So you’ve fallen behind on your mortgage. You need to sell your home or condo but you owe more than it’s worth. You’d like to enlist the assistance of a real estate agent and an attorney to help advise you but you don’t think you can afford to pay either of them.
You are being hounded by people saying they can help and all you need to do is sign a few documents and everything will be taken care of. What are your options? Who can you trust? What should you do?
For owners who can no longer afford to keep mortgage payments current, there are alternatives to bankruptcy or foreclosure proceedings. One of those options is a short sale.
What is a Short Sale?
A short sale occurs when the proceeds of a real estate sale fall short of the balance owed on the property. In a short sale, the bank or mortgage lender agrees to discount a loan balance due to an economic or financial hardship on the part of the mortgagor. This negotiation is all done through communication with a bank’s Loss Mitigation Department and if approved the bank allows the homeowner to sell the mortgaged property for less than the outstanding balance of the loan sometimes (but not always) in full satisfaction of the debt. A short sale is typically executed to prevent foreclosure but contrary to popular belief the homeowner need not be in default however, this does tend to make the lender more responsive.
Why are banks motivated to accept short sales? Often a bank will choose to allow a short sale if they believe that it will result in a smaller financial loss than foreclosing. By accepting a short sale the banks can avoid the costs of property maintenance, homeowner’s association dues, property taxes, attorney fees, etc. Properties that go into foreclosure can take longer to sell, particularly in a declining market. There’s also the chance that the property could be vandalized. Furthermore the bank’s losses are not isolated to the direct losses incurs on a short sale or foreclosure, but rather these loans in default reduce the banks overall lending capacity and thus drastically reduces it’s ability to make money.
For the homeowner, the advantages of a short sale include avoidance of having a foreclosure on their credit history and the partial control of the monetary deficiency. Additionally, a short sale is typically faster and less expensive than a foreclosure.
In short, a short sale is nothing more than negotiating with lien holders a payoff for less than what they are owed, or rather a sale of a debt, generally on a piece of real estate, short of the full debt amount. It does not extinguish the remaining balance unless settlement is clearly indicated on the acceptance of offer.
These sales require significant work on everyone’s part and start with the homeowner proving to the lender that they can no longer afford to pay their bills and meet all of their financial obligations. This process varies between banks however, typical submission packages (short sale or workout package) will include W-2 forms from employers (or a letter explaining the seller is self or unemployed), bank statements, two years of tax returns, and other financial documents outlining income and debt obligations. In addition, homeowners will be required to submit a hardship letter, explaining the circumstances that make it impossible for them to pay the full amount of the loan.
Tip: In preparing the package, be careful about discrepancies between your income and the income used to obtain the loan, as a big gap may indicate mortgage fraud, unless employment circumstances have drastically changed.
The bank will also need comps or a broker’s price opinion letters showing an estimate of your home’s value. Most lenders will want to get a broker’s price opinion or even an appraisal to see what the property is worth before a list price is set. One way to help ensure that the bank’s estimate of value is realistic is to offer comps of recent sales
If you and your real estate agent don’t already have a buyer lined up for your home, this will be your next step. Once a buyer is located an offer is written this will need to be submitted to the bank for review and acceptance. Although response times vary from lender to lender, it can take two weeks or as long as 60 days to receive an approval of a short sale from a lender. That’s why it’s critical that buyers and their representative understand and accept that time frame before they make an offer.
Tip: Homeowners must understand that the purchase contract on a short-sale property is a legally binding agreement once the earnest money has been deposited. Without language in the contract stating that the lenders must approve the offer and release all liens on the property, the seller may face a legal problem for failing to execute the contract if the short sale is not approved.
Getting a lender to approve a short sale is primarily a question of economics. You have to provide hard numbers to show that the amount of money a bank will realize on the short sale is better than the amount it may recoup from foreclosing on the property and selling the property as a REO. Other factors that can influence a bank’s decision include the liability risk it assumes by owning the property after foreclosures, the money tied up during the holding period for a foreclosure and REO resale, additional costs associated with an REO such as attorney fees, and the additional reserves it will need if REOs rise in the bank’s portfolio.
Tip: A buyer that is willing to close in 30 days and who can make a substantial down payment may make the deal more attractive than a buyer who wants 95 percent financing, however, to avoid unnecessary costs, buyers should wait on having a home inspection and an appraisal for the loan until after the bank has accepted the short sale proposition.
Short sales are not easy transactions and there are a variety of reasons a bank might reject a short sale, from too low a price to too many files on the loss mitigator’s desk. If your transaction is denied you can look for another buyer or even try resubmitting the same contract. Banks don’t want to take properties back in foreclosure, so they are going to do everything they can to make it work. But you should be prepared for the possibility of foreclosure if a short sale fails.
One misunderstood aspect of short sales is that most homeowners are under the impression a seller must count any amount forgiven by the lender as income and pay taxes on that income, even if no actual money was received. The IRS requires lenders to submit a Form 1099 stating the forgiven amount, however, sellers who meet the Internal Revenue Service definition of insolvency (either in bankruptcy or with debts exceeding assets) will not have to pay taxes on the forgiven amount and the 2007 Mortgage Debt Relief Act offers further protection allowing taxpayers to exclude income from the discharge off debt on their principle residence in calendar years 2007-2012 and up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately) and the loan must have been taken out to buy, build or substantially improve a primary residence, not a second or vacation home (congress has extended this protection every year since 2012 and it is valid through 2016 and is likely to be extended beyond this).
Tip: It’s a good idea to get knowledgeable legal and tax help, especially if a 1099 is issued as an experienced tax attorney may able to show that the original loan process was so flawed that the borrower is not liable for taxes at all. Or if a borrower can demonstrate that he or she is insolvent they also may be able to escape the tax.
What are the options besides a short sale?
Thanks to programs such as those proposed by Fannie Mae and Freddie Mac to assist subprime borrowers, many lenders are more willing to offer loan modification options. This option can extend the term of the loan, add on delinquent payments to the loan principal, and/or reduce the interest rate to make the loan more manageable for the home owner.
Another option is a repayment plan that requires home owners to increase their monthly payments until the loan is current. It may be possible to refinance an adjustable rate loan with a Federal Housing Authority or conventional fixed loan. Note that lenders will not postpone a foreclosure just because a property is listed, although they may postpone if you have a reasonable offer in the works.
Benefits of a Bank Short Sale
Preserve your credit standing and avoid a foreclosure.
Eliminates negative cash flow.
Release of mortgage obligations.
Allow you to sell your home with no out-of-pocket expense.
Avoid potential foreclosure
Avoid possible bankruptcy.
Relieves financial and emotional stress.
If you’re facing foreclosure you’re facing some very important decisions. We want you know you’re not alone and we are here to help with any questions you may have to assist you in making the best decisions for your situation. There is no charge for this service and we are happy to help! We offer confidential and professional real estate advice.
The Opland Group Specializes in Real Estate Sales, Luxury Home Sales, Short Sales in; Bexley 43209 Columbus 43201 43206 43214 43215 Delaware 43015 Dublin 43016 43017 Gahanna 43219 43230 Grandview Heights 43212 Hilliard 43026 Lewis Center 43035 Marysville 43040 43041 New Albany 43054 Pickerington 43147 Powell 43065 Upper Arlington 43220 43221 Westerville 43081 43082 Worthington 43235