3 Common Problems Short Sale Sellers Face (And How To Avoid Them)

As foreclosures in the U.S keep on being commonplace all through these tough economic periods, several homeowners who are getting overwhelmed by their mortgage payments are looking at pursuing a short sale as an alternative to foreclosure.

A short sale must be approved by the mortgage lender, and not just every short sale applicant will qualify. In other words, while a short sale is a preferable alternative to a foreclosure, it is still a time-consuming, complex process. Sellers considering whether or not to attempt short selling their property need to know the processes and the various issues they may face while going for the short sale option.

What Does a Seller Need To Pursue a Short Sale

If the choice has been made to pursue a short sale, the first steps are to get in touch with a real estate agent knowledgeable in handling short sales in your area and also notify your lender that you will be attempting to short sell the home. But just because you decide to pursue a short sale does not ensure you’ll automatically meet the requirements from the lender. Among some other paperwork, lenders might request the following to determine if they will deem consenting to a short sale of the property:

Letter of Authorization: Contains the home address, name, date, your agent’s name and contact info as well as the loan reference number

Hardship Letter: Describes the need of the homeowner for a short sale (i.e., unemployment, hospitalization, divorce, bankruptcy, etc.)

Proof of Income & Assets: Including any savings, money market accounts, stocks or bonds, or cash and other real estate

Copies of Bank Statements: You will have to show all deposit and withdrawals done over a period of time

Preliminary Net Sheet: An estimated closing statement that displays the predicted sale price, together with all the costs of the sale, unpaid loan balances and outstanding payments due

Comparative Market Analysis: Shows the prices of similar homes sold in that area

Tax Returns: As much as two years of tax returns

 Problems Short Sale Sellers Face & Their Solutions

  1. Seller Without Hardship

The most common short sale problem is when the seller has no hardship. Most sellers realize that a short sale implies the house is under water. You can’t do a short sale on a home that will auction for enough to pony up all required funds and pay the majority of the cost of selling. When there is insufficient value on a property to pay the sum due the bank, the home short sells.

Simply being short to the bank is not really reason enough to do a short sale transaction, in most cases. Generally, the bank expects for a hardship letter from the seller describing:

  • The seller’s trouble
  • What the seller did to fix the problem
  • Why nothing seems to work

If the sellers’ situation is the same as it was on the day the seller took out the mortgage, the lender may be very unlikely to grant the short sale. Many banks insist upon a seller hardship. No hardship is a short sale problem that might lead to short sale rejection.

A solution to the short sale problem is either to try again after a hardship occurs or offer to partake in the bank’s loss by making a seller contribution.

  1. Issue of multiple loans

Some smaller banks have a notoriety for being difficult. Commonly, those banks can go one of two ways. Either the bank will dismiss the short sale or the bank will endorse it, it’s either black or white and your chances are around 50/50 with these banks.

This does not imply that whenever you have a short sale with two loans that the second lender will cause problems, but this is not the case. The reason for the problem with the second lender is often the amount of payoff. The first lender may not want to pay out the second lender in excess of, say, $3,000.

If the home goes to foreclosure, fairly probably the mortgage with the second lender may well get wiped out. But it doesn’t mean the second has no recourse, or that the bank isn’t compensated by the PSA or stand to receive substantial bail-out cash from the federal government.

A solution to the problem is to put pressure on the second lender to accept the short sale or the first lender to contribute more. The first lender might back down and agree to pay more.

  1. No Release of Personal Liability

Apart from eschewing the stigma and pitfalls of foreclosure, many sellers do short sales because they believe they’ll get a release of personal liability. Borrowers deserve to be relinquished from the mortgage, to know the lender will not pursue them for the deficiency after the transaction closes.

Granting the short sale and releasing a seller from personal liability are two different things. A bank can accede to do a short sale and still reserve the right to pursue the seller for the amount unpaid. Generally, if a short sale letter does not categorically address the issue, the seller is not relinquished.

The solution is to insist on being relinquished. The bank will tell you it cannot change the verbiage, but it’s the negotiator who chooses not to be bothered. Banks can and do change the clause. Insist on it. If your agent can’t get it for you, hire a short sale lawyer to obtain the release of liability.

Short Sale Pros & Cons

Short sales can help a homeowner out of a difficult situation, sparing him the stress and embarrassment of a long, drawn-out foreclosure process. However, there are drawbacks to the short sale process. Of course, you will lose your home – but that will still happen when the bank forecloses. You will also walk away without a penny of profit from the sale. And, your credit score will take a hit.

Typically, the perfect situation would be that you mysteriously make up for lost time with your home loan installments and keep your home. In any case, for an increasing number of Americans, that is not a reasonable plausibility, so it truly is to your advantage to play an active role. This is the thing that a short sale is about – confronting the issue, rather than just hiding from your moneylender and hoping the issue will go away or, more terrible, leaving the property.

Why Would a Lender Agree to a Short Sale?

Why might your moneylender let you walk away from the home and overlook the deficit on your credit? To spare time and cash. Foreclosures are costly and tedious for loan specialists. Once the lender understands that foreclosure is inescapable, a short sale might appear like the lesser of two evils. Also, short sales help the moneylender look great on paper – the property was never recorded as a real dispossession, which helps the lender’s numbers.

In a short sale, the lender is already concurring to take a discounted or lower payoff on the loan, should they concur to the short sale. The equity position, that is, the property owner, is in the first loss position (as he would be in the first gain position if the property had appreciated instead of losing value). Because of leverage, customarily the lender in a short sale takes a much more preponderant hit than the owner ever will.

This said, there is great liability for a dealer to attempt to cheat the bank by undercutting a home and taking any returns from the deal. A respectable real estate broker won’t partake in extortion with a customer as it at last is not in the seller’s best advantage.

As of late, many lenders have started collaborating with the Home Affordable Foreclosure Alternatives (HAFA) program. This government sponsored short sale program sets pre-approved short sale prices for any sale of properties and also approves three thousand dollars ($3, 000) in moving costs for the seller. Because this is authorized by the lender, it is permitted in a short sale.

Pros of Doing a Short Sale

  1. Avoid Foreclosure

A short sale allows the homeowner to avoid foreclosure, the legal process employed by lenders to enforce payment of a mortgage debt. The homeowner must move from home before the public foreclosure auction. A short sale allows the owner more time to sell the house and find a new spot to live.

The average legal cost to the homeowner going by way of a foreclosure is around $7, 500, according to the U. S. Congress Joint Economic Committee. Add in any additional costs that can accumulate during the sometimes lengthy foreclosure process, which could be just the tip of a hard financial iceberg. And if the homeowner struggles to afford payments, the foreclosure could eventually lead to a financial predicament where bankruptcy — having its significant credit implications for the borrower and costs with the lenders — may be the only option. Therefore, if a foreclosure is generally avoided, it’s in the best interest of everybody involved.

  1. It Can Safeguard Your Credit

From a lender’s view, it’s better to recuperate a portion of a mortgage loan than to soak up a total loss. Therefore, in lieu of a foreclosure, banks will often acknowledge a short sale. This allows the lender and homeowner to end up in a better position.

One concern for many homeowners, however, is whether the financial institution will sue for a deficiency judgment just after the short sale. In an attempt to recover the difference in the amount that was initially paid and the sum of the loan, the bank can file case against the homeowner. A deficiency judgment will appear on a homeowner’s credit report and have a damaging impact, just as a foreclosure would.

But rather than endure a pricey and time-consuming litigation process, a bank will cut its losses with homeowners who are unable to pay their mortgages as a result of proven hardship, such as the divorce or decrease in income. And the reduced cost owed will ease the burden on the homeowners and not irreparably damage their credit.

  1. It Can Offer the Seller Relief

Real estate sales generate a flutter of activity relating to the buyer and the seller, and they’re often stressful of course. But they don’t compare to the pressure that a homeowner is under a foreclosure. The major credit hit, the drawn-out legalities and the general stigma connected to foreclosure is usually quite unnerving.

Short sales are not exactly risk-free on the subject of the seller’s credit rating, and they will not completely diminish this financial implication when homeowners cannot pay for a house that they purchased. But the sale will open the entryway to solutions for homeowners which may allow them avoid legal action plus the lengthy, laborious foreclosure process.

Cons of Doing a Short Sale

  1. Financial implications

Lenders may consider getting a deficiency after a short sale in some states. The collateral amount sold is determined by the difference between the balance of the mortgage loan and the price of the property. The borrower may be liable for taxes by the IRS, on the amount forgiven by the lender.

  1. Selling Obligations

The homeowner must list the home available and find a buyer to accomplish a short purchase. Some lenders require a real estate agent be used for the sale. The short sale application involves the seller providing the lender with solid proof, such as the borrower’s pay stubs and proof of hardship. A seller who has a high-paying job or assets might have a harder time carrying out a short sale with a lender.

  1. Bank is in the Driver’s Seat

When you offer a house in the standard way, you give orders. You set the listing value, you negotiate offers, you accept or dismiss a deal. In a short sale, you are only one player- – and not an essential one at that. In a short sale, the dealer puts the house available to be purchased and signs the business contract, yet it is truly the moneylender that chooses whether or not a short sale can continue, sets the time span and negotiates the price.

Short Sale Tax Break Extended

A short sale is an option for the homeowners who are burdened with underwater homes or mortgages they cannot afford to get on track financially again. However, the short sale itself is not the end of the road. You can still have a deficit balance or an unsecured promissory note to settle with the bank, you are concerned about your credit score and your ability to get a new mortgage, and you may also have the income tax obligations of short sale.

But, there is good news; The mortgage forgiveness debt relief has been extended to cover the whole of 2016 for short sale homeowners.

What’s Mortgage Forgiveness debt relief?

A while back, there was a tax forgiveness program issued by the central government in 2007 that waived tax collection on the “phantom” income, this is the sum the IRS charges at whatever point a bank discharges a vender from an insufficiency, the borrower is taxed on the measure of overlooked obligation. The program sunsetted in December 2013, and to date, has not been restored. Sometime later in 2014, in any case, Congress re-tended to the tax assessment pardoning program, and the House of Representatives passed a bill to augment the tax absolution through 2014.

A report coming from RealtyTrac estimated that from the first three quarters of 2014, there were more than 170, 000 short sales representing a home loan debt forgiveness of $8. 1 billion total.

The average short sale features a mortgage forgiveness of about $75, 000, which if the tax break expired could well be counted as income by the IRS.

RealtyTrac also estimated the potential taxes on the average short sale to be $22, 114, which would have brought the sum of tax liability to $2. 7 billion. The Mortgage Debt Forgiveness Act was set to terminate toward the end of 2015, and without an augmentation, any home loan absolution accomplished in a short sale would have been considered income for property holders whom banks permitted to offer their homes for not exactly the measure of their home loan amid 2015.

Yet, an extension to the Mortgage Debt Forgiveness Act was incorporated into the financial 2016 government apportionments and tax relief bill, which passed both the House of Representatives and the Senate in late December.

Short sale tax relief extended until 2017

Despite the fact that most housing marketplaces have rebounded from the recession lows, this rigorous fact remains: About 7 million homeowners perpetuate to be stuck in the tar pit of earnest negative equity, with mortgage debt at least 25% higher than the value of their property, according to research firm RealtyTrac.

Many of these owners are withal hurting financially. They are behind on mortgage payments, often in negotiations with their lenders on ways to modify their mortgage terms, knock off a portion of their debt or do a short sale — selling the house for less than the mortgage amount owed to an incipient buyer, with the lender forgiving the unpaid balance. Ameliorations in housing prices have largely bypassed these folks, as has the overall economic recuperation in the last several years.

The debt forgiveness law expired at the cessation of December and is now dead. Owners who are currently negotiating or orchestrating loan modifications or short sales involving abrogation of portions of what they owe in 2015 have no licit bulwark against immensely colossal tax bills in 2016.

Under the federal tax code, if a lender forgives mortgage debt as a component of a mortgage modification or other arrangement, that amount will be treated by the IRS as mundane income and taxed accordingly. Typically the tax bill runs into the tens of thousands of dollars.

Two congresspersons — Nevada Republican Dean Heller and Michigan Democrat Debbie Stabenow — presented a bipartisan bill that would extend the home loan tax relief for qualified property holders through the end of 2016. Both Heller and Stabenow speak to territories that were hit hard amid the housing bust and still have critical quantities of submerged and fiscally upset homeowners.

Negative equity is a national issue — from Rhode Island and segments of Maryland to Arizona and non-seaside California —In Florida, for instance, four metropolitan territories rank among the most noteworthy with negative equity levels across the country. In Tampa, 52% of extremely underwater properties were also financially distressed. In Miami, it’s 46%. Other expansive metropolitan markets with bizarrely elevated amounts of negative equity joined with financial distress incorporate Chicago (48%) and Cleveland (45%).

The administration also knows this and through this bill, short sale sellers would be able to sleep at night not having to worry about big tax obligations by the IRS. However, this might not necessarily apply to everybody.

Who is Eligible?

Keep in mind that not all real estate investment qualifies for the debt cancellation tax exemption. To be a candidate, the property should be your “main house ” the key residence you occupy almost all of the year. So if you did this short sale on some sort of Miami Beach condo which you use during the wintertime months but your home is elsewhere for all of those other year, it won’t qualify. Ditto for local rental properties and real estate investment you use largely for business functions. Your lender is obliged to report debt cancellations (over $600) on the IRS and should currently have sent you a questionnaire 1099-C showing the quantity forgiven. If you haven’t received the proper execution, or you disagree on what much debt has been written off, get in touch with the lender.