What is a Short Sale?
A short sale is when property is sold but the sale price does not cover the balance of existing loans. This is often the case when a property owner cannot pay the mortgage payment on the property. Both the lender and the borrower have to agree that a short sale is in the best interest of those involved. The lender may see that taking some loss on the balance owed is better than trying to go after the borrower for the amount due. A borrower benefits in that they can be free of the debt if a short sale happens and they may avoid foreclosure and even bankruptcy in some cases. Depending on how the terms of the short sale the borrower may or may not be released of any responsibility for the remaining debt on the property.
If the lender does choose to release the borrower of their obligation to pay any remaining balance, they would issue a tax form 1099-C. This does not necessarily mean that the borrower shows this as income so be sure to check with a tax professional to clarify.
Can I do a short sale?
There are many things to consider when deciding if a short sale is best for you or if you are a candidate for this option. We recommend calling us so that we can get some information from you and help you make an educated decision. We can also help you through the process. Please call and we would be more than happy to answer your questions and assist you in every way possible.
What about bankruptcy?
Bankruptcy is always to be used as a last resort. This option is available to individuals and businesses who want to eliminate or repay their debts while under protection from the federal bankruptcy court. There are two types of bankruptcy in general. One is considered a liquidation and the other is a reorganization.
Chapter 7 – This is considered liquidation. Property may be taken and sold (liquidated) and the proceeds may be dispersed to the lenders that are owed. There is property that is considered exempt and a person may keep this property. State laws generally dictate what property is considered exempt. After the liquidation of property, the debtor is cleared of all debt and essentially has a clean slate where debt is concerned. However, this bankruptcy does stay on a credit report for about 10 years and should not be taken lightly. This option is not available to everyone so it is important to discuss options with a lawyer.
Chapter 13 – This is considered a reorganization. Chapter 13 bankruptcy has also been called a “wage earner” bankruptcy. This is when a person has income sufficient to pay a portion of the debt back over time. An individual or business doing a chapter 13 bankruptcy would propose a plan to repay the debt. The minimum amounts that can be paid back are all based on income and other factors. The debt owed also has to fall under certain amounts. This enables a borrower to pay back a portion of the debt and when their new payments plan is paid in full they are completely relieved of the debt owed.
If you are declaring bankruptcy and wonder if a short sale is right for you please call our office so we can help you decide what is best for your situation.
What are HAMP and HAFA programs?
HAMP – This is the Home Affordable Modification Program. This program was put in place to help around four million homeowners to stay out of foreclosure by enabling them to modify their mortgages to make a more affordable payment. The goal of this program was not just to prevent immediate foreclosure but to get the loans to a payment that the homeowner can make month after month for the long term so that they avoid foreclosure not and in the future.
There are several determining factors for eligibility:
* Homeowner must be delinquent on mortgage payments or they must be in immediate danger of loan default or foreclosure.
* Property must be the primary residence of the borrower.
* The mortgage must have been initiated before January 1, 2009 and cannot have a balance of more than $729,750 (for a single family home or one unit property).
Once eligibility has been determined the payment amount is set based on 31% of the borrowers income. The payment needed can be reached by reducing the loan interest rate (to as low as 2%), by extending the term of the loan (up to 40 years), and/or deferring a portion of the loan interest free.
HAFA – This is the Home Affordable Foreclosure Alternatives Program. This program is in place to give incentive to
borrowers, lenders, servicers and others to use alternatives other than foreclosure. This can be achieved by doing short sales or deed in lieu (DIL) rather than foreclose. Foreclosures can be very costly for all involved so these options are a great help. The HAFA is available to the same group that is eligible for the HAMP program but that have had one or more of the following situations:
* Cannot qualify for the trial period plan.
* Did not complete the trial period plan successfully.
* Have two or more missed payments on the HAMP plan.
* Request a short sale or DIL (deed in lieu).
Qualifying for HAMP or HAFA programs
Our office is ready to help you find out if you are eligible for the HAMP or HAFA program and we can help you start the process. Please call us today!
Short Sales and Federal Taxes
When a homeowner does a short sale the lender will send them a 1099-C tax form for the amount of debt that was
unresolved in the sale. This means that any amount still owing on the balance of the loan after the time of the short sale will show on the 1099-C. The “C” on this form stands for “cancellation of debt”. This means that the lender has written off the debt and will not keep trying to collect from the homeowner.
The Internal Revenue Service does regard “debt relief” as a taxable source of income. Because a lender is writing off the amount of the balance due on the loan in most cases, this is considered to be “debt relief”. The Mortgage Tax Debt Relief Act provides a few tax shelters for those who do short sales. Here we will list the different instances in which this unpaid debt is not taxable:
* If borrower is considered “insolvent”. Insolvency means that at the time of the short sale the borrowers debt exceeded their assets. The IRS has specific terms under which someone is found insolvent so it is important to look up your tax forms and talk to a tax professional regarding your specific situation.
* Borrowers who cashed out some of the equity in their home to improve their home substantially are exempt from taxes on a short sale. This means that any money that was pulled out of the home got put back into the home for improvements.
Homeowners who have taken cash out of their homes and used it for anything other than substantial improvements to the home are most likely going to owe taxes after a short sale.
Loan Types: Recourse and Non-Recourse
If you were to get a recourse loan this is usually given as money for a purchase. This means that the lender has recourse to get the money from you as repayment for the loan.
Non-recourse loans are cash-out loans. Lenders do not generally have any recourse in this situation.
If you wonder what type of loan you have and what it means you are welcome to call and ask us or you may want to talk with your lawyer and/or lender.
Second Mortgages In a Short Sale
When a homeowner is looking to do a short sale all lenders and the homeowner have to agree to the terms and to move forward with the short sale. It is in the best interest of all parties to move forward with a short sale if foreclosure is imminent. The primary lender is most likely very willing to give some of the proceeds of the short sale to the second mortgage lender since they will benefit as well. The second lender is at risk of getting nothing to repay the debt should the home be foreclosed on and this provides motivation for all parties to work things out.
Should I Foreclose Or Do A Short Sale?
If you are behind in payments and think you may be risking foreclosure it is most likely in your best interest to do a short sale. The main reason for this is because if you do a short sale the debt is settled and you no longer owe anything to any of the lenders involved. With foreclosure you take the risk of the bank filing a judicial foreclosure and you could lose the home and still be responsible for some of the money owed.
Another great reason for doing a short sale is that a foreclosure will be horrible for your credit score. You are much better off showing a short sale than a foreclosure. Future lenders will also look at you with better favor if you show a short sale rather than a foreclosure or bankruptcy. This is due in part because Freddie Mac and Fannie Mae did a revision of how they perceive these items in August of 2008. The are looking more favorably upon those that chose a short sale than those that went the route of foreclosure or bankruptcy.
The Cost of a Short Sale
Another great benefit of a short sale for the homeowner is that there are no costs involved for them. The lender handles the payment of all closing costs, escrow fees and commissions.
The Short Sale Time Frame
Each short sale is very unique. In general short sales can be done in about four months time. Some can take less time, possibly as little as 60 days or so. However, there are no guidelines saying how long it should take.
Can I do a short sale even if my loan is current?
Yes! Many people are very misinformed about this and think that you have to be behind on payments in order to take this step but that is not true. If you foresee that you cannot maintain the home and the payments you owe you have good reason to look into a short sale.
Who will handle my short sale?
We will. Just give us a call. We will negotiate with your lender(s) and get things handled for you. Call today and let us help you.