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 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.

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.

Virginia Tax Debt Relief

The amount of money that you owe to the IRS varies from year to year, and this can make it difficult for taxpayers to estimate and plan for their tax bill. While you may have taxes withheld from your paycheck regularly, other factors related to the deductions you qualify for, your tax rate, if you sold a home or other assets and more can all potentially result in a much higher than expected tax bill. If you are currently facing a huge IRS bill that you are unable to pay, Virginia tax debt relief may be available.

Virginia Tax Settlement
When you fail to pay your tax bill to the IRS, you may face penalties related to monetary fines, wage garnishments, levies and even imprisonment in some cases. Virginia tax debt relief is available to help you settle the debt and move on with your life. While there are different strategies that a debt relief company may recommend based on your unique situation, an offer in compromise is a top solution. With an offer in compromise, the IRS may agree to accept hundreds or even thousands of dollars less than you actually owe, and you may never have to pay the remaining balance to the IRS.

How an Offer in Compromise Works
Virginia tax debt relief can help you to re-establish solid footing with your finances, and an offer in compromise is a popular option that works well for many. However, there are requirements and strategies that are more effective for taxpayers to use, so those who are interested in this type of Virginia tax debt relief may seek professional tax debt services for the best results. With an offer in compromise, you must formally make a request to the IRS and must provide solid reasons why the IRS should accept the offer. Your tax debt company can assist you in preparing this request.

While the IRS could turn down the offer in compromise request, many will find that this type of Virginia tax debt relief is highly effective. The consequences associated with not paying your taxes to the IRS are serious and significant, and you should take time to explore debt relief options as soon as you realize that you are unable to pay the full amount owed. If you would like to explore debt relief options in greater detail, contact a tax debt service company for personalized information about your options.

Short Sale Tax Implications 2014

Property values may rise and fall periodically due to fluctuations in the market and other factors. Because real estate values can decline in any market, there are some situations when an individual needs to sell a property quickly but may be upside down with a mortgage loan. If you owe more on your mortgage than the property is worth and cannot wait for equity to build in the property, you could sell the property for a loss and pay off the remaining mortgage balance with your own personal funds. Another option is to pursue a short sale. A short sale occurs when a lender agrees to accept a lower amount for the mortgage payoff than what is owed. While this can benefit you financially, there are some tax implications that you should consider before you proceed with a short sale.

The Current Tax Rules Regarding Short Sales
The tax code changes regularly, and the short sale tax implications 2014 will impact you if you completed the sale of the property in the 2014 tax year. When you sell a property, you are required to pay capital gains taxes on the profit from the sale when you file your tax return. There are homestead exemptions and other rules that may apply, and you can work with an accountant to learn more. When you sell a property on a short sale, the lender is forgiving a portion of your debt on that property. As part of the short sale tax implications 2014, you should be aware that the lender is required to report any canceled debt to the IRS.

Exclusions to this
With short sale tax implications 2014, you should also be aware that the Mortgage Forgiveness Debt Relief Act has created a homestead exclusion that may apply to you. If you lived in the home as your primary residence for two of the last five years, you may be able to exclude up to $250,000 of capital gains for individuals or up to $500,000 of capital gains for married couples.

The short sale tax implications for 2014 may mean that some property owners need to pay taxes on their property’s sale even when pursuing a short sale. However, the homestead exclusion may apply to many individuals. If you are interested in learning more about this, you may seek advice from your accountant before making the final decision to pursue a short sale.

What Does a Short Sale Cost Me?

For homeowners who can no longer keep up with their mortgages, worrying about fees and expenses to do a short sale is the last thing they need. Fortunately, using a short sale expert to help your sale doesn’t have to cost you an arm and a leg.

When you use our team of experienced short sale agents:

You will not have to pay commission on the sale.

You will not have to pay any out of pocket fees.

You will be cleared of deficiency debt.

This is not necessarily the case (especially the deficiency debt erasure) with all short sale real estate agents, so make sure you ask!

There may be some costs along the way that will make the process smoother if you can at all afford to pay them. These include any unpaid Real Estate Taxes, Tax Liens, HOA fees, Condo fees, and any other liens on the property. At the very least, you need to let your negotiators know about any and all of these unpaid costs as soon as possible to coordinate your strategy for negotiation with the bank. Finding out about an HOA lien on the property at the last second can derail an otherwise progressing short sale!

If you think a short sale might be the right option for you, you can give us a call to find out more about how our team can help you get your underwater property sold at 703-212-3344 today.