Short Sales

In a Short Sale the lender may allow you to complete a sale even though the price is less than what you owe them. Most servicers will accept a request to short sell the home but will reserve the right to finalize the agreement until a signed purchase agreement has been submitted. Most often, servicers are requiring the home to be listed at fair market value for 60-90 days before they will consider a short sale offer. In order to be considered for a short sale, servicers will want the following information faxed to their loss mitigation department: 

1. Hardship letter detailing the nature of the crisis and requesting permission to short sell the mortgage. 
2. Two consecutive years of federal tax returns.
3. Thirty days proof of income.
4. Three months of checking and savings account statements.
5. 401(k) statements, list of assets.
6. Home budget summary including income, current housing expense, utilities, car payments, food/gas/insurance, and credit card debt and monthly payments. This budget should reflect the financial hardship to the household by continuing to make the mortgage payment. 

Complications: Even if the servicer agrees to consider a short sale pending a signed purchase agreement from a qualified buyer, collection activity will NOT stop while you are trying to sell the home. In some cases, the servicer may agree to delay the foreclosure sale; however, this is uncommon. A short sale can take 90-120 days to be fully executed from the time a purchase agreement has been submitted to the servicer. It is not uncommon for the servicer to foreclose on a property in the middle of a short sale negotiation. 

Second Mortgage Complications: It is very difficult to execute a short sale for property that has a second mortgage involved. It might be possible for the homeowner to negotiate with the second lien holder to release their lien for a small fee (sometimes as little as $1,000) but that does NOT absolve the homeowner from responsibility for the second mortgage debt. It simply transforms the secured debt to an unsecured debt (by releasing the lien). The homeowner may be asked to sign a promissory note or negotiate a payment arrangement to the second mortgage holder. If repayment arrangements are not worked out, it is possible for the second mortgage holder to sue the homeowner and garnish wages. It is worth noting that even in a foreclosure situation, the second lien holder will attempt to collect the debt after the Sheriff‟s sale. The foreclosure eliminates the second mortgage lien; however, it doesn‟t eliminate the obligation of the homeowner to the debt. 

When negotiating a short sale, it may be possible for the first mortgage lender to “cancel any deficiency,” (the difference between what you owed and what you sold the home for). In other words, ask the lender to waive their right to demand repayment on the rest of what you owe. The sale will be reported to the credit bureau; however, it might be reported as “paid less than what is owed without deficiency” which is technically a settlement statement and has less of an impact on your credit report than a foreclosure. It is important to get all commitments in writing.

There are income tax consequences of a short sale option. In situations like this, the IRS considers the amount of debt the lender cancels for you (the amount you don‟t pay back) to be passive income. If you have lost income and will be in a lower tax bracket, it could work out fine. If not, you could be left with a big tax bill. Talk to a tax professional, a tax lawyer, or a non-profit advocate familiar with tax law. If by doing a short sale you will be facing a big tax bill you cannot pay, sometimes the better choice is to let the foreclosure proceed. Even in a foreclosure, there can be tax implications. Remember, a tax professional is essential during this process.