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What is a Short Sale?
When you decide to Sell your home and your mortgage balance is higher than today's market value, someone is going to take a loss or come up Short in paying off the mortgage. Thus the name Short Sale. Since your Lender is holding the mortgage, your Lender is who comes up short. How Short? Your Lender will decide that when an offer comes in.
If you are thinking of doing a Short Sale, talk with your Lender about a Loan Modification first. Ask for the Loss Mitigation Department. A Loan Modification could keep you in your home, which is the best option for everyone.
What is a Loan Modification?
A loan Modification essentially renegotiates and restructures your existing mortgage. It's sometimes called a "workout plan."
A loan modification may include completely forgiving missed payments or moving them to the end of your loan's term. It can also include freezing or reducing the interest rate for a short term period or through the full term of your loan. In rare cases, Lenders sometimes agree to reduce a loan's principle balance to match a home's current market value. In some cases, a Lender may agree to do all of the above.
As part of the negotiation, you will need to provide detailed income information to prove your hardship; W-2s, tax forms, copies of payroll checks and bank statements, as well as a list of all your expenses. You will also include a Hardship Letter, explaining the reason for your hardship. Here is a video from FreddieMac on the typical documentation needed.
Your Lender needs to weigh the cost of the loan modification against the foreclosure or Short Sale of your home. Your Lender will view a foreclosure as the worst outcome (they loose the most money). A short Sale is better. A loan modification could be a better option for your Lender - depending on what you ask for, and if it's better than a potential short sale offer.
It is wise to have a real estate professional negotiate either the short sale or loan modification for you with the Lender.
How do we get beyond the emotional aspect of these situations?
While we can define and describe these options to you in "black on white" terms, please understand that we know just how these situations can impact the lives of our Clients. Our Devas Team has personal experience in "learning lessons" (both financial and personal) along with the experience of coming back stronger. This is a nationwide challenge and there are solutions. We hold the space and offer guidance for our Clients to go through this economic process in the most positive manner possible. We truly are here for you...whether you are an experienced investor or novice in the real estate market.
How does a Short Sale work?
A Short Sale typically works like this. Your home is listed with a Realtor - just as you would do normally. On the Listing though, we specify that it is a Short Sale, and it specifically says "Lender must approve all offers." There can be multiple offers, and the Lender decides which is an acceptable price and terms.
When a Buyer makes a written offer, your Realtor will turn it in to the Loss Mitigation Department of your Lender. The Lender will then have an appraisal done to determine today's market value. If the offer is 82% or higher of today's market value, they typically will accept that. If your Lender decides the offer is too low, your Lender will come back with a counter offer on the price.
Some Lenders are slow. Once the offer is sent over, it could take 3 days to 3 months for them to respond. The Buyer and Seller needs to be really patient to get through this process. Once you get a written acceptance that the Lender accepts the offer, you will typically have 30 days to close. That is when the clock starts for the Buyer to complete all inspections and have their financing in place.
Short Sale Requirements
You need to prepare some documents to be included with the offer...
1) A hardship letter explaining why you fell behind on payments and why you have a financial hardship and can't pay.
2) A Financial Statement detailing all personal income and expenses. When you call your Lender and ask for the Short Sale kit, they will provide a financial worksheet for this, as well as an itemized list of additional documents they require - typically payroll stubs, tax filings, and bank statements to prove your hardship.
3) A letter from you authorizing your Realtor to handle all matters for you regarding this loan and the sale of your home.
Your Realtor Will Need to Provide
- A copy of the Purchase Offer Contract including the Short Sale and As Is Addendums as well as the LSR (Loan Status Report) for the Buyers' financing
- An example HUD1 showing all Buyer and Seller estimated costs
Investment Property Example
Mortgage is $300,000
Short Sale price is $150,000
Taxable forgiven debt = $150,000
Assuming you are in a 25% tax bracket, taxes due could be $37,500, unless you have some other approved deductions to offset the $150,000 income.
If this is a Primary Residence, meaning you meet the IRS' guidelines of living in the home 2 out of the past 5 years, the forgiven debt is potentially tax free.
Again you should consult a competent Tax adviser on your specific situation.
When you decide to Sell your home and your mortgage balance is higher than today's market value, someone is going to take a loss or come up Short in paying off the mortgage. Thus the name Short Sale. Since your Lender is holding the mortgage, your Lender is who comes up short. How Short? Your Lender will decide that when an offer comes in.
If you are thinking of doing a Short Sale, talk with your Lender about a Loan Modification first. Ask for the Loss Mitigation Department. A Loan Modification could keep you in your home, which is the best option for everyone.
What is a Loan Modification?
A loan Modification essentially renegotiates and restructures your existing mortgage. It's sometimes called a "workout plan."
A loan modification may include completely forgiving missed payments or moving them to the end of your loan's term. It can also include freezing or reducing the interest rate for a short term period or through the full term of your loan. In rare cases, Lenders sometimes agree to reduce a loan's principle balance to match a home's current market value. In some cases, a Lender may agree to do all of the above.
As part of the negotiation, you will need to provide detailed income information to prove your hardship; W-2s, tax forms, copies of payroll checks and bank statements, as well as a list of all your expenses. You will also include a Hardship Letter, explaining the reason for your hardship. Here is a video from FreddieMac on the typical documentation needed.
Your Lender needs to weigh the cost of the loan modification against the foreclosure or Short Sale of your home. Your Lender will view a foreclosure as the worst outcome (they loose the most money). A short Sale is better. A loan modification could be a better option for your Lender - depending on what you ask for, and if it's better than a potential short sale offer.
It is wise to have a real estate professional negotiate either the short sale or loan modification for you with the Lender.
How do we get beyond the emotional aspect of these situations?
While we can define and describe these options to you in "black on white" terms, please understand that we know just how these situations can impact the lives of our Clients. Our Devas Team has personal experience in "learning lessons" (both financial and personal) along with the experience of coming back stronger. This is a nationwide challenge and there are solutions. We hold the space and offer guidance for our Clients to go through this economic process in the most positive manner possible. We truly are here for you...whether you are an experienced investor or novice in the real estate market.
How does a Short Sale work?
A Short Sale typically works like this. Your home is listed with a Realtor - just as you would do normally. On the Listing though, we specify that it is a Short Sale, and it specifically says "Lender must approve all offers." There can be multiple offers, and the Lender decides which is an acceptable price and terms.
When a Buyer makes a written offer, your Realtor will turn it in to the Loss Mitigation Department of your Lender. The Lender will then have an appraisal done to determine today's market value. If the offer is 82% or higher of today's market value, they typically will accept that. If your Lender decides the offer is too low, your Lender will come back with a counter offer on the price.
Some Lenders are slow. Once the offer is sent over, it could take 3 days to 3 months for them to respond. The Buyer and Seller needs to be really patient to get through this process. Once you get a written acceptance that the Lender accepts the offer, you will typically have 30 days to close. That is when the clock starts for the Buyer to complete all inspections and have their financing in place.
Short Sale Requirements
You need to prepare some documents to be included with the offer...
1) A hardship letter explaining why you fell behind on payments and why you have a financial hardship and can't pay.
2) A Financial Statement detailing all personal income and expenses. When you call your Lender and ask for the Short Sale kit, they will provide a financial worksheet for this, as well as an itemized list of additional documents they require - typically payroll stubs, tax filings, and bank statements to prove your hardship.
3) A letter from you authorizing your Realtor to handle all matters for you regarding this loan and the sale of your home.
Your Realtor Will Need to Provide
- A copy of the Purchase Offer Contract including the Short Sale and As Is Addendums as well as the LSR (Loan Status Report) for the Buyers' financing
- An example HUD1 showing all Buyer and Seller estimated costs
- A copy of the Listing agreement
- Any Lender required documents signed by the appropriate parties
Tax Implications
You should discuss with your Tax advisor on your particular Tax situation. Typically, this is what happens if the home is an investment property...the difference between your mortgage balance and the approved short sale price is called Forgiven Debt. The Lender will most likely issue a Form 1099 for that amount. The IRS treats forgiven debt as earned income. So you will be taxed on your W2 income PLUS the Forgiven debt, based on where you are on the tax rate schedule. - Any Lender required documents signed by the appropriate parties
Tax Implications
Investment Property Example
Mortgage is $300,000
Short Sale price is $150,000
Taxable forgiven debt = $150,000
Assuming you are in a 25% tax bracket, taxes due could be $37,500, unless you have some other approved deductions to offset the $150,000 income.
If this is a Primary Residence, meaning you meet the IRS' guidelines of living in the home 2 out of the past 5 years, the forgiven debt is potentially tax free.
Again you should consult a competent Tax adviser on your specific situation.
Devas & Associates have successfully completed numerous Short Sales and we are prepared to assist with yours.
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