Frequently Asked Questions About Short Sales as an Alternative to Foreclosure

1.)    What are Short Sales?...A short sale is the sale of a home or property under circumstances in which the proceeds of the sale are insufficient to fully satisfy the lien held by the bank or mortgage company.  In order to accomplish the sale, the lender agrees to accept an amount less than the outstanding principal and accrued interest on the loan in exchange for a release of the lien.

2.)    Must a homeowner show some type of economic "hardship" in order to convince their lender to accept the proceeds of a short sale in satisfaciton of their mortgage?...Yes, in nearly all cases.  Lenders are not interested in negotiating a short sale unless they determine that the likelihood of repayment is uncertain due to the borrower's financial situation.  The homeowner may be required to provide evidence of a decrease in family income, job loss, illness or disability, extraordinary medical expense, business loss, increase in mortgage payment (ex:  ARM reset), etc...which will enable the lender to evaluate the merits of allowing a short sale as opposed to proceeding with the foreclosure process.   

3.)  Do lenders approve all short sales?...No.  Most lenders will only approve a short sale when they are convinced that accepting an amount less than the mortgage balance will be economically more advantageous to the lender than going through the foreclosrue process.  In evaluating the feasibility of a short sale, the lender will look at current market conditions, any needed repairs or maintenance issues on the home, predicted time required to market the property and any other unique circumstance that might  make the property difficult to sell.

4.)  How can a Realtor help a distressed homeowner enter into a short sale if that is what they ultimately decide to do?...A Realtor who is experienced and knowledgeable in marketing short sale properties can help the homeowner realistically assess the market value and predicted time on the market to sell their home. He or she can also provide the homeowner with an estimate of closing costs and expenses related to the sale to give the homeowner and their lender an accurate picture of the implications of a short sale.  This should enable the homeowner, with the advice of their attorney and tax accountant specialist, to decide if a short sale is the best plan.  Once a potential buyer has been found, a Realtor will assist the homeowner in negotiating a sale with a potential buyer that is acceptable to both the homeowner and their lender.

5.)  Will a short sale hurt a homeowner's credit rating?...Most likely yes but, not as much as a foreclosure.  In negotiating with your lender, it is often possible to obtain an agreement where the loan obligation can be reported to credit agencies as "settled" or "paid in full".  In nearly all cases, a short sale has less of an adverse impact on their credit rating than a foreclosure or bankruptcy.

6.)  If the homeowner is considering filing for bankruptcy, can they enter into a short sale listing of their home while bankruptcy proceedings are pending?...A homeowner should not enter into a listing agreement on their home if they are in bankruptcy or are considering filing for bankruptcy within the next year without first consulting with their bankruptcy attorney.  Under certain circumstances a bankruptcy filing will forestall short sale negotiations between the homeowner and their lender as this can be considered a collection activity which is prohibited during bankruptcy.  If a homeowner sees bankruptcy looming on the horizon, they should talk to a bankruptcy attorney.  The advice he or she gives the homeowner will be an important consideration when determining whether a short sale of their property is a good choice.

7.)  If the lender agrees to a short sale of the homeowner's property for less than the amount owing on their mortgage, will the homeowner have to pay income taxes on the difference between the net sale price and the mortgage balance?...Probably not.  The Mortgage Debt Relief Act of 2007 generally allows the taxpayer to exclude from income the discharge of debt on their principal residence.  For more information on this important legislation, see IRS Publication 4681 or visit IRS' website at  www.irs.gov and refer to        Form 982 and Form 1099-C.  IRS regulations in this area are subject to frequent change.  Consult with your tax accountant professional for the most up to date information. 

8.)  If a homeowner has both a conventional mortgage and a home equity line of credit, can they still do a short sale? ...Yes, provided both lenders agree to the deal.  Negotiating a short sale when two lenders are involved can be more difficult but, it is still possible.  The homeowner should inform their Realtor about both first and second mortgages (or home equity lines of credit) before requesting a short sale analysis. 

For IRS Form 982 visit  www.irs.gov/pub/irs-pdf/f982.pdf

For IRS Form 1099-C visit www.irs.gov/pub/irs-pdf/i1099ac.pdf  

To download Ten Facts about Mortgage Debt Foregiveness visit www.irs.gov for IRS Tax Tip 2010-44 or IRS Publication 4681

If you have more questions about short sales, please contact Janice at #616-355-6326.

 

 

 

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Janice VandenBerg

Janice VandenBerg

Associate Broker
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