Do Not do this alone.
Contact us to help with legal consultation and information.
Your lender cannot confuse or miss-lead us.
1-800-673-7616
Short Sales and You… What You Need to Know!
What is a Short Sale?
A Short Sale is when the lender of record (Your Mortgage Company) agrees to discount their payoff to accommodate a sale when:
1. The borrower/seller (i.e.: You) has experienced hardship.
2. The value is proven to be less than the amount needed to pay off all loans, encumbrances and real estate selling costs.
3. The loan is delinquent or in default.
How Do Borrowers/Sellers Benefit?
1. The borrower/seller can avoid having a “foreclosure” on their credit report. Most lenders tend to report “settled” upon successful closing of a short sale. Recent reports state that if a borrower misses 2‐5 mortgage payments, their credit score will be affected by an estimated 30 to 60 points. If a borrower suffers foreclosure, it can affect their score 140 to 200 points.
2. Assuming the borrower/seller is already not making mortgage payments, they can continue to live in the property and not make payments during the length of the short sales process.
3. Most sellers feel it is the “right thing to do” when in default. They tend to feel that walking away from the house is irresponsible and unfair to the lender. It’s a respectable option.
Why Would Lenders/Servicers Agree to a Short Sale?
1. Not having another “bad debt” on the books. Most investors require their lenders not to exceed 3% of bad debts on the books.
2. Not having to complete the expensive foreclosure process including all of the legal fees and procedural duties.
3. Not having to evict occupants and pay for their cooperation.
4. Not having to rehab the property. (i.e.: Contractor bids, disgruntled borrower vandalizing, etc.). The shorted price will also be determine by the condition of the home. For instance; multiple deficiencies in the property will give room to decrease the amount approved on the shortsale price. Important! Please note all deficiencies in the property
5. Not having to later sell the property for no more than the proposed short sale would generate, or even less when the market continues to decline.
6. Not having to pay a commission to the R.E.O. broker they choose to market and list the property for them.
When are Short Sales Highly Likely?
A Short Sale is highly possible when the following variables exist:
1. The borrower/seller has experienced legitimate hardship which can be proven.
2. The property is in a marketable area and in marketable condition.
3. The remaining value will yield a minimum of 20% to 30% of the original loan amount (i.e.: After selling costs, commissions, etc.)
4. If multiple loans exist, it is traditionally easier if the same lender has all or both loans. These are sometimes seen as “package deals” for the lenders.
5. The borrower/seller provides all the documentation required by the short sale processing institution and the financial application shows insolvency.
6. There is ample time to market the property, negotiate with the lender and close an escrow before foreclosure occurs (This will vary based on market conditions, consult your VP Solutions Group short sale rep for more information).
When are Short Sales Highly Unlikely?
1. When the borrower/seller has not experienced any type of hardship that has led to the delinquency of the loan.
2. When the borrower/seller is upside down but current on his/her loans with no plans of missing payments.
3. When a borrower/seller is in a Chapter 13 bankruptcy plan.
4. When a borrower/seller has completed a recent refinance with cash out and soon after decides he/she wants to sell or if the borrower/seller has taken out a very recent loan against the property. (Many times recent inflated appraisals for refi’s can haunt a seller when trying to do a short sale. H.E.L.O.C.s have the same effect.)
5. When there is not enough value in a property to pay off the senior lenders and give 20% to the most junior lender after all real estate costs / selling costs are paid.
6. When the Seller cannot provide a full package. (i.e.: “Full” implies all supporting hardship documentation required by VP Solutions Group.) Lenders tend to not prioritize incomplete short sale submission packages.
7. When outstanding liens and judgments cloud title. It can be very difficult to negotiate with a private party lien/judgment holder. Also, most lenders don’t want to allow them to receive more than $1,000 ‐ $2,500 since they are in the most junior position.
What are the Possible Tax Ramifications?
On December 20th, 2007, President Bush signed into law a new measure giving tax breaks to homeowners who have mortgage debt forgiven. Under pre‐existing law, the debt forgiven by a lender, such as for short sales, was generally taxable to the borrower as debt discharge income. With the passage of the Mortgage Forgiveness Debt Relief Act of 2007, a taxpayer does not have to pay federal income tax on debt forgiven for a loan secured by a qualified principal residence. This tax break applies to debts discharged beginning January 1, 2007.
The Important Details of H.R. 3648
The following are the sections of the IRS tax code Section 2 of H.R. 3648.
Section 108. Income From Discharge of Indebtedness.
(a) Exclusion from gross income.
(1) In general
Gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of indebtedness of the taxpayer if:
(A) The discharge occurs in a Title 11 case,
(B) The discharge occurs when the taxpayer is insolvent (insolvency exception Code #108(a)(1)(B)). [A.K.A. “1401”]
(C) The indebtedness discharged is qualified farm indebtedness, or
(D) In the case of a taxpayer other than a C corporation, the indebtedness discharged is qualified real property business indebtedness, or
(E) The indebtedness discharged is qualified principal residence indebtedness which is discharged before January 1, 2010.
Acquisition Indebtedness (Very Important)
Section 163(h)(3)(B)
(b) Acquisition indebtedness
(i) In general the term “acquisition indebtedness means any indebtedness which:
(I) Is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and
(II) Is secured by such residence.
Such term also includes any indebtedness secured by such residence resulting from the refinancing of indebtedness meeting the requirements of the preceding sentence (or this sentence); but only to the extent the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness.
FAQ for the Mortgage Forgiveness Debt Relief Act of 2007 (Provided by www.irs.gov )
What is the Mortgage Forgiveness Debt Relief Act of 2007?
The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007. Generally, the Act allows exclusion of income realized as a result of modification of the terms of the mortgage (i.e., short sale), or foreclosure on your principal residence.
What does that mean?
Usually, debt that is forgiven or cancelled by a lender must be included as (ordinary) income on your tax return and is taxable. The Mortgage Forgiveness Debt Relief Act of 2007 allows you to exclude certain cancelled debt on your principal residence from income.
Does the Mortgage Forgiveness Debt Relief Act of 2007 apply to all forgiven or cancelled debts?
No, the Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes.
What about refinanced homes?
Debt used to refinance your home qualifies for this exclusion, but only up to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified.
Does this provision apply for the 2007 tax year only?
It applies to qualified debt forgiven in 2007, 2008, 2009.
Can I exclude debt forgiven on my second home, credit card or car loans?
Not under this provision. Only cancelled debt used to buy, build or improve your principal residence or refinance debt incurred for those purposes qualifies for this exclusion.
If part of the forgiven debt doesn’t qualify for exclusion from income under this provision, is it possible that it may qualify for exclusion under a different provision?
Yes. The forgiven debt may qualify under the “insolvency” exclusion. Normally, a taxpayer is not required to include forgiven debts in income to the extent that the taxpayer is insolvent. A taxpayer is insolvent when his or her total liabilities exceed his or her total assets. The forgiven debt may also qualify for exclusion if the debt was discharged in a Title 11 bankruptcy proceeding or if the debt is qualified farm indebtedness or qualified real property business indebtedness. If you believe you qualify for any of these exceptions, see the instructions for Form 982.
Is there a limit on the amount of forgiven qualified principal residence indebtedness that can be excluded from income?
There is no dollar limit if the principal balance of the loan was less than $2 million ($1 million if married filing separately for the tax year) at the time the loan was forgiven.
Writing Your Hardship Letter
The hardship letter is a very important part of your Short Sale Package. Your story, though concise, allows for the Lender of Record to feel your situation and possibly place you as a person and/or family rather than a loan number in arrears. Be sure to place the times and events in sequential order and if possible – handwrite.
Introduction
Introduce yourself (Borrower(s) and current default status)
Reason
Why can’t you continue to make payments or become current in monies owed?
1. Medical – crisis, bills, etc.
2. Job loss of either borrower or spouse who works to help with expenses of household.
3. Business change, loss, etc.
4. Marital Status – Divorce, separation, etc.
5. Other
Story
Provide one or two paragraphs explaining your story. Explain how/when and the effects
the mortgage payment issue, adjustable mortgage, etc. has had on your family. Be clear and concise with some expression of emotion concerning your current dilemma.
Request
Make a statement requesting a Short Pay to the Lender of Record.
Closing Statement
Thank you for your consideration.
Sign and Date
Borrower and Co-Borrower Only
Do not waste any more time. Call us now to get the process started to ensure your credit and home are safe from the vultures that will take away what you have work a lifetime to protect.
1-800-673-7616