Home values are down more than twenty-five percent from their peak in 2006 and continue to fall rapidly across the country. Some experts predict an additional fifteen percent decline in the upcoming year. As a result more than 12 million homeowners now have mortgage debt that exceeds the value of their homes.
WHAT IS A SHORT SALE?
A short sale occurs when the lender agrees to discount a loan balance and accept less than the total amount due incident to the sale of a home due to financial hardship. In today's economic environment more and more lenders are initiating short sale programs to assist people in selling their homes and thereby avoiding foreclosure.
WHO QUALIFIES?
Once homeowners find themselves in a circumstance where their home is worth less than the mortgage balance this is just the beginning of the process to determine if they are eligible for a short sale. Moving into 2009 more lenders appear ready to assist homeowners in loan modifications and short sales in an attempt to slow down the ever growing foreclosure crisis.
In virtually every short sale negotiation the lender will be looking for a statement of hardship from the homeowners which explains why they need relief and more specifically why the homeowners cannot pay the difference still due on the mortgage after the short sale. Declining property values coupled with a need to relocate or upwardly adjusting mortgages and unable to refinance are the beginning, in many cases, of the hardship picture. The declining home property value, increasing adjustable rate mortgages coupled with unemployment greatly defines the downward spiral leaving many homeowners in desperate need to sell their homes, which would not be possible without short sale assistance.
THE SHORT SALE PROCESS
The first and most prudent step would be to seek the assistance of a competent real estate lawyer to assist in the process. While each lender has their own specific requirements there is a consistency in the nature and type of documentation that can be expected.
The first step is to contact the lender to see if they have a person or department set up to respond to inquiries regarding short sales. While the situation seems to be improving as lenders become more and more organized in dealing with short sales it still may require some persistence in getting the proper individual on the phone to ascertain the lender's procedure.
Once contact is made with the workout or short sale department typically a lender will want an authorization signed by the borrower(s) which would allow the real estate attorney to communicate directly with the lender regarding the potential short sale. Many lenders will merely accept a letter, others will require a signed authorization and still others will require their specific written authorization form to be signed.
Once proper contact and authorization is in place the following requirements can be expected from your lender:
o Hardship Statement
This is a written statement which describes for the lender what has changed making it difficult/impossible for the homeowners to continue paying their current mortgage. Specifically, this is the statement where it is outlined for the lender if the homeowner(s) has lost a job or had a significant decrease in income, was hospitalized or had some other unexpected illness or medical emergency contributing to their problems, or simply had their mortgage adjust up making the payments no longer affordable. Again, your real estate attorney should assist you in writing this letter making a strong plea to your lender to accept less than the full payoff.
o Statement of Income/Assets
Most lenders will require a financial statement outlining all liquid assets, including savings accounts, checking accounts, money market accounts, stocks, bonds, cash and other real estate. Obviously this statement needs to be consistent with the facts outlined in the hardship statement in order for a lender to seriously consider the request. In many cases the borrower should be prepared to provide backup information including bank and other statements for the accounts disclosed in your statement of income and assets.
o Appraisal/Comparative Market Analysis
As part of the short sale process most lenders will require either that an appraisal be performed confirming the value of the property or in the alternative a current market analysis obtained from a real estate agent which will compare the suggested price of the home to that of similar homes that are either currently on the market for sale or have recently sold.
o Listing Agreement and Purchase Agreement
Many lenders also require a copy of a Listing Agreement with a real estate brokerage for the sale of the property together with a copy of the Purchase Agreement for the sale of the property as part of the short sale package. Obviously, any such Purchase Agreement should be carefully worded to include language that the sellers' obligations are expressly contingent upon lender approval. The lender may also require a preliminary settlement statement or net sheet which includes estimated closing costs and reflects the bottom line payoff to the lender.
In most circumstances after a complete short sale package is received by the lender it will take thirty to sixty days for approval and if granted sellers may move forward and close the sale of the house to the prospective purchaser.
CREDIT CONSEQUENCES
Selling a property by short sale will cause a hit on the sellers' credit report and in many cases the affect on credit and FICO scores could be the same as a foreclosure. As such, a short sale should only be considered, and in most cases will only be considered by your lender, to avoid a foreclosure. The good news for short sale sellers is that in most circumstances the wait involved before qualifying for a loan to buy another home is much shorter than if a foreclosure occurs. New Fannie Mae guidelines now require only twenty-four months seasoning before a short sale seller can again buy with a reasonable interest rate. In most cases a person who wants to buy another home after a foreclosure may end up having to wait as long as thirty-six to seventy-two months before a lender will offer a reasonable interest rate in relation to the current market.
One of the key areas that must be negotiated for sellers incident to the short sale is whether or not they will be subject to a deficiency judgment, meaning having to repay the difference between the loan amount and the amount paid to the lender at the short sale. In most cases it is up to the lender to decide whether to require a payback of some or all of the deficiency and as such the seller should discuss this matter with a real estate lawyer prior to finalizing a short sale. A lender's position regarding pursuing a deficiency varies from institution to institution and is greatly impacted by the hardship circumstance as well as the seller's income and assets. In many cases a good attorney can present the case to a lender and reach some agreement that is acceptable with regard to the deficiency.
TAX RAMIFICATIONS OF A SHORT SALE
While I am a licensed attorney, I am not a CPA and cannot advise on tax consequences. Generally speaking the cancellation or forgiveness of debt is included as taxable income. If a lender forgives that balance of a mortgage there is cancellation of that debt which could be taxed as ordinary income. Fortunately, tax relief has been enacted for such debts secured by a principal residence. Congress has passed the Mortgage Forgiveness Debt Relief Act of 2007 which is effective for discharge of indebtedness on or after January 1, 2007 and before January 1, 2010. The federal bailout legislation passed in October, 2008 extended this relief through December 31, 2012. In most circumstances, under this law, the forgiveness of debt incident to the sale of a qualified principal residence is excluded from taxable income.
CONCLUSION
Given the ever changing challenges of today's economy short sales are going to become more and more prevalent. With continued declining property values homeowners are in need of assistance and both lenders and the government are recognizing this need and enacting programs to provide for that assistance. While a short sale will have a negative impact on credit in many cases it is the only opportunity a seller may have to avoid foreclosure and will potentially afford the short sale seller the opportunity to qualify to purchase a new home sooner. The need to get out from underneath the negative equity is something that has been recognized by our government and the IRS but should only be considered after consultation with the appropriate real estate and tax professionals.
Always seek legal counsel before attempting to pursue a short sale. A real estate agent, although qualified in other aspects of real estate, is not qualified or licensed to give legal advice.