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 Tax Liability? What Happens After the Short Sale?

In many cases, people choose to sell their home in a short sale procedure because they can no longer afford to keep their homes. Banks consider short sale an alternative to foreclosure and while the borrower might find the short sale option better than a foreclosure, he still must carefully consider the tax implications.

Let’s assume you owe $100,000 on your mortgage and you are no more able to make your mortgage installments. Because of the condition of the economy you might just have the capacity to offer your home for $80,000, leaving the bank $20,000 short. The bank consents to close your document after you pay the $80,000 – all things considered, since 80% is better than nothing.

The problem is that the other 20% is not a gift or free ride. The government sees that other 20% as “income” even though you have never had the money in hand. When you prepare your income tax return you have the $ 20,000 of short sales as income for that year to record and will be required to pay additional income tax on it.

Keep the extra taxes you owe in mind as you complete your short sale process. You need to start putting some extra money away to be prepared when tax season rolls around again. A person would only pay tax if the home was an investment property in most cases due to the Mortgage Debt Relief Act. When this law was enacted, it benefitted those short selling their principal residence.

The 2007 Mortgage Debt Relief Act

In the past, homeowners applying short sales or deeds in lieu needed to pay the amount of the forgiven debt load. However, the Mortgage Forgiveness Debt Relief Act of 2007 (HR 3648) changed this for certain loans.

The new law provides for tax relief if your deficiency stems from the sale of your principal residence (the home that you live). Here are the rules:

  1. Loans for your primary residence: If the loan was secured for your principal residence and was used to buy or improve the house, you can exclude generally up to $ 2 million of forgiven debt. This means you do not have to pay the deficit.
  2. Loans on other properties: If you default on a mortgage that is secured by property that is not your primary residence (e.g. a loan on your vacation home), you will owe tax on the deficit.
  3. Loans secured by yet not used to enhance main living place: If you take out a credit, secured by your main residence, however utilize it to take a vacation or send your tyke to school, you will owe charge on any deficit.

How to deal with the 1099-c

When a homeowner decides to sell their home, but the house is worth less than they owe on their mortgage (for their Lender), the Lender takes a loss and the homeowner makes $0 on the sale of their home. The loss is negotiated with the lender by your broker.

During the year the short sale occurs the Bank shows a loss in their accounting. Therefore in order for them to indicate a loss, someone has a profit. That person is the homeowner (Seller). The owner is issued a 1099-c, this shows income.

Although the Seller did not get any income, this 1099c, is the phantom income.

The next question is how to deal with the 1099-c.

If the home was your primary residence, The Mortgage Forgiveness Debt relief Act of 2007- INTERNAL REVENUE SERVICE Publication 4681, applies to you. You must have lived in the home for 2 out of the last 5 years, it must be your primary residence and it cancels any debt around $2, 000, 000. This means you’ll not have to pay income tax on the 1099-C, the income will then be canceled or void.

If the house was an investment property, there is a way to avoid the taxes too. The first step is to check with your accountant, then see if you can make technical insolvency claim. In a nutshell, it means that your debts outweigh your assets, in the current real estate market, this is simple. You should claim technical insolvency at the time of the short sale and the 1099-c gets to be void.

The bankruptcy exemption to tax liability: If you don’t get an exception under the Mortgage Forgiveness Debt Relief Act, you may still be eligible for tax relief. If you are able to show you were legally insolvent at the time of the short sale, you won’t be subject to paying tax on the shortage.

Legal insolvency happens when your total debts are greater than the value of your entire assets (your assets are the worth in your real estate and personal property). To use the insolvency exclusion, you’ll have to prove to the satisfaction of the IRS that your debts went beyond the value of your assets.

In short, a large part of whether tax liability of a short sale is dependent on whether the house was a primary residence or not. In most cases, you will pay taxes on a short sale if it was your primary residence. However, all sellers considering the short sale need to consult their tax advisors for more information on whether or not they will be subject to tax liabilities after the sale.




Virginia Short Sale Laws You Should Know About


Foreclosures, short sales and bank claimed properties are making up a bigger rate of the stock of accessible properties nowadays. We felt immune for quite a while, but these entrenched correction has also had an effect here in Virginia. Here are some basic things you should know about short sale and their disposition.

  1. If it’s a deal you want, risk is a part of the equation. When you get hold of a foreclosure in Va, you are buying it “as is” which could include unfiled technicians liens or some other clouds on title. Vigorous research which includes property inspections and also title work offers you some idea on the deficiencies, but there tend to be no guarantees and no recourse should you be surprised. Still, picking up home for well underneath market value and also turning them into rentals is usually an excellent investment for the people with the assets to rehabilitate these properties and wait for the marketplace to rebound.
  2. REOs or bank owned properties are usually those properties that have gone through the particular foreclosure process and also have been bought back by the bank. These properties are generally in better situation than foreclosures because the banks are likely to protect their assets to some extent. They are most often listed with Realtors in order that they are easily accessible for viewings. These “bank assets” are usually priced below market value to go fast. REOs often possess multiple offers when they come available on the market. Astute buyers realize that they cannot expect any concessions either in price tag or repairs, and if needed financing they should present a full loan application with the financial institution that owns the home with their authentic contract.
  3. A short sale occurs when a seller cannot acquire enough money from the sale to pay off existing debt. If the seller has no other assets to go after, the bank can agree to let the property go for a price lower than what is owed. It may happen that you negotiate with the owner of the house, and you would have a ratified contract with the owner, but you do not have a deal until the bank has signed off on the short sale. Short sales are clearly more attractive to banks compared to foreclosures which cost banks $50, 000 on average and will become less cumbersome in the foreseeable future as banks recognize the necessity of moving inventory.

So, you need to sell a short sale in Virginia, here are few regulations you should know about:

  1. The Short Sales Request

Homeowners who would like to try a short sale in order to avoid foreclosure must request permission for this from their loan provider. Lenders will often approve a short sale to stay away from the lengthy and costly means of foreclosure and avoid getting the home as a real estate owned property.

Lenders will most likely approve the short sale of the home. Home owners who ask for a short sale from their bank may be required to prove financial hardship such as a job loss or medical bills. Home owners might also need to provide the lender with pay stubs and also bank statements.

  1. Deficiency Lawsuit

Homeowners who sell their apartment through the short sale process may want to obtain information on paper from their lender regarding credit rating and deficiencies. Once the property is sold this way, there will certainly be a difference in the actual loan amount plus the amount received in the short sale; this is generally known as a deficiency.

Virginia lenders may file case against the homeowner for the amount of the deficiency, unless the homeowner receives a statement in writing that the lender won’t sue for a new deficient balance. Lenders often report a short sale as satisfaction on the debt. However, lenders may report this short sale as settled at under the full sense of balance owed, which can damage the homeowner’s credit rating. This may certainly be a better option than foreclosure, which can stick to the homeowner’s credit report for up to 10 years.

  1. Taxation

Homeowners in Virginia should seek the advice of a tax professional before obtaining approval for a short sale. When a house is sold in a short sale, the lender may claim the amount of the debt that had been forgiven as income provided to the homeowner. This means that homeowners may be forced to pay tax on this amount the following year. Homeowners who meet standards of insolvency by the IRS at the time of the short sale cannot be required to pay tax on this amount.

  1. Real Estate Brokers

There is absolutely no state law that will require you to hire a licensed agent to sell your home in a short sale. The bank however might have to have that you list your home for sale with a local real estate professional to ensure you are undertaking everything possible to have fair market value for that property. They can’t force you to list your home with an agent, but they can refuse a short sale if you don’t.

  1. Financial Info

For the most part the bank will need to see that you don’t have the ability to keep on making your credit installments until it is paid off as concurred when you acquired the cash. Because of this they will need to see a reason for you to sell your home. If you claim that you cannot afford to make your payments, they will require proof. This is done by having you supply tax returns, bank statements, and recent paystubs and a short sale hardship letter. There are some short sale programs that require a restricted measure of documentation which would dispose of the need to supply private financial documentation.

Legal Advice On Short Sales

If you’ve found yourself in a difficult situation when it comes to your mortgage and you’re considering foreclosure, rest assured you have a better option. A short sale or pre-foreclosure sale is an agreement between you and the mortgage company that you will sell your home for less than the balance remaining.

You should consider this option if:

  • You’re behind on payments
  • Your home is worth less than you owe
  • You haven’t been able to sell your home
  • You’re having financial difficulties
  • Refinancing is not an option

It’s true that foreclosure has a negative effect on your credit, so it is best to avoid it if you can. Not only that, you can see the bank coming back at you years later to recoup the amount you still owe on a past mortgage. They can take legal action and dock your pay to get the owed amount back.

Though a short sale may take up to 120 days, the benefits are worth it. Not only will you be able to sell your home at or around market value, when you seek legal advice on short sales from a professional, you’ll be able to agree upon the price with the bank and buyers and discover other helpful options to ease the stress.

Some acceptable reasons for a short sale include, but aren’t limited to:

  • Job loss or reduced income
  • Military service
  • Death
  • Medical bills
  • Divorce or separation
  • Incarceration

Because there are plenty of legalities involved that the average home buyer or seller won’t understand, your smartest decision is to work with a Corporate Counsel like Michael Benmira for legal advice on short sales. You want to be in the know about all the best options currently available to you during the process. In some cases you can even get help relocating, which is a burden many face after the final sale.

Don’t fall prey to the banks. Get help with negotiation of deficiency debt and come to an agreement that benefits you and your particular needs. Have help with hardship letters, current tax rules, and more. In addition, working with an individual who is CDPE, or a Certified Distressed Property Expert means that you have help from someone who understands all the complexities and give the best legal advice on short sales.

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