Short sales have become more and more popular since the housing market began its struggle during the recession. Though the term is thrown around more loosely now, there are still a great deal of people who do not understand exactly what a short sale is.
What is a short sale?
A short sale is a carefully agreed upon sale of a property for less than the amount of the mortgage balance, executed as a means for both a homeowner and a mortgage lender to essentially cut their losses.
Typically, short sales are for extreme cases when the bank or lender decides that it is in their best interest to take an early loss instead of enduring costly foreclosure proceedings.
If you have missed multiple mortgage payments and are facing foreclosure, the bank or lender won’t automatically offer a short sale. You need to prove that your situation merits a short sale, which typically involves providing documentation that proves you are indeed in a crisis with no other viable options.
Submitting a letter of hardship.
To prove your case, you’ll need to spend some time on a cover letter explaining your hardship and provide full financial disclosure; the original purchase contract; a balance sheet of your income and expenses; asset statements, proof of income; bank statements; two years of tax returns; and a professional who knows the ropes.
Simply stating, ‘My house is worth less than the loan and I don’t want to pay any more,’ will not be acceptable.
Along with the required documentation, you stand the best chance of getting through the two- to seven-month short sale ordeal if:
- The home is marketable
- The second mortgage holder (if there is one) gets a cut or otherwise goes along with the deal
- The same lender holds all mortgages
- There is enough time before foreclosure (at least about 4 months).
Lenders prefer handwritten letters and are more apt to agree to a short sale for those who lost jobs or encountered significant medical bills, as opposed to careless spending.
Your best approach to a short sale is by contracting with a real estate professional familiar with the transaction. If your home’s value is significantly less than debt tied to the property, you are a candidate for a short sale. You are not selling a home on the open market so much as you are selling your case to the lender. Call Sonja today at 661-979-9000 or email her at [email protected] to discuss this in more detail.
Letter of hardship
The State of California Appropriations Committee is meeting this Friday. On the agenda a SB 30 which was originally introduced in December 2012 and finally received its first hearing last week. If not approved this Friday, the bill would stall up until January 2014.
Why is SB 30 important? Under the current state law, when a lender forgives mortgage debt in a short sale, the seller must pay state income tax on the amount of forgiven debit (there is currently no federal income tax). If passed, this bill will assist to eliminate the state income tax on short sale transactions. According to the California Association of Realtors (CAR) and many others, passing this bill is the right thing to do. Distressed homeowners are faced with a no-win situation — either pay taxes on money they don’t get or let the home go into foreclosure. They generally have two choices — foreclosure or short sale. If they fear state income tax liability on a short sale, they are likely to choose foreclosure. Foreclosures are bad for everyone….the community, the homeowner and damage property values more than short sales.
Not all delinquent homeowners face foreclosure because they purchased above their means. Many homeowners have financial hardships that have placed them in a difficult situation. If this bill is not passed, these borrowers will face credit challenges and additional financial challenges as a result of having to pay taxes on money they will never see again.
What can you do to help?
Encourage State Assembly member Mike Gatto (Chair of the Appropriations Committee) to pass this bill by visiting his Facebook page: www.facebook.com/mikegatto and sending him a message asking him to support SB 30 and distressed homeowners
Call Assembly Member Mike Gatto at: 1-800-969-3420 — enter PIN number 3043 (call Monday – Friday 9 AM – 5 PM)
If you wish, you can bypass the first part of the message by entering the PIN, followed by the # sign, at any time. You may also bypass the 2nd part of the message by hitting the “1” key to be directly connected to the legislator’s office. Ask him to support distressed homeowners and support SB 30. As the Chair of the Appropriations Committee, he is responsible for the committee’s failure to act on behalf of distressed homeowners.
To read the full bill click here
The Internal Revenue Service’s Mortgage Debt Forgiveness Act of 2007 has been extended through the end of 2013. What does this mean?
You probably recall the Mortgage Debt Relief Act of 2007 allows certain taxpayers to exclude income connected with the discharge of debt on a primary residence. This includes debt that has been reduced through the restructuring of a mortgage as well as mortgage debt forgiven in connection with foreclosure, short sale, or deed-in-lieu of foreclosure.
The recent extension comes as part of the vote that passed so we do not go over the “fiscal cliff.” This vote should motivate potential short sale sellers to list and sell their homes in 2013.
According to the IRS (Tax Tip 2011-44), here are 10 facts that the IRS wants people to know about Mortgage Debt Forgiveness. (Information courtesy of the IRS. Please check with your tax advisor/CPA regarding your specific situation.)
- Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence.
- The limit is $1 million for a married person filing a separate return.
- You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.
- To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.
- Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.
- Proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion.
- If you qualify, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.
- Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the tax relief provision. In some cases, however, other tax relief provisions – such as insolvency – may be applicable. IRS Form 982 provides more details about these provisions.
- If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed.
- Examine the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7.
The follow-up question is does the tax forgiveness apply to state taxes as well? The California Association of Realtor® recently issued the following statement about California taxes in a short sale:
“The state Senate today passed C.A.R.’s tax relief bill without a single “no” vote. SB 30, which provides tax relief to those who are selling a home in a short sale, will now be considered in the state Assembly.
In late May, the Senate Appropriations Committee linked SB 30 to SB 391, a C.A.R.-opposed bill that creates a recording tax. This link, in the form of an amendment, says that SB 30 cannot take effect unless SB 391 does as well. While we are troubled by this transparent political maneuver meant to force C.A.R. to support the recording tax, C.A.R. will continue to work toward the passage of SB 30 in the Assembly, the defeat of the recording tax, and the delinking of the two bills.”
Again, check with your tax advisor/CPA for details regarding your specific situation.
Source: Short Sale Expeditor and IRS
For previous articles, visit www.sonjabush.com
Consciously or knowingly ceasing to make mortgage payments is called strategic default. There are many people that knowingly stop paying the mortgage because they cannot afford to continue to do so, and there are others that opt to stop because they believe that this might accelerate their short sale or their loan modification.
Borrowers need to understand the consequences of their actions. Late mortgage payments impact your credit score and thus, they also impact your future ability to borrow.
The Home Affordable Foreclosure Alternatives (HAFA) program has specific guidelines, which often allow for a short sale when the borrower is current on the mortgage. Additionally, short sales can be completed for short sale sellers that have not missed a single mortgage payment. For more information on the HAFA program, visit www.MakingHomeAffordable.com
Some homeowners also stop making their Home Owners Association (HOA) payments. This can often be a short sale deal killer. Short sale lenders do not like to pay the seller’s unpaid HOA balance and often will only allocate a small amount of money for HOA document and transfer fees. Most experts advise short sale sellers to continue to pay the HOA dues whenever possible.
Whether to continue to make the mortgage payments or HOA dues is a personal decision that can only be made by the borrower. Understanding the consequences of the late payments can often help to make a more informed decision.
For previous articles, visit www.sonjabush.com
There are distressed sales in almost every market. Before we look at Mammoth Lakes specifically, it is important to understand the definition of distressed sale.
A distressed sale in real estate is defined as the urgent need to sell property when the owner can no longer make the mortgage payments. He/she must sell the property immediately to pay off the mortgage, even if it involves losing money on the property. There are two primary types of distressed sales:
Foreclosure: A situation in which a mortgage lender takes possession of the property because the borrower has not made payments on interest or principal for a certain period of time.
Short Sale: An agreement between a mortgage borrower in distress and the lender that allows the borrower to sell the house and remit the proceeds to the lender. A short sale is an alternative to foreclosure or a deed in lieu of foreclosure.
Foreclosure-related sales are on the decline but distressed sales continue to claim a “disproportionately high portion” of total home sales across the country, according to RealtyTrac’s most recent foreclosure and short sales report. The firm also found increases in prices for distressed properties in 2012.
Distressed property sales made up 43 percent of all home sales nationwide in 2012, according to RealtyTrac. Foreclosure-related sales made up 21 percent of all sales, while non-foreclosure short sales made up 22 percent of sales. Together, foreclosure and REO sales decreased 6 percent from 2011 with a total of 947,995 sales over the year in 2012.
Here in Mammoth Lakes, in 2012 distressed property sales made up 41 percent of all home sales. Foreclosure sales made up 15 percent of all sales and short sales were 26 percent.
A qualified licensed real estate agent can provide information on available distressed sales. Often the lender has special requirements for buyers and although there are some “good deals,” patience is a virtue when dealing with distressed sales.
For previous articles, visit www.sonjabush.com
There are several benefits by getting your home purchase or sale closed before 2013. The first and most important is you will benefit from the Mortgage Debt Relief Forgiveness Act.
This law exempts current homeowners from serious income taxes normally incurred when mortgage debt is forgiven – including in cases where an underwater home is sold short. A mortgage lender extends cash to a borrower when they make a mortgage on a home. If that debt is wiped out without actually being paid back, then the cash that was extended to that borrower is normally considered income by the IRS, and is taxed as such.
But when the real estate market crashed, the federal government enacted this Act to eliminate the thousands and thousands of dollars of income taxes the average American who loses a home to foreclosure or short sale would otherwise incur.
This Act is set to expire on December 31, 2012. Most industry insiders expect it will be extended before that time, but growing numbers are surprised it hasn’t already been. And with the upcoming election, some are unsure what will happen.
If you need to sell an underwater home via a short sale, the time to list it was really a few months ago. But some servicers are expediting these transactions so that it might still be possible to get your short sale closed before year’s end. If your escrow closes by December 31st, you’ll avoid the enormous tax burden that could result if the Act expires and you had to do a short sale in the future. (Ask your accountant or financial advisory for advice on your specific situation.)
For previous articles, visit www.sonjabush.com
Myth #1: The homeowner must have missed mortgage payments in order to qualify for a short sale.
FACT: Years ago this may have been true, but not in 2012.
A financial hardship should exist or be imminent. But, not all people with financial hardships have missed a mortgage payment. Common hardships include mortgage rate adjustments, loss of job or income, health or medical issues, and divorce among others.
Myth #2: Banks prefer foreclosure to processing a short sale.
FACT: The truth is that banks would prefer NOT to foreclose on a property because it costs them big bucks. The bank will lose a lot less on a short sale than on a foreclosure.
In fact, many banks are so interested in short sales that they are paying sellers to participate in a short sale versus letting the home go to foreclosure.
Myth #3: In order to the seller to qualify for a short sale, he or she must speak with the lender first and get pre-approved.
FACT: While each lender has a different way in which they process the short sale, overall the best way to get in front of a tough situation is to speak with a knowledgeable agent that knows how each short sale lender operates. Often, when calling the lender, short sale sellers find that they do not get the answers that they want and need from the first line of short sale support.
Myth #4: Short sales don’t close.
FACT: The truth is that about 50% of all nationwide real estate transactions right now involve distressed properties.
Myth #5: Short sales take months (and months) to close.
FACT: It can take months to close if you don’t know “rules of the road.” The short sale process must be mastered and it helps quite a bit to know the ins and outs at each of the major lending institutions. There are many short sales that can be approved in a much quicker time frame. The more liens on title, then the more lengthy the short sale process. A qualified real estate professional can help navigate the process.
Source: Short Sale Expeditor
The answer is “yes” and “no” and “maybe.” According to an excellent chart that is available for download (http://www.scribd.com/doc/85625440/Loan-Waiting-Periods), if you are obtaining an FHA loan for your next purchase, there may be no waiting period for a borrower who participated in a short sale to buy again. However, that borrower would have to have completed the short sale with no late payments on any mortgages and no consumer debt within the 12-month period prior to the short sale. Also, the borrower must be able to prove that s/he was not taking advantage of the declining market conditions.
Short sale sellers are often curious about the waiting periods required to purchase again after significant derogatory credit events (such as short sale, foreclosure, and bankruptcy). Use the handy chart in order to familiarize yourself with the latest and greatest information about all of the different loans and their waiting periods. That way, when you take your next short sale listing, you will have another tool at your disposal.
Whether you’re a seller in the middle of a real estate problem or you’re searching real estate listings as a potential buyer, it’s important to know the difference between a foreclosure and a short sale. Foreclosure is a far worse fate than a short sale if you are the seller, but as a buyer of a distressed property, a short sale is often the more difficult process to wade through.
A property that has been foreclosed on means the owner was not able to make the monthly payments for a certain amount of time and the lender has taken control of the property. If not sold at auction, foreclosure property is simply owned by the lender, often called REOs or real estate-owned properties. In either case, the seller is taken out of the equation and the buyer only negotiates with the bank /lender.
You can stop a foreclosure by considering a short sale. Don’t be fooled by the name, the process of a buying a short sale property can be a long one. Once the seller accepts an offer, he sends it to the lender for approval. Even if a seller accepts the offer, the lender’s approval is the one that matters and that can take time. More paperwork is involved in a short sale than a regular sale, or even a foreclosure. Use a realtor who is knowledgeable in short sales, as there are many nuances to completing a short sale successfully.
With both foreclosure and short sales, the sellers credit is affected negatively. According to MyFico.com for a foreclosure, you can expect your FICO score to drop by as such as 200 and for a short sale at least 75 points. Both types of default are considered as “not paid as agreed.” There are also tax consequences to consider with both options – check with your accountant.
Broker Associate – DRE #01904399
The Village at Mammoth