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Short Sales


What is a short sale?


A home short sale (short sale or short sales) are when you sell your house for a sum that is often just enough to pay the mortgage. Often, the lender gets less, but lets you off the hook anyway. Some lenders OK the sale, but come after you for their loss. Once the house is sold, you must get out so the buyer can occup the home. If you can pull off a short sale and avoid paying any deficiency, this is a good way to help keep your credit score from collapsing with a foreclosure. Loans are harder to obtain. Therefore, many short sale attempts fall through due to lack of financing. If have decided that you cannot afford to keep your home, a foreclosure might be better than a short sale. In a short sale, you will need to move out soon after the closing. In a foreclosure, you don't need to move out until the end of the foreclosure process.


Short sale definition

A short sale process involves the sale of real estate in which the proceeds from selling the property will fall short of the balance of debts secured by lien(s) against the property and the property owner cannot afford to repay the liens' full amounts, whereby the lien holders agree to release their lien on the real estate and accept less than the amount owed on the debt. Any unpaid balance owed to the creditors is known as a deficiency. Short sale agreements do not necessarily release borrowers from their obligations to repay any deficiencies of the loans, unless specifically agreed to between the parties.


A short sale is often used as an alternative to foreclosure since it mitigates additional fees and costs to both the creditor and borrower; however both will often result in a negative credit report against the property owner.

If have decided that you cannot afford to keep your home, a foreclosure might be better than a short sale. In a short sale, you will need to move out soon after the closing. In a foreclosure, you don't need to move out until the end of the foreclosure process.


Why do lenders allow a short sale?
The seller is out of the home the cannot afford and the lender avoids the costly foreclosure proceedings.


Can I still profit on a short sale?
No. A seller may not receive proceeds from a short sale. SOMETIMES a lender will pay a fee to encourage a home owner to proceed with a short sale instead of dragging out a foreclosure.


How much time do I have to start a short sale?
In a Pre-foreclosure "Time is of the essence". Time lines starts from the date the notice to the borrower is filed. While a foreclosure process can be long, however, consult with a lawyer to find out for sure.


Is there an application process to start a short sale?
Yes - In basic terms you are applying for a short sale in much the same way you applied for your mortgage. The individual short sale process will depend on the lender. Be prepared to submit a hardship letter detailing the circumstances behind the short sale; Current financial condition of the seller, ie; pay check stubs, bank statements, a personal financial statement.


Additional, they may require a monthly budget assessment. Lastly, a signed, valid purchase and sales contract, preliminary HUD-1 settlement statement and a preliminary estimate of proceeds to the lender.

How will a short sale affect my credit rating?
Current estimate is -50 points. Each individual lender to decide what to report. Often it will note loan as "paid" on their credit report, while in the footnote it may reference "settled for less than amount owed". though it is a mark on the credit report, it is more favorable that "foreclosed" which could be -200 FICO points.

I have filed for bankruptcy, can I still do a short sale?
Most lender would not consider a short sale if the homeowner is in the middle of a bankruptcy proceeding. A short sale by nature is a collection activity which is prohibited in a bankruptcy.

Will I need an appraisal for a short sale?
No. The lender will want its own 3rd party BPO to gauge the value of the home.

What are the tax implications in the short of real estate?
Generally, taxes are reported as a loss to the lender and a gain to the buyer. If the lender forgives 20K on your mortgage, you would receive a form 1099C in that amount as income, and responsible for paying the tax. Note that a bankruptcy can eliminate the 1099C income.


What if your short sale realator says you don't need a short sale attorney?

Play it safe and have a lawyer look over the transaction.


What is a short sale mortgage?

This just means the mortgage was part of a short sale.


What is MFDRA?

The Mortgage Forgiveness Debt Relief Act (MFDRA) of 2007, it was passed by President Bush in an attempt to help homeowners who completed short sale transactions avoid a potentially large tax bill after the fact and was extended through the end of 2013. If this is NOT extended again, you would want to complete your short sale by the end of 2013. This would apply to you if you're not insolvent or if you have not filed a bankruptcy. Your tax exposure, by way of an example:

If you owe $150,000 on your home and it sells for $100,000 in a foreclosure auction, the IRS could tax you on the remaining $50,000. For someone in the 25% tax bracket, that could mean paying $12,500 in taxes. Similar taxes would apply for forgiven amounts in short sales and principal reductions.


When a homeowner completes a short sale their lender will deal with their “loss” in one of a few ways. Either they will pursue the homeowner for the balance of the loan owed, or they will give the homeowner a 1099C for the amount they lost which is considered “forgiveness of debt”. The Mortgage Forgiveness Debt Relief Act deals with the 2nd scenerio where a 1099C is given to the homeowner.

In many cases, prior to the MFDRA, when a homeowner received a 1099C after completing a short sale, the “forgiven amount” could be considered income (phantom income) by the IRS and taxes would be due for that amount. This created another hardship for many homeowners who escaped foreclosure only the fall in the lap of the IRS with a large tax bill now due. Many homeowners decided to let their property go into foreclosure instead of taking a tax hit.

When the government saw homeowners choosing to let lenders foreclose rather than facing the tax bite of a short sale, the IRS took action and this law came into existence. Homeowners who qualify for the protection under the MFDRA, when a short sale is completed and they receive a 1099C, that income would not be considered taxable. This took the burden off the backs of homeowners and incentivized working with lenders to complete short sales. This was done with hopes to help not only these homeowners, but also the housing market and our economy as a whole.