Another Virginia Short Sale Approved!

Excited for my client! She had owned this property for many years as a rental and the value had just not come back. Every month she bleed money on this rental and it caused her extreme hardship. We were able to get a full deficiency release ( which means they won’t come after her for the 100K difference between the loan amount and the sales new sales price)!

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What Is A Pre-Foreclosure?

The pre-foreclosure status is when somebody is starting to miss payments. They’re 30, 60, or 90 days behind. It’s inevitable that they’re going to get a letter from the bank or an attorney that says that the property is now going to go to auction. Once they’re at the 30, 60, or 90 days that’s kind of the pre-foreclosure period and people need to take action sooner rather than later because it’s important that the bank gets all the necessary documentation they need in order to do a short sale.

That documentation is going to be the last two months of bank statements, the last two paystubs, the last two years of tax returns along with a hardship letter, along with a financial form that kind of shows all the income flowing into your house and all the expenses that flow out. Essentially that’s the short sale package in a nut shell, along with any necessary disclosure that the bank may want or that the agent may also want.

The sooner somebody can address it the better their case will be during the entire transaction. Gathering the paperwork is a majority of the battle for people. If you make a really strong case for a short sale and you presented all the documents the way the banks want them there is a good chance that if a foreclosure date has been scheduled you can stop the foreclosure.

Are There Short Sale Tax Implications?

Under the Mortgage Forgiveness Debt Relief Act of 2007, if somebody does a short sale in the taxable year of 2013 there are no tax implications if it is your primary residence. That tax amnesty may end at the end of 2013, we don’t know, but if it does end at the end of 2013 what would happen is if somebody did a foreclosure in 2014 and it wasn’t extended somebody could end up owing taxes on the deficiency debt that was waived.

Let’s say they owed $100,000 and the bank forgave all $100,000, well the IRS can still come after you as if you made $100,000 and tax you on that, at whatever your tax basis is. In the year 2013 you’re still okay, however in the year 2014 we don’t know what’s going to happen. I suspect they’ll probably extend that amnesty debt relief act in 2014, but I am not for certain. There is a way around it, you can meet with your accountant and if you can prove insolvency, then essentially your accountant can make that tax liability go away. If somebody goes to the website and types ‘tax implications for a short sale’ they’ll get all the rules that are associated with their specific case.

There is a difference if it is an investment property vs. a primary residence and people need to look into that. What I always say is consult with a tax accountant because they know best and you should also consult with an attorney during the process to just make sure that you understand the entire process.

How Do I Write a Short Sale Hardship Letter?

In order to qualify for a short sale you first have to be able to prove some sort of hardship. Hardship can come in a lot of different forms. It can be job loss, medical, excessive debt, divorce, or job relocation. There are a lot of things that would qualify somebody to put them in the category of hardship to attempt a short sale. If you fall into or somebody falls into a category like that, then you need to prepare a hardship letter that essentially describes what the hardship is.

So, if you’re going through a divorce and you’re being forced to sell the property because of a divorce decree that should be in your hardship. Perhaps both parties were qualified for that hardship initially, but now one party is forced to move out.
They have to find their own place to rent and now the other party can’t support the mortgage payment by themselves, so divorce has created a hardship. That has to be in the letter and be explained in detail to the bank so they understand what the hardship is. You can go online and Google hardship letters or short sales and you’ll find good examples of hardship letters out there.

How can I prevent a short sale?

If somebody has decided to do a short sale I don’t see any reason why they would want to prevent a short sale. What they probably want to do is prevent a foreclosure through a short sale. If you decided you didn’t want to do a short sale the option would be to do a loan modification. So, if you wanted to keep the house then you would see whether or not you could actually modify your loan in order to reduce the payments. If you qualify for it the banks will add those additional payments that you missed possibly to the back of the loan, reduce your interest rates, or in rare cases they do a principal reduction, which are things that I have heard about, but have really never seen.

If somebody wanted to figure out a different option besides a short sale it would be a modification. Most modifications we find don’t work, but some do, so you want to attempt that first. If a modification doesn’t work and you’re still behind on your mortgage payment the next best option would be to do a short sale in order to prevent the foreclosure.