The Short Sale
When housing prices in many parts of the country were booming a couple of years ago, there wasnít much national attention given to short sales. But with the current increasing mortgage delinquencies, many homeoweners are wondering if the short sale process is a way to avoid foreclosure.
The definition of the short sale process is when the lender of a property allows the property to be sold for less than the amount due on the mortgage loan.
The obvious benefit to the short sale process is that it allows the seller to avoid the credit report damage associated with a foreclosure. A foreclosure can stay on your credit report for up to 7 years and can take an emotional and financial toll.
But the pitfalls of the short sale process should be considered as well. The I.R.S. may consider any debt forgiveness as taxable income, thus resulting in a tax liability. In addition, lenders can often pursue a borrower for the deficiency balance (the difference between the amount owed and the amount paid).
In some cases you may be able to avoid taxation if you can prove you are insolvent. But if insolvency is unsuccessful, and you are faced with a tax liability resulting from the deficiency amount, it may make more financial sense for you to let the lender foreclose.
However, The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief. For more info click here Debt Relief Act of 2007.
The Short Sale Process
The short sale process can vary, but it will generally work as follows:
- The lender is contacted to discuss the possibility of a short sale and to determine the lenderís process for completing the sale.
- The seller issues a letter authorizing the release of personal information about the loan and the property to the buyer or escrow agency.
- The lender will review a settlement statement, which will indicate the proposed selling price, remaining loan balances and itemize all expenses, including real estate commissions and other fees and expenses associated with the closing.
- The seller will complete a "hardship letter," which will detail and explain all financial difficulties. Lenders will usually want to validate the sellerís financial situation by looking at bank statements, investment accounts, along with examining paystubs and other financial records.
- The lender will then look to the broker to provide a price opinion by examining the condition of the house and the market value of comparable properties.
- The lender will then want to scrutinize the purchase agreement to determine if all amounts are reasonable and the real estate commission is acceptable.
Because of the documentation required, the short sale process can be lengthy. But if done correctly, it can work well for all parties involved. The lender avoids the uncertainty of the foreclosure process, the seller avoids a foreclosure on his or her credit report (along with potential bankruptcy), and the buyer hopefully got a good deal on a property.
Considering the complexity of the short sale process, you must be educated. If you are considering a short sale, make sure that you discuss your situation with a competent lawyer and accountant. The more educated you are on the process, the easier the transaction will be, and the better the impression you will make on the lender.
The Short Sale Package
All of the documentation needed to start a short sale is commonly called a "Short Sale Package" and is usually submitted by the investor interested in the property, the agent representing the seller, or the seller of the property. The package usually includes the following items:
Sample Short Sale Package (items may vary depending upon the lender):
- Cover Letter
- Authorization to Release Information
- Sellers Hardship Letter
- Sellerís Financial information
- 2 years w2ís
- 2 months pay stubs
- 2 months bank statements
- Supporting Hardship Info Ė HOA liens, medical/disability statements etc.
- Repair Estimate for the property
- Comparable sales for the property
- Net Sheet/HUD 1
- First mortgage holder may ask for a payoff amount from the 2nd
- Second mortgage holder may ask for a payoff amount from the 1st
- Lender may ask for an Initial Title Report