Avoiding the Worst Case Scenario

Are you in default, close to foreclosure, in foreclosure, or are you simply upside-down in your home?

Are you not sure how to transact a short sale or do you just not have time to research it?

Do you need help from an experienced Real Estate Broker that can do short sales?

Are any of these following options something you might consider?

What is a Short Sale?

A short sale is a negotiated settlement. This is when the lender agrees to accept less than the amount owed as a payoff on a loan.

Why would my Lender want to allow a Short Sale to help me?

The reason is simple; a short sale often has a better return on investment to the lender than a foreclosure. The average savings a lender sees from a short sale property compared with a foreclosure property is about $20,000. Not only does the lender receive this savings, they are also paid on the loan 6 months earlier than in the foreclosure process. This allows them to collect and cash-out earlier than they would in a foreclosure. Plus, lenders spend a great deal of money with attorneys to complete the foreclosure process. Lenders created the short sale process as a foreclosure alternative for those reasons. The incentives to perform a short sale on your property are in place to motivate you to participate.

When should I start my Short Sale?

It is best to begin a short sale when you realize you can no longer afford the mortgage, so that your property can be marketed properly and you can receive a high offer. The earlier you start, the higher our likelihood of success. Call us to see if you have enough time for a short sale.

Payment Assistance Programs

Various assistance programs are offered by mortgage companies. You may be eligible for one or more of the following programs:

Assumption When a person takes title to the property and assumes liability for the payment of an existing note or bond secured by a mortgage against the property.

Deed in Lieu To voluntarily surrender the property to the lender/investor instead of having it foreclosed on.

Soft Second Loan Which is a second mortgage whose payment is forgiven or deferred until resale of the property

Extension/Extension Stipulation To postpone specified monthly payments to the end of the loan, beyond original maturity date.

Forbearance/Repayment Plan A specified payment plan, agreed upon by the lender over a period of time to cure the past due amounts.

Loan Modification Changing the terms of the note, by possibly lowering the interest rate or converting the loan from an adjustable rate mortgage loan to a fixed rate loan.

Pre-Foreclosure Sale Allows a borrower, delinquent on their mortgage, to sell the home and use the sale proceeds to possibly satisfy the mortgage debts.

Short sale/Short Payoff Lender accepts less than the full payoff to satisfy the debt.

If you answered yes to any of the above then we would like to speak with you as soon as possible about how we can help you.

We have a system in place for short sales that is right for your situation--no matter what the circumstances are.

We have been trying to help as many sellers as possible to avoid foreclosure and/or do irreparable damage to their credit standing. We can help you solve all these problems IMMEDIATELY. From marketing for short sale leads, to qualifying you as a Seller for a short sale, to negotiating with the lender, all the way down to the closing. These are a few of the STEPS necessary for a Short Sale Transaction:

1. Marketing for leads (Best way to generate short sale leads)
2. Qualifying you as a Short Sale Seller (20 Questions that need to be asked)
3. Short Sale Packet (all necessary forms filled out correctly)
4. Listing forms (what to write in order to protect you)
5. HUD forms if FHA loan
6. Submitting all Forms
7. Dealing with the Appraiser
8. Acceptance into a lender's Short Sale Program
9. MLS entry (specifically for a short sale)
10. Short Sale Math for the HUD 1 statement
11. Contract Offers & Responses
12. Closing

99% of the time you have to be behind on your mortgage payments to be eligible for a short sale

All lenders have varying requirements and may demand that a borrower provide an array of documentation, the following steps will give you a good idea of what those requirements may be.

List the Home on the MLS for Sale

Realtor places your property on the local MLS to locate a buyer for the property. Although you will have to sign a listing agreement, all the terms of the listing agreement are contingent upon the lender approving a short sale. You can stay in the home until it is sold.

Submit Letter of Authorization

Lenders will not disclose any of your personal account information without written authorization. When you work with us you will need to provide an authorization to release information form, which we will provide to you. This will give a Realtor permission to speak with the lender on your behalf about a short sale.

Hardship Letter

This is a letter written by you stating how you got into this financial situation and why you have not or cannot continue to make your mortgage payments. You are basically making a plea to the lender to take into consideration a short sale. Lenders are not out to get you and can understand if you lost your job, were hospitalized or some unforeseen event(s) led to your current financial situation. This includes the market depreciating. Dishonesty or conducting criminal behavior is illegal and if the truth comes out you may be subject to legal repercussions.

Proof of Income and Assets

It is always best to be truthful and honest about your financial situation and disclose assets. Lenders will want to know if you have savings accounts, cash or other real estate or anything of tangible value. In some cases they may request checking account statements and/or stock and bond statements. Lenders want assurance that you cannot afford the home any longer.

Copies of Bank Statements

If your bank statements reflect unaccountable deposits, large withdrawals or an unusual number of checks written, it's will be a great idea to explain each of those items.

Comparative Market Analysis

If property values are declining and the price you bought your home or condo for is less than what you can sell it for; this becomes a major factor for a short sale. Your real estate agent can submit a comparative market analysis (CMA) to the lender(s). The CMA will show the lender what home values are in your neighborhood and confirm the value is less that what you owe on the mortgage.

Agreement for Purchase and Sale

Without a contract on your property from a buyer a short sale cannot happen. Once we have a contract on your property it can be sent to the lender(s) for approval. There are several addendum(s) to protect you, which are signed by the buyer. We will provide this addendum(s).

The Final Stretch

Hopefully at this point the lender is seriously considering all the information that has been provided. At this time your real estate agent and attorney are doing their best to help the lender understand why the short sale is the best option in this circumstance. if the short sale is approved the closing date of the property should be 30-60 days away.

As you can see these are just some of the steps required in conducting a short sale transaction. There is a tremendous amount of energy and time needed to see these transactions close from beginning to end.

If you would like assistance from LuxeMark Realty, we would be more then happy to sit down with you and discuss how we can be of assistance.

More on Short Sales

How long does it take for you to complete the case once we fill out the paperwork?

Typical cases are often completed in three to six months--some sooner, some longer. If you have a foreclosure sale date approaching we may be able to complete it sooner.

What is a Deed in Lieu?

A Deed in Lieu is when the property is deeded back to the lender with the approval of the borrower prior to foreclosure. (This process may still leave a negative impact on the borrower's credit.)

Why should a lien holder accept less than the outstanding debt?

After the lender does an appraisal on the property and discovers that the value is less than the payoff, the lender will decide if it is worth further legal actions and cost. A business decision is made to either continue foreclosure action or accept the short sale offer.

What is a Closing Statement?

A form used at closing that gives an account of the funds received and paid at closing, including the escrow deposits for taxes, hazard insurance, and mortgage insurance.

What is a Deed?

The legal document conveying title to a real property.

What is a Deed of Trust?

A deed of trust is an instrument used in many states in place of a mortgage. Property is transferred to a trustee by the borrower (trustor), in favor of the lender (beneficiary) and reconveyed upon payment in full.

What is Depreciation?

A loss of value in a real property brought about by age, physical deterioration, functional or economic obsolescence.

What is Loss Mitigation?

Loss Mitigation is a process to avoid foreclosure; the lender tries to help a borrower who has been unable to make loan payments and is in danger of defaulting on his or her loan.

What is a Loan Modification?

A mortgage modification is a loss mitigation option that allows a borrower to refinance and/or extend the term of the mortgage loan and reduce the monthly payments.

What is a Forbearance Plan?

A forbearance plan is a loss mitigation option where the lender arranges a revised repayment plan for the borrower that may include a temporary reduction or suspension of monthly loan payments.

What is an Offer on a property?

An offer is an indication by a potential buyer of a willingness to purchase a home at a specific price; generally put forth in writing.

How long is a Short Sale process?

Depending on the mortgage company, a short sale process can take between 2 to 6 months.

What is the difference between a Satisfaction of a Lien vs. a Release?

A satisfaction is a total release from the debt owed. A release is when the lender releases the lien from the property to allow the home to be sold. (The borrower may still be required to repay the balance of the debt.)

How does a foreclosure and a short sale show up on my credit?

Foreclosures show up as FORECLOSURE, and can stay on your record for seven years. Anytime you apply for a new loan or have your credit run, the foreclosure will show up and is usually a required disclosure you must make on most credit and job applications. A short sale is listed as SETTLED DEBT, and is much less harmful to your credit. Please consult a credit company for more information.

What liability do I have when doing a short sale?

In a short sale, it is possible the bank could 1099 you for the difference in what you sell your property for and what you owed. This means the IRS could consider the difference as income, and you could be taxed on that income. The bank might also ask you to pay a portion of the difference back in the form of an unsecured note, which is similar to an I.O.U. It is a negotiation, and we employ tactics to have the bank consider the debt settled.

In a foreclosure, your house is sold at an auction, which typically causes the difference of the total amount you owe and the foreclosure sale price to be much greater. This means you have a higher potential tax liability. Additionally, the bank may come after you for a Deficiency Judgment.

A successful short sale will eliminate a deficiency judgment, minimize your tax liability, and keep the foreclosure off your credit.

What is a Deficiency Judgment?

A Deficiency Judgment can arise when the bank sells the house at foreclosure auction. The bank can sell the house at auction for any amount less than the total amount owing of the debt plus fees. A deficiency judgment can arise if the bank sells the house for less than the mortgage debt. The lender then holds you responsible for the unpaid portion of the loan. For instance, if you owe $100,000 to the mortgage servicer and they see proceeds after the auction of $55,000, the remaining difference of $45,000 can be moved into a judgment against you. This will also appear on your credit report along with the foreclosure. The lender may be allowed to take further legal action such as garnishing wages to pursue payment based on the laws of your state. Some states have restrictions and regulations on deficiency judgments, but unfortunately the majority do not.

Some lenders will choose the deficiency judgment while others may pursue a path to write off the loan. If they choose to write off the loan, the lender may issue a 1099 form which you will have to pay taxes on for the calendar year. Recently, according to an MSNBC news article, President Bush announced plans to do away with this tax penalty. According to the same article, the Democrats said they support this plan. For more information on deficiency judgments and the tax liability you may face based on your current situation, submit your information to one of our analysts for a free consultation, and as always consult your attorney/tax advisor.

Tax Consequences - Taxable Income From Home Foreclosure and Debt Cancellation

Update Dec. 11, 2008 — The Mortgage Forgiveness 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, qualify for this relief. This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion doesn’t apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition. The amount excluded reduces the taxpayer’s cost basis in the home. More details. Further information, including detailed examples, can also be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. The questions and answers, below, are based on the law prior to the passage of the Mortgage Forgiveness Debt Relief Act of 2007. 1. What is Cancellation of Debt? If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt. Here’s a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you. 2. Is Cancellation of Debt income always taxable? Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve: Bankruptcy: Debts discharged through bankruptcy are not considered taxable income. Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you.You are insolvent when your total debts are more than the fair market value of your total assets.Insolvency can be fairly complex to determine and the assistance of a tax professional is recommended if you believe you qualify for this exception. Certain farm debts:If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income.The rules applicable to farmers are complex and the assistance of a tax professional is recommended if you believe you qualify for this exception. Non-recourse loans:A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral.That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences, as discussed in Question 3 below. 3. I lost my home through foreclosure.  Are there tax consequences?   There are two possible consequences you must consider:  Taxable cancellation of debt income.(Note: As stated above, cancellation of debt income is not taxable in the case of non-recourse loans.) A reportable gain from the disposition of the home (because foreclosures are treated like sales for tax purposes).(Note: Often some or all of the gain from the sale of a personal residence qualifies for exclusion from income.) Use the following steps to compute the income to be reported from a foreclosure: Step 1 - Figuring Cancellation of Debt Income (Note: For non-recourse loans, skip this section.  You have no income from cancellation of debt.) 1. Enter the total amount of the debt immediately prior to the foreclosure.___________ 2. Enter the fair market value of the property from Form 1099-C, box 7. ___________ 3. Subtract line 2 from line 1.If less than zero, enter zero.___________ The amount on line 3 will generally equal the amount shown in box 2 of Form 1099-C.  This amount is taxable unless you meet one of the exceptions in question 2.  Enter it on line 21, Other Income, of your Form 1040. Step 2 – Figuring Gain from Foreclosure 4. Enter the fair market value of the property foreclosed.For non-recourse loans, enter the amount of the debt immediately prior to the foreclosure ________ 5.    Enter your adjusted basis in the property.(Usually your purchase price plus the cost of any major improvements.)                                    ____________ 6. Subtract line 5 from line 4.  If less than zero, enter zero.    The amount on line 6 is your gain from the foreclosure of your home.  If you have owned and used the home as your principal residence for periods totaling at least two years during the five year period ending on the date of the foreclosure, you may exclude up to $250,000 (up to $500,000 for married couples filing a joint return) from income.  If you do not qualify for this exclusion, or your gain exceeds $250,000 ($500,000 for married couples filing a joint return), report the taxable amount on Schedule D, Capital Gains and Losses. 4. I lost money on the foreclosure of my home.  Can I claim a loss on my tax return?    No.  Losses from the sale or foreclosure of personal property are not deductible.   5.  Can you provide examples? A borrower bought a home in August 2005 and lived in it until it was taken through foreclosure in September 2007. The original purchase price was $170,000, the home is worth $200,000 at foreclosure, and the mortgage debt canceled at foreclosure is $220,000. At the time of the foreclosure, the borrower is insolvent, with liabilities (mortgage, credit cards, car loans and other debts) totaling $250,000 and assets totaling $230,000. The borrower figures income from the foreclosure as follows: Use the following steps to compute the income to be reported from a foreclosure: Step 1 - Figuring Cancellation of Debt Income (Note: For non-recourse loans, skip this section.  You have no income from cancellation of debt.) 1. Enter the total amount of the debt immediately prior to the foreclosure.___$220,000__ 2. Enter the fair market value of the property from Form 1099-C, box 7. ___$200,000__ 3. Subtract line 2 from line 1.If less than zero, enter zero.___$20,000__ The amount on line 3 will generally equal the amount shown in box 2 of Form 1099-C.  This amount is taxable unless you meet one of the exceptions in question 2.  Enter it on line 21, Other Income, of your Form 1040. Step 2 – Figuring Gain from Foreclosure 4. Enter the fair market value of the property foreclosed.For non-recourse loans, enter the amount of the debt immediately prior to the foreclosure. __$200,000__ 5.  Enter your adjusted basis in the property.(Usually your purchase price plus the cost of any major improvements.)                                        ___$170,000__ 6. Subtract line 5 from line 4.If less than zero, enter zero.___$30,000__ The amount on line 6 is your gain from the foreclosure of your home.  If you have owned and used the home as your principal residence for periods totaling at least two years during the five year period ending on the date of the foreclosure, you may exclude up to $250,000 (up to $500,000 for married couples filing a joint return) from income.  If you do not qualify for this exclusion, or your gain exceeds $250,000 ($500,000 for married couples filing a joint return), report the taxable amount on Schedule D, Capital Gains and Losses. In this situation, the borrower has a tax-free home-sale gain of $30,000 ($200,000 minus $170,000), because they owned and lived in their home as a principal residence for at least two years. Ordinarily, the borrower would also have taxable debt-forgiveness income of $20,000 ($220,000 minus $200,000). But since the borrower’s liabilities exceed assets by $20,000 ($250,000 minus $230,000) there is no tax on the canceled debt. Other examples can be found in IRS Publication 544, Sales and Other Dispositions of Assets, under the section “Foreclosures and Repossessions”. 6.  I don’t agree with the information on the Form 1099-C.  What should I do? Contact the lender.  The lender should issue a corrected form if the information is determined to be incorrect.  Retain all records related to the purchase of your home and all related debt. 7.  I received a notice from the IRS on this. What should I do? The IRS urges borrowers with questions to call the phone number shown on the notice. The IRS also urges borrowers who wind up owing additional tax and are unable to pay it in full to use the installment agreement form, normally included with the notice, to request a payment agreement with the agency. Share |