of foreclosure, due to legal cost of foreclosure. Before this housing crisis there were tax consequences as the IRS would consider any debt forgiveness as income. The amount of debt forgiveness would be sent to the debtor as a 1099 for income tax purposes.

The IRS mortgage forgiveness debt relief act of 2007 which applies to debt forgiven in calendar years 2007 through 2012. The basic criteria under the mortgage debt relief act of 2007

-          The debt must have been incurred to acquire, build or to substantially improve your principle residence.

-          Cancelled debt up to 2,000,000 for married couples or 1,000,000 for single.

-          Cancelled debt for investment property and second homes are not eligible.

-          Debt used to refinance your home qualifies for this exclusion, but only to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified.

California, all purchase-money home loans are required to be "nonrecourse" debt, which means the lender can't pursue the borrower for additional money that's still owed after the property is sold.

Debt does not have to be forgiven by the lender on non purchase-money loans; the banks can obtain a deficiency judgment against the homeowner. To make up the difference between the amounts the lender received in the short sale or foreclosure and the amount still owed from the debtor. The banks have up to 4 years after the deficiency to file for a deficiency judgment. If the bank is awarded the deficiency judgment, this will show on your credit report with the short sale or foreclosure.  The lender can proceed with further legal action and garnish wages to collect on the debt. Promissory notes may also be offered by the lender to allow a short sale.As of January 2011 First loans have no recourse even if the loan has been refinanced, Seconds have full recourse.

Credit is always a concern, but there is no way to get out of a situation of losing you home without credit damage. Other sources on the web claim a short sale will damage your credit for 2 to 3 years, a deed in lieu of foreclosure for 5 to 7 years and a foreclosure or bankruptcy for 7 to 10 years.

Pros and Cons of a short sale

PROS-

-          Avoids a foreclosure which can be stressful to a family.

-          Being proactive helps give you some control over the process.

-          Minimizes damage to your credit score and help get you back on your feet faster.

-          You could be able to purchase another home sooner than if you had a foreclosure on your credit record.

-          The thought is that the home will sell for more as a short sale than as a bank foreclosure reducing the amount of any deficiency judgment.

-          Try to obtain debt forgiveness on all loans.

CONS-

-          There is damage to your credit, but won't have the same impact as a foreclosure.

SHORT SALE PROCESS-

1.       You will need to contact your lender and speak with the loss mitigation department. See if they have specific paperwork for the short sale process. A letter of authorization will need to be provided to the bank to allow them to communicate with your real estate agent. At the end of 2009 and beginning of 2010 the FDIC required a standardization of forms for short sales, loan modifications, including timelines and incentives. 

      a. 50% of all  homeowners do not talk with anyone before they're home is foreclosed. This is the worst thing that could be done.  Also if you are doing a short sale it is important that you respond to all your lenders calls and letters.
 

2.       A short sale package will need to be created to substantiate your need for a short sale. The items needed in the package will include.

a.       A hardship letter, describe in your letter to the lender all the reasons why youre experiencing financial hardship and why you can no longer afford your mortgage. A handwritten letter will help, if you have good hand writing. This letter will outline the issues and support your need for a short sale. Try to keep the letter to one page; you want the asset manager to read your letter. Below are items to include in the letter.

                                                               i.      Your Loan Number

                                                             ii.      Foreclosure date if you have one.

                                                            iii.      Why you need a short sale.

1.       Unemployment or reduced wages provide any supporting documentation from your employer that can verify your layoff or reduction in wages.

2.       Divorce

3.       Costly medical issues

4.       Job Transfer

5.       Bankruptcy

6.       Death

                                                           iv.      Empathize with the lender; let them know you do not want a foreclosure.

b.      Proof of Income and Assets. This information is needed to prove the need for a short sale, but could work against you if the bank obtains a deficiency judgment.

                                                               i.      Last 2 paycheck stubs

                                                             ii.      Last 2 months of bank statements

                                                            iii.      1099 or W-2 for the last 2 years

                                                           iv.      Last 2 years of income tax returns

                                                             v.      A monthly budget most likely will be required

c.       A comparative market analysis showing the lender the value of your home compared to other like your home.

d.      A copy of the listing agreement with your listing agent.

                                                               i.      Do not over price or under price the home. You want to get an offer to submit to the bank, but an underpriced offer will not be considered by a bank. The bank will order a Brokers Price Opinion or appraisal to verify the offering priced is realistic.

e.      Submit an offer to purchase to the bank. The bank may want the best offer you have or all the offers you have.

f.        A net sheet or HUD statement provided by the escrow officer you will be using for the sale. The bank will pay for the Realtor fees, seller closing cost, current HOA fees and charges  (do not be delinquent on your HOA fees the banks usually dont pay these) and property taxes.

3.       A complete short sale package with complete documentation will tell the story to your lender.  The facts are accurate and the circumstances speak for themselves. This type of short sale package will help get a quicker response to your short sale request. Short sales do take time; the average time for a short sale is 1 to 4 months. The more loans or banks on a home make the short sale more difficult. If your facts dont substantiate the short sale the approval may take longer or may not be approved.