Short Sales Help
Part III

Issues Taken Into Account by Lender

  • The Amount of Equity You Have In Your Property Compared To The Outstanding Loan Balance

  • The Additional Financial Resources You May Be Able To Bring To Bear

  • Whether Or Not You Live In A Homestead State, (see below) and The Nature and Amount Of The Homestead Exemption

  • The Amount Of Private Mortgage Insurance You Have

All of these factors should be taken into account along with many other variables and special conditions. The lender will make a purely financial determination about what is best for the lender The lender is looking for the way to maximize the amount of cash it receives. It is up to you to present a persuasive case.

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Tax Issues

Before you put your home on the market for a short sale, talk with a tax advisor about possible tax repercussions. The IRS may consider the difference between the value at which you sell your home and the mortgage balance as "income" on which you have to pay taxes if your lender forgives the debt. Money you'll have to come up with the cash to cover the taxes. Your lender will likely send either a Form 1099-A or 1099-C,Cancellation of Debt.

The Mortgage 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, qualifies for the relief. However, there are specific qualifications that you have to meet. For example only, 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.

Another possible tax exception is if you can prove that you were "insolvent" - that your debts were bigger than your assets- before your mortgage lender agreed to a short sale of your property. Only a tax professional will truly know if you are insolvent by IRS standards.

Regardless of the above, you may still have to report debt relief on your state return only a tax professional can advise you.

Legal Issues

In the event that you have been delinquent in paying your mortgage or anticipate that you will not be able to make payments moving forward, your options will vary based upon several factors or variables that are specific to you and your property. If you are late on your payment and the bank has been calling you and you have seem to have exhausted all possibilities, contact an attorney or pre-foreclosure specialist to discuss your options.

Do not contact the lender until you fully understand the potential risks involved. Short sales and foreclosures are confusing for most homeowners. Even after receiving an explanation of the potential outcomes of a short sale or foreclosure, homeowners still feel overwhelmed. There are many potential legal pitfalls that you want to avoid. For example:

As troubling it is to lose your house to foreclosure, borrowers may still be on the hook for the deficiency amount. For example, a home that has a note of $200,000 for which a buyer is purchasing for $150,000 has a deficient amount of $50,000. Most homeowners cannot afford to bring $50,000 to closing so that $50,000 can either be forgiven debt by the lender or a deficiency that the lender can pursue. In fact, many lenders have been known to use this "forgiveness of debt" issue as a way of dissuading their borrowers from pursuing the Short Sale approach.

It can be an unpleasant shock for borrowers who have sold their home via a short sale arrangement where the bank approved selling the property for an amount less than the mortgage debt that they still owe the lender money. Deficiency judgments can hurt ex-homeowners years after they have lost their property. In Massachusetts, for example, a lender has 2 years to pursue a judgment. If judgment is ordered they have up to 20 years to collect.

Some borrowers, thrilled when they get a short-sale fail to carefully review the documents send by their lender before they sign. Often these include a document that makes them still legally responsible for the debt. If called to their attention, lenders will often negotiate this clause on terms more favorable to the seller but won't if not asked.

What facts should you include in your proposal letter to convince your lender? Not all short sales or other pre-foreclosure or foreclosure options are structured alike. It is important that the package you put together for your lender addresses the lender's concerns and puts forward a persuasive case. For example, your proposal will need to include a detailed description of the price you are asking the lender to accept and that costs you are asking the lender to assume.

Keep in mind that in many jurisdictions, there is a recordation and transfer tax which is typically split between buyer and seller. It also helps to include a market analysis which will show what houses in your area are currently selling for. Your proposal should be as specific as possible. Therefore, it is important to understand the lender's requirements.

But the lender's approval to proceed with a short sale does not end the process. When you or your real estate agent find a prospective purchaser, the contract must state that it is contingent on lender's approval. You have to send the contract to the lender, and it would help if you would include an accounting of all expenses which you will have to pay at settlement, and a final number that the lender will receive when settlement takes place.

Your lender will then review the documentation, and may reject certain expenses. You don't want to learn at settlement that you still have to come up with a lot of cash, because your lender did not authorize certain out-of-pocket expenses.

Do you live in a Homestead state and does this afford you any protections in the current situation? The owner or owners of a home or those who rightfully possess the premises by lease or otherwise and also occupy or intend to occupy the home as a principal residence may file for Homestead protection.

The Homestead Exemption is designed to protect the value of the homes of residents from property taxes, creditors, and circumstances arising from the death of the homeowner spouse. However, protections vary according to state law. In Massachusetts, for example, the Homestead Exemption only protects against unsecured creditors. Other states have more comprehensive protections.

For the rest of this article please go to

Short Sale Help, Part I

Short Sale Help, Part II

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Short Sale Help, Part I

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Short Sale Help, Part III

Short Sales Help FAQ, Part I

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Short Sales Help FAQ, Part III

Short Sales: Our Services

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