The short sale process from A to Z – Short selling your Fresno home, step by step.

Step one: Do your due diligence. Search the web and find out as much as you can on the process. There are a lot of misconceptions about short sales. Be sure a short sale is the right thing for you and your family.

Step two: Hire an agent. I know of a really good one, visit his website here. You need to hire an agent who has done many short sales. Don’t worry about commissions because the bank pays all commissions and closing costs for you. And you can rest assured the job is getting done right.

Step three: Put your home on the market. At this point your agent will list your property for sale and price it at “today’s current market value”. Don’t worry about the list price either…You see, the bank doesn’t care about the amount you owe or how much they may lose. As long as the home sells for its current market value, there will be no issues about price.

Step four: Hardship documents. Your agent will request you to gather the required documents need for your “Short Sale Package” that will be submitted to your lender(s). The required documents are;
                a. Letter of Authorization (Authorizing you agent to speak with your lenders.)
                b. Hardship letter
                c. Financial information form (most lenders have their own version)
                d. Statement of information
                e. Two most recent paycheck stubs
                f. Two most recent bank statements
                g. Two most recent 1040’s (first two pages only)
If you are missing any one of these you will need a short written explanation, signed and dated.

Step five:  Accept an offer for submission. Once an offer or offer(s) come in on the property your agent will have you accept the best offer and submit it for review by your lender(s). The offer will be packaged together with all your “Hardship Documents” and faxed to the appropriate department for review and acceptance.

Step six: The waiting game. This is the most misunderstood aspect of short sales both by sellers and buyers alike. But as long as everyone is educated on the timeframes associated with short sales there will no surprises for anyone involved. It’s really the listing agents job to educated everyone on the expected timeframes.  The average timeframe for a short sale is 45-60 days for lender approval. There are several steps involved in the lender review process. Here’s a quick break down.

a. Preliminary document review (3-7 days) – Verifying all documents needed for short sale are there.
b. Assign to a negotiator (5-10 days) – The file is assigned to a negotiator for processing.
c. BPO ordered (7-14 days) – A BPO is similar to an appraisal. To get current value of home.
d. Counter offer or acceptance (7-14 days) – If the offer is within 85% of value they will usually approve the offer. If the offer is to low, the lender will counter with a higher price.

These time frames will be extended if any needed documents are missing from the file.

Step seven: Received short sale acceptance letter and open escrow. Once the short sale is approved the negotiator will send an acceptance letter over and your agent will open escrow with a local title company. It’s very important that your agent has a great working relationship with the title company chosen to handle the escrow. These short sales are very tricky, and an inexperienced escrow officer can kill a deal. The acceptance letter should state that the “Lien” will be released and how it will be reported on your credit report. Always strive to have the short sale reported as “Paid as agreed” on your credit report.

Step eight: Close the Deal! The average escrow will take 45 days to close. At this point you can rent for 2 years and buy again or you may be able to buy again right away.

Jeremy Smiley, Realtor
Short Sale Specialist
London Properties – Fresno, CA
(559)790-8760

A Short Sale is unique.  Although you are the homeowner according to the note & or deed recorded when you purchased your home…because the home is selling for “Less” than that original note, the lender/bank now has to approve the terms of the sale and will decide how much of a reduced price will be accepted for the property.  With that, the bank will also decide if they are going to offer money towards closing costs, home warranty, termite…fees etc.

When you are asked to sign a purchase offer, the buyer may ask the “seller” to pay closing costs.  Remember, the bank holding the title has the ultimate say on what will be paid in the transaction. These fees or costs will be paid from the proceeds of the sale.  If approved…the closing costs will be paid from the proceeds.  You as the seller, will not be responsible to pay for the closing costs at close of escrow. This is also true of real estate broker commissions. Commissions are negotiated by the broker and are also paid from the proceeds. Again, you will not be responsible to pay commissions.

Another very important thing to be aware of as the homeowner-

When you list your home for Short Sale, in Fresno you will be asked to sign a Short Sale Listing Addendum.  This form explains the Short Sale process and ultimately allows you to cancel the sale at anytime, for any reason.

What does this mean for you?

If you are not comfortable with the terms the lender has offered as an approval, CANCEL the sale.  You are in complete control.  Do remember that you will have to deal with the possibility of Foreclosure if you refuse the terms as agreed by the bank.

Make sure you have an experienced and trained Short Sale Agent represent you through the sale. Experienced? 10+ closed short sales. Ask to see previous clients Approved short sales.

I have never had a sale approved that the homeowners were not thrilled with.

Jeremy Smiley, Realtor
Short Sale Specialist
London Properties
Fresno, CA
(559)790-8760

Top 10 Fresno Seller Short Sale Questions, Answered.

Number 10
Q. I can’t make my house payments but I do have an ability to pay back all or part of the negative equity. Also, I want to preserve my credit score…is a short sale right for me?
A. Probably not. In cases where the seller can pay back all or part of the negative equity (usually to the 2^nd lien holder) it makes sense for them to work out a repayment plan. The lender will then release the lien and allow the home to close.

Number 9
Q. If I pay mortgage insurance and default on my loan, wouldn’t that cover the deficiency amount?
A. The mortgage insurance is not there for your protection, it protects the mortgage lender.

Number 8
Q. Do I have to have my home ‘Approved’ by my lender prior to offering it for sale as a short sale?
A. No. Technically speaking, there is no such thing as being ‘Short Sale Approved’. The actual approval only happens with an accepted offer.

Number 7
Q. I just missed a payment and I know I will miss more….how long does the foreclosure process take and is there time to do a short sale?
A. The foreclosure process takes differing times depending on your state.  In the Midwest a foreclosure can take over a year. In California it’s taking 6+ months.  Generally speaking a well-priced short sale being processed by an educated short sale listing agent will sell and close in less than 120 days.

Number 6
Q. Will I still have to pay property taxes if I do a short sale?
A. Property taxes will always have to be paid as part of any accepted short sale. Whether it’s you or the lender depends on their policies and the specific agreement you reach while negotiating the short sale.

Number 5
Q. I owe more than my home is worth and I can’t make the payment, do I have to somehow qualify for a short sale?
A. The simple answer is NO. If someone can’t make their payment and they are otherwise insolvent they qualify for a short sale. Note: insolvent simply means their total debts are great than their assets.

Number 4
Q. Do I have to pay income taxes?  I have heard that I will get a 1099. Will the loss the bank takes be treated as a taxable gain to me..the seller..is this true?!
A. It WAS true, now it’s not. Consult your Tax Attorney or Qualified CPA.  Very recently the tax law was modified and now most people who do a short sale will have no taxes due.

Number 3
Q. How do you, my listing agent get paid?  Who pays your commission?
A.The bank will pay the commission along with all the other usual closing costs.

Number 2
Q. Do I have to miss a payment to do a Short Sale?
A. No. Late last year most major lenders started accepting short sale offers from sellers who have never missed a payment.

Number 1
Q. I want to do a short sale and have a 2nd mortgage, does this make me ineligible?
A. No. Both of your lenders will need to be satisfied in some way to complete the short sale. If your first lender will be paid off by the sale, then you just negotiate the terms with the second lender. Most short sales do involve 1^st and 2^nd lien holder.

In a short sale, the lender agrees to settle the debt owed on the property for less than the full amount. “Settled” means that the lender is writing off the debt (which is why you get a 1099 after a short sale for the amount of debt forgiven) and that they are not going to go after you for the money they lost by filing a deficiency judgment in the future.

2. How will I know if I will qualify for a short sale?

Give me a call or submit your question to the right. I can tell you over the phone or through email whether you will likely qualify. The overwhelming majority of our clients are approved for a short sale because 1) we know how to submit the short sale package in such a way that the lenders will approve them and 2) we have a tremendous amount of experience with short sales and negotiating with the lenders.

3. How will a short sale affect my credit?

This is a great question as there is a lot of misinformation on the internet about this topic. A short sale is recorded on your credit report as “debt settled for less than the amount owed”. This typically will result in a relatively minor hit on your credit compared to a foreclosure or late payments on your mortgage. I say ‘”typically” because it affects everyone’s credit differently. The more established your credit, the less of an impact it will have on your score.

The reason you often hear and read that a short sale will drop your credit 100 points or more, is that, many people, when they do a short sale, stop making their mortgage payments. If you stop making your mortgage payments for 4 months, regardless of whether you do a short sale or not, 4 months of missed mortgage payments will have a significant negative impact on your credit. In other words, it is the missed mortgage payments that have the big impact on your credit, not the short sale itself.

With this said, if you are already behind on your payments, you have already incurred the majority of the hit that a short sale will have on your credit. Doing a successful short sale at this point will insure that your debt is settled with your lender.

If you are current on your payments and can stay current throughout the short sale process, you will save your credit to a large extent.

Finally, if you do stop making your mortgage payments, there are various credit repair agencies that can repair your credit by removing late payments from your credit report after a short sale.

4. Will I have to pay federal taxes on the money my lender loses in the short sale?

There are several different scenarios with regard to whether or not you will owe federal income taxes on the loss the lender takes in a short sale.

When you do a short sale, your lender is agreeing to settle the debt on the property for less than the amount they are owed. The IRS therefore allows them to write off this loss, which is why your lender will send you a 1099-C after the short sale.

The IRS considers “debt relief” to be income for tax purposes. In other words, if your lender writes off $50,000 on your short sale, they will send you a 1099-C for that amount, and you would include that when you file your income taxes. The “C” stands for “Cancellation of Debt” and the law says cancelled debt is taxable as income.

There are however a few exceptions that most people who do a short sale qualify for that exclude them from having to pay taxes on their short sale.

Thanks to the Mortgage Tax Debt Relief Act that George W. Bush signed into law in January of 2008, homeowners who do a short sale on their primary residence, and have a purchase money loan (in other words, they have not pulled cash out of their home with a cash-out refinance) pay no taxes on the loss that their lender incurs in a short sale.

Homeowners who have pulled out cash from their home but have put that money back into their home to “substantially improve” their home, also are excluded from taxes on the short sale.

All other short sale scenarios – if you pulled cash out on your primary residence but spent it something other than upgrading your home or if you are doing a short sale on a second home or investment property – result in a taxable event unless you qualify for the “Insolvency” exclusion.

The IRS does not require you to pay taxes on the loss the lender takes in a short sale if, at the time of the short sale, you are insolvent. Insolvency means your debts (including your mortgage) exceed the value of all your assets. In other words, if, at the time of the short sale, you have more debt than you do money or assets, you are considered insolvent.

Many people who find themselves facing a short sale are in exactly this situation and are thus excluded from paying taxes on a short sale. We recommend you check with your CPA or accountant or go to the IRS website and look up IRS Form 982, which is the IRS form for debt relief and short sales. The IRS gives an explanation of “Insolvency” on this form.

Finally, the time period for The Mortgage Tax Debt Relief Act was originally only slated to go until the end of 2008, however it has now been extended to the end of 2012.

5. Will I have to pay CA state taxes on the money my lender loses in the short sale?

California has passed its own version of the federal Mortgage Tax Debt Relief Act. It is Senate Bill 401, which conforms to the federal law described in detail above, but applies to California state income taxes on a short sale.

Also, debt forgiveness on non-recourse loans is not taxable in California. In other words, if your lender forgives debt on a purchase money or non-recourse loan, you are not subject to CA state income taxes.

6. Can my lender go after me for the money it loses in the short sale?

The point of a short sale is to get out from under the debt of the mortgage. This is why your lender will send you a 1099-C after the short sale. The “C” in “1099-C” stands for “Cancellation of Debt.” Your lender cannot write off their loss on their corporate taxes, send you a 1099-C so you have to pay taxes on the loss, report the short sale as a “settled debt” on your credit and then turn around and go after you for the money.

If you hire an inexperienced short sale agent or negotiator who does not negotiate a full release from your lender, then, yes, you could be liable for the money the lender loses in a short sale or end up being forced to sign a promissory note to close the deal.

We do not ever recommend that our clients sign a promissory note or close escrow without a full written release from their lender(s).

7. What if I have a first and a second loan on my property with 2 different lenders (or the same lender)?

Most people that we do short sales for have a first and a second loan, often with 2 different lenders. For the short sale to reach a successful close of escrow, both lenders have to approve the short sale and agree to settle the debt.

It is important to note that both lenders have a vested interest in doing this. The lender with the first loan does not want to foreclose, and therefore is willing to give a little money to the second in order to get them to agree to the short sale.

The second lender will get nothing if the first forecloses, so with the attitude that something is better than nothing, they will agree to take a fraction of what they are owed in order to avoid getting absolutely nothing.

8. What is the difference between a recourse and a non recourse loan?

In general, a purchase money loan is considered to be a “non recourse” loan, while a “cash out” loan is considered to be a “recourse” loan.

The difference between these two loans is that in a “recourse loan” the lender technically has recourse to go after the borrower for the money they lose in a foreclosure. I say “technically” because, for this to happen, the lender has to file a judicial foreclosure, which is rarely done in California.

The overwhelming majority of foreclosures in California are “non-judicial” foreclosures, where the property is sold at a trustee sale.

9. How will I know that I am being released from the debt?

It will be stated clearly on the bank’s short sale approval. Your lender will state in plain English (though in different verbiage depending on the lender) that they are “releasing the lien”, “accepting a short payoff to satisfy the lien”, “reporting the sale as a settled debt to the reporting agencies”, “issuing a full satisfaction of the mortgage”, “not pursuing a deficiency judgment”, or some other variation that states they are settling the debt for less than what they were owed.

Further, your bank will issue a 1099-C to you, the borrower, after the short sale, confirming that the debt has been written off and is settled. Your lender cannot write off the debt, issue you a 1099-C & then go after you for the deficiency.

10. What are the advantages of a short sale vs. letting my home go to foreclosure?

The primary advantage to doing a short sale vs. walking away and letting your home go to foreclosure is that in a short sale the debt is settled and you no longer owe the bank any money. If your home goes to foreclosure, you may still be liable for the deficiency in the event that the bank files a judicial foreclosure.

A secondary (but still very important) advantage is that in a short sale, your credit takes much less of a hit compared to a foreclosure. The impact on your credit will vary depending on how established your credit is at the time of the short sale or foreclosure.

Finally, Fannie Mae & Freddie Mac revised their guidelines in August of 2008 with regard to how they view borrowers who have filed bankruptcy, gone through foreclosure or done a short sale. Through these new guidelines, they are in effect severely penalizing those who go the route of foreclosure or bankruptcy, and rewarding or encouraging those who do short sales, which they view as the borrower doing the responsible thing in light of the circumstances.

Per recent Fannie Mae / Freddie Mac guidelines, borrowers who file bankruptcy or go through foreclosure have to wait up to 7 years to buy another home.

By contrast, the new guidelines stipulate only a 24 month waiting period after a short sale, so borrowers who do a short sale can buy again in just 2 years.

11. Are there any advantages to letting my home go to foreclosure vs. doing a short sale?

I have yet to hear a coherent argument for letting your home go to foreclosure vs. doing a successful short sale. Depending on whether you have a recourse or non-recourse loan, when you let your home go to foreclosure you either run the risk of being liable for the deficiency amount or liable for the income taxes on that loss.

Secondly, your credit will drop up to 400 points and you will not be able to buy a home or get any decent credit for up to 7 years.

Compare this with a short sale, in which the lender agrees to SETTLE the debt for less than the amount owed. If you have recourse loan, you may be liable for income taxes on the lender’s loss (just as in a foreclosure) but you will not be liable for the deficiency (and if you qualify for the “Insolvency” exclusion, you will avoid the income taxes as well).

Further, the loss that the lender takes in a short sale will be MUCH LESS than the loss the lender takes at the end of the foreclosure process. The foreclosure process takes months & months, at the end of which the lender has to process the property through its overwhelmed system (another 3 -5 months) and then put the property back on the market, all while the market continues to drop.

Finally, the impact on your credit from a short sale will be significantly less than with a foreclosure and you will be able to buy again within 2 years, compared to up to a 7 year waiting period to buy a home after a foreclosure.

12. How much will a short sale cost me?

A short sale costs the seller nothing – the lender pays all closing costs, escrow fees, commissions etc. The lender may also pay any outstanding property taxes.

13. How long will a short sale take?

The short sale process typically takes about 4 months, start to finish. It can take longer depending on how backlogged the lender is. You can live in the property for the entire duration of the short sale or you can move out whenever you wish.

14. Do I need to be behind on my payments to do a short sale?

No. This is a common misconception. You do not need to be behind on your payments or have been late on a payment to do a short sale although the lenders are more motivated to do the short sale if you are not making payments.

15. Do I need to hire an attorney to do a short sale?

It is our belief that you will be best represented in a short sale by a competent, experienced real estate agent who works every day in the real estate business, will market your property aggressively in order to attract buyers, and who is experienced at doing short sales and negotiating with lenders. In our view, an “experienced short sale agent” is one who has done at least 20 successful short sales in this downturn cycle (i.e. since 2006).

If you have questions about the tax implications of a short sale, we recommend you seek the advice of a qualified CPA or tax accountant.

If you want to explore filing bankruptcy, we recommend you seek the advice of a competent bankruptcy attorney. Call our office – we can recommend several.

With this said, a word of caution. Many attorneys seem to be preying on the fear and desperation of people facing foreclosure. Their websites use scare tactics to make people think that they would be crazy to do a short sale without first hiring an attorney, that attorneys are the only ones qualified to interpret a short sale approval, and that hiring an attorney is a normal and accepted part of doing a short sale, like hiring an attorney for divorce proceedings.

The bottom line is that this is just not the case. The overwhelming majority of short sales are conducted by real estate brokers who are experienced at negotiating with the lenders and charge NO UPFRONT FEES for their services.

Finally, many of these attorneys do not even negotiate the short sales themselves, and instead subcontract out all of the short sale negotiations. In our opinion, these short sale negotiation companies (known in the industry as “short sale mills”) are absolutely the wrong entities to entrust with the negotiation of your short sale. See the following FAQ.

16. I found an attorney’s short sale website that talks about a new law in California that, as of July 1 2009, supposedly limits negotiating short sales to attorneys ONLY. It says that from July 1 on, all short sales have to be negotiated by attorneys and not realtors. Is this true?

No. There has been a good deal of misinformation put out of late regarding this law by attorneys looking to get into the short sale business. We recommend you be very wary of any attorney trying to distort or interpret the law for his or her advantage.

The California Foreclosure Consultant Act (July 1 2009) applies to foreclosure consultants – those who collect an advance fee for modifying loans or helping borrowers avoid foreclosure in situations where a Notice of Default has been filed on the property. This Act has an exclusion in it for licensed real estate agents.

Per CA Civic Code and the CA Assoc of Realtors, The California Foreclosure Consultant Act does not apply to real estate agents facilitating a short sale except in the extremely unusual event that an agent is 1) Making a direct loan for a residence in foreclosure, 2) Acquiring an interest in a residence in foreclosure, 3) Receiving an advance fee before performing services for a residence in foreclosure, or 4) Assisting an owner in obtaining the remaining proceeds if any from a foreclosure sale of an owner’s residence.

That’s it. 99% of the short sales in CA have always been, and continue to be, negotiated and completed by licensed Realtors, not attorneys.

17. Who will be negotiating my short sale with the bank? Do you do this in your office or do you sub it out to an outside company?

I have negotiated many successful short sales and handle every aspect of the short sale process myself. I do not farm any part of the negotiations out to an outside company and recommend you be extremely skeptical of any agent or attorney who uses an outside company to handle their short sale negotiations.

Real estate agents & bankruptcy attorneys are solicited on a daily basis by the many “short sale negotiation” companies that have sprung up on the web over the past couple of years. For the agents or attorneys that use these companies, it’s a very attractive set up: they just take the listing and refer the file out to the negotiation company, and wait to see what happens.

The agent has invested almost no time or effort into the deal, so if it closes, great, they pay a referral fee to the negotiator and keep the rest of the commission. If the negotiator tells them they couldn’t get an approval, or that the bank wants an unreasonable amount of money for the property, or the bank wants the seller to sign a promissory note, well, the agent has invested almost no time or money into the deal, so…who’s next?

18. Should I file bankruptcy? Will it allow me to keep my home? I’ve heard the lender cannot foreclose if I file bankruptcy.

There are 2 types of bankruptcy commonly used by individuals – Chapter 7 (“Fresh Start”) and Chapter 13 (“Wage Earner”). Chapter 7 can enable individual filers to wipe away debts such as credit card and medical bills so they can continue to make their mortgage payments.

Chapter 13 involves setting up a 3-5 year repayment plan to repay your debts. Chapter 13 requires that you are earning a steady income, as you will be repaying all of your debt. Both have a very negative impact on your credit and remain on your credit report for 10 years.

Because of the new 2005 bankruptcy law, which raised the bar for people to qualify for Chapter 7 “fresh start” bankruptcy proceedings, fewer and fewer people pass the “means” test to qualify for Chapter 7 and for this reason can only qualify for Chapter 13 bankruptcy (a 3-5 year repayment plan).

While both Chapter 7 and Chapter 13 can temporarily delay foreclosure proceedings, neither will allow you to keep your home unless you can bring your mortgage current.

19. Can any agent do a short sale?

Absolutely not. Many agents have no interest in doing short sales because they require a tremendous amount of time and expertise, and if you do not know what you are doing, they often go to foreclosure and then the agent does not get paid. If an agent is not extremely experienced at doing short sales – in other words they have done at least 20 of them successfully in the past 2 years – then I would not use them.

Lest you think I am simply trying to toot my own horn, this site gets visitors from all over the country. In every market, there are agents who specialize in short sales and have a team of staff members assembled to work on them, and then there are agents who are inexperienced at short sales and just recently started trying to do them, learning as they go, because they’ve realized they have no choice due to the state of current market.

You get one shot at doing a short sale – if your agent does not know what they are doing and has not learned the many tricks to the trade, you will likely find yourself being asked to sign a promissory note or worse, be denied by your lender or lenders and go to foreclosure.

In other words, let the inexperienced agents and/or attorneys learn the short sale process on someone else’s property – as the saying goes, don’t allow yourself to be one of the surgeon’s first patients.

Source: Elizabeth Weintraub, About.com Guide

•  You are in control of the sale, not the bank.
• You may sleep better at night knowing who is buying your home.
• You will spare yourself the social stigma of the “F” word, foreclosure.
• Contrary to popular belief, you can be current on your payments and still effect a short sale.
• Your home sale will be handled like any other home sale.

Buying Again After a Short Sale
If your payments have never fallen behind 30 days late and the lender does not require that you pay back the loan, Fannie Mae guidelines may allow you to buy another home immediately. The wait for an FHA loan is 3 years.

If your payments are in arrears yet a short sale is granted by your lender, you may qualify to buy another home with a Fannie-Mae backed mortgage within two years, regardless of whether the home is your primary residence.

Buying Again After a Foreclosure
With certain restrictions, you may be eligible to buy another home in 5 years if the home was your primary residence. Without restrictions, the wait is 7 years.

If you are an investor and do not occupy the home, the wait to buy with a Fannie Mae insured loan is 7 years.

Affects on Credit After a Short Sale
A short sale is not a derogatory mark on your credit because credit bureaus do not show the word “short sale” on your credit report. It may say “pay as agreed” or “paid as less than agreed,” among other categories. Some clients have reported negative FICO score drops from 50 points to 130 points.

The point drop is typically due to being in default, that is behind on your payments.

Affects on Credit After a Foreclosure
A number of sources have reported FICO score drops from 200 to 400 points after a foreclosure. Generally this credit score will remain on your credit report as a public record for 10 years.

Credit Reports After a Short Sale
All lenders report short sales differently and some do not report them to the credit bureaus at all.

Credit Reports After a Foreclosure
If a prospective employer runs a credit check on you, your job application may be denied if you have a foreclosure on your record.

Deficiency Judgments After a Short Sale
Judgments are often negotiated between the seller and the short sale bank. In some cases, such as California, if the home is your personal residence and was financed through purchase money, there is no deficiency judgment.

Deficiency Judgments After a Foreclosure
Banks are unwilling to negotiate deficiency judgments with the homeowner after a foreclosure. In California, for example, according to the California Association of REALTORS, a deficiency judgment may be filed regarding a hard-money loan if the lender forecloses under a judicial foreclosure versus a trustee sale or if the second loan is a hard money loan and the sale takes place as a trustee’s sale.

Loan Application Questions After a Short Sale
Loan applications do not ask questions about a short sale. You may report that you sold your home.

Loan Application Questions After a Foreclosure
You are required to answer the question: “Have you ever had a property foreclosed upon or given a deed-in-lieu thereof in the past 7 years.” If the bank sees you have had a foreclosure, your loan most likely will be denied. If you lie, you may be subject to investigation by the FBI for mortgage fraud.

Length of Time to Move After a Short Sale
If you’ve had a foreclosure notice filed, you may be able to postpone that action while the bank considers your short sale. The wait for short sale approval can be from 2 to 3 months, or longer.

Length of Time to Move After a Foreclosure
Unless prior arrangements have been made, the bank may want you to immediately vacate the property and can commence eviction proceedings.

Taxation After a Short Sale
A personal residence is exempt from mortgage debt relief until the end of 2012 on a federal level. Some states will still tax you unless you qualify for an exemption. An investor is not exempt from mortgage debt relief, subject to certain conditions.

Taxation After a Foreclosure
Same as with a short sale. Except some lenders immediately send out 1099s, even if the owner is exempt.

In closing, always obtain legal and tax advice before making a decision between a short sale or a foreclosure.

Should You Choose a Short Sale Over a Foreclosure?

Source:

Although some economic indicators hint that the U.S. economy is moving toward a recovery, home values are still suffering from a serious economic hangover. Many home owners are putting off a sale until prices recover. But some owners must sell immediately, even at a loss. Selling a home for less than the debt on the loan — called a “short sale” — is not desirable, but sometimes it is necessary for those who face major financial hardship.

While things may be improving — one August report indicated that 80 percent of real estate markets increased in median home value — a separate July report found that home values are down 21 percent from their peak in the second quarter of 2006. However, July was the sixth consecutive month that the decline in national home values lessened.

Lower home values mean that many home owners are “upside down” in their mortgages, meaning they owe more on a mortgage than the home is now worth. This is especially true in the current real estate market, because low down payments and cash-out refinance deals were the norm in the past decade.

If you are facing a possible short sale, consider these points:

1) Know what qualifies for a short sale

Several factors make a home a candidate for a short sale. Typically these are a general drop in home values (such as has happened in many markets recently), a mortgage that is near default status, or a home owner who is unable to pay due to hard times.

2) Find the right real estate agent

The short-sale process is specialized. Lenders have stringent requirements and might ask agents to take a lower-than-standard commission. Look for agents with experience.

3) Talk to the lender

If your home is worth less than the mortgage amount, you will need special permission from the lender to sell the home at a loss for its current value. If the sale stems from financial hardship, you will need to prepare a hardship letter explaining why you need to sell. Remember that some lenders will be open to the possibility of a short sale to avoid the alternative of foreclosure. If you are a good borrower hit by bad times, make sure to communicate this effectively to the lender.

4) Understand tax consequences

In some cases, a lender forgives the difference between what is owed and the selling price. Lenders can classify that forgiven debt as income to you, which means that you would be required to pay income tax on the amount. However, the Mortgage Forgiveness Debt Relief Act of 2007 allows some home owners to exclude that income. This exclusion primarily applies to those whose home was foreclosed on or who had debt forgiven as part of a loan restructuring. Individuals who are truly insolvent (total liabilities are greater than total assets) also can file IRS Form 982 declaring the insolvency to have the tax waived. To learn whether you qualify, consult a licensed tax advisor.

5) Know it will impact credit

A short sale is recorded on a credit report as a pre-foreclosure proceeding. As such, it will damage credit scores. Still, it may be the best alternative for some homeowners.

6) Consider alternatives

If paying the mortgage is the problem — rather than a desire to sell — you might have options. Some lenders will consider a loan modification, which seeks a permanent change to the loan, such as lowering the payment and extending the loan’s term, or rolling delinquencies into future pay­ments. Government programs such as Hope for Homeowners also fall into this category. Another option is a “deed in lieu” of foreclosure, which essentially allows the borrower to return the title or deed of the property — giving the home back — to the mortgage holder to avoid foreclosure. The borrower forfeits equity in the property, but avoids a foreclosure on his or her credit record.

Short sales are hard facts of life following a serious real estate downturn like the one our nation has undergone. Do your homework before agreeing to a short sale. Becoming a knowledgeable seller will help make the process as painless as possible.

The topic of short sales and foreclosures seem to dominate the headlines everywhere. There has been a lot written about short sales and whether you should or shouldn’t short sale your home if you’re in this situation. This has led to many misconceptions about short selling your home.

This series is about the myths regarding short sales. Caveat: The rules regarding short sales are different for every lender and are changing all the time as the market changes. ALWAYS consult a real estate attorney and a CPA regarding the particulars of short selling.

Short sale Myth #1:

You need to be behind in your payments before the lender with consider a short sale.

Fact:

This may have been true in the past, but today the key phrase is hardship. Certainly being behind in payments is the most common type of hardship. But hardship could also be caused by job loss, death in the family, divorce, adjustable rate mortgage hike, loss of property value (especially in places like California).

If you are considering a short sale please feel free to contact me with any questions. I am focused on short sales and helping homeowners through the process in the Fresno Area. have also co-authored the book “Should I Short Sale My Home?”.

Watch for the next article in the Short Sale Myths series. Or, just subscribe to the blog and they will be sent automatically.

If you are interested in buying or selling a home in the Fresno area visit my website. For frequently updated information on foreclosures, short sales, real estate news and market conditions visit my blog. There are many free reports as well as free access to MLS listed properties. You can also call 559-790-8760.

Jeremy Smiley is a licensed Realtor®, certified short sale specialist and Realtor for London Properties. Jeremy has co-authored the book “Should I Short Sale My Home?”. Get your FREE copy now.

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Property Details

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Property Details

Property Photos

Property Details

Property Photos