Short Sale

Did You Know - Short Sale Tips

Definition of Short Sale

A short sale is when you sell your home for less than what is owed on the loan. A short sale may also be referred to as a pre-foreclosure sale. In a short sale, the bank or mortgage lender agrees to discount a loan balance due to economic or financial hardship on the part of the mortgagor.

For example, you owe your mortgage company $200,000 and you sell your house for $150,000. You are short (i.e. deficient) $50,000 in the sale.

Process of Short Sale

The process of a short sale is similar to a regular home sale. You are selling and a buyer is purchasing your home. All required contract document must be signed by the seller and buyer once an offer is considered.  The lender would have the right to approve or disapprove of a proposed sale.

Depending on the lender, it could take anywhere from 14 days to 90 days for an approval or counter of a short sale. Each lender has specific requirements for submitting a short sale request.  However, the majority is similar and will require the following documents:

1. Hardship letter – a letter detailing the circumstance behind the short sale.
2. Financial analysis – a breakdown of your monthly income, liabilities (expense), and assets (checking/savings etc).
3. 3rd Party Authorization to Release Information – a form that provides permission for your Agent to obtain information on your account
4. Copy of most recent filed federal tax return with all schedules required by IRS.
5. Copy of two most recent pay stubs or other proof of income from your employer including frequency in which you get paid (monthly, bi-weekly, or weekly).
6.  Copy of listing agreement.
7. Copy of the sales contract.
8. Copy of preliminary HUD-1 settlement statement.

Foreclosure versus Short Sale

Ruined Credit VS Bruised Credit- In a foreclosure your credit can be ruined for as long as 10 years. With a short sale your credit will be bruised for 12 to 18 months. Most banks and lenders understand just about everyone out there is having some sort of credit problem but what they don't want to see is you just giving up. A short sale is a much better alternative to a foreclosure.

Buy again in 10 years VS Buy again in 12 to 18 months- With a foreclosure showing up on your credit report it will be very difficult if not almost impossible to buy anything on credit. No house, no cars, no credit cards, large deposits for utilities and so on. With a short sale your credit will suffer but it has been our experience for those clients who are able to show 12 months of good credit history that banks and lenders are willing to extend credit once again.

Court Ordered Judgment VS Negotiated Settlement- Once the foreclosure process is completed the court will issue a judgment in favor of your lender. This judgment will show up in the public records and on your credit report. A short sale is a negotiated settlement between the Agent and the lender. Asettlement is much better than a judgment.

Large Attorney Fees VS No cost to you- In order to facilitate a foreclosure action against you your lender will need to hire a law firm. The law firm will charge thousands upon thousands of dollars to handle the foreclosure which will be added to the amount you owe the lender. A short sale will cost you nothing to facilitate.

Possible Bankruptcy VS No bankruptcy needed- Many home owners believe they have to file a bankruptcy in order to protect their home. With a short sale there is no need to file a bankruptcy and further complicate your credit problems.

Deficiency Judgment(s) VS Negotiated settlement- If you do owe more on your home than what it may be worth and is foreclosed on, your lender will have the option to chase you for the difference. They will be able to garnish wages, attach personal property and make your life miserable for up to 10 years. A short sale will allow the Agent to negotiate with your lender to release any and all deficiencies before the short sale is completed.

No Peace of Mind VS Peace of MindA foreclosure will haunt you for up to 10 yearsor even longer. A short sale will end the process in as little as 3 to 4 months and allow you to get on with your life. It's your choice.

 (Reference: David Barlow, iHome REALTORS, 2007)

Tax Consequences of a Short Sale

If you are considering a real estate short sale of your home, you should be aware that you may receive a form 1099-C for the amount of the lender's losses. This is considered loan forgiveness in the eyes of the IRS.

If you have other assets such as saving and you are not insolvent, you may end up being responsible to pay ordinary taxes on the amount of the 1099-C.

If you settle a debt with a creditor for less than the full amount owed, you may be required to report this forgiven debt as regular income, with certain important exceptions. The forgiven debts include money owed after foreclosure or property repossession or credit accounts that you don't pay. There are exceptions noted below.

If a lender forgives or writes off $600 or more of a debt's principal (the amount not including interest or fees) must send you and the IRS a Form 1099-C at the end of the year. When you file your tax return for the tax year in which your debt was written off, the IRS willrequire that you report the amount on the form as income.

While you may not have received this form from the creditor, the creditor may have submitted one to the IRS anyway. If you don’t list the income on your tax return and the IRS has the information of the transaction on file, you could get a tax bill or, worse, an audit notice. This could end up costing you more than just the original tax bill.

There are several exceptions stated in the Internal Revenue Code. For example, you do not have to report the income on your tax return if the write off of the debt is intended as a gift, you discharge the debt in bankruptcy