Again, I am not a credit advisor. What follows is just basic information concerning the average short sale according to recent reports.
The credit consequences of a short sale and foreclosure vary. Generally, a short sale will show up on your credit report as a ”settlement" or “settlement for less than owed” Also, in many cases, payments were not being made, so there will also be some “lates” on your credit report. Neither of these marks is a good thing to have but it’s possible to get them off of your credit report within a few years or less. We work agressively with an individual who assists in these situations. Please feel free to check out this website at www.clearvision.improvecreditstore.com. Please click on the box for free information on fixing your credit and getting back to a normal situation, sooner than later.
While it is true that a sale can drop your credit score by 80-100 points, there is also the possibility that through negotiation with the lender you can avoid having the short sale reported to a credit agency. This is not guaranteed, but it is possible.
A foreclosure on your credit report can take 7-10 years to remove and can bring your credit rating (FICO score) down on average of 200-280 points. This is a huge hit.
Thus, if you have no better alternatives in your situation, it is generally better to pursue a short sale and avoid foreclosure. But again, please talk to an attorney first to see what direction is best for you.
Monday, November 24, 2008
Friday, November 21, 2008
What Does the Hardship Letter Accomplish?
The Hardship Letter is one of the most important parts in the short sale package. This is written by the seller. This is highly important as it explains to the lender(s) the reasons for your NEED for a short sale. All that is generally needed is a one page letter with all your pertinent information.
Items that could be mentioned in such a letter could include:
Unemployment
Reduced Income
Divorce
Separation
Medical Bills
Debt
Death Payment Increase
Business Failure
Job Relocation
Illness
Military Service
Please note that market shift is not included in this list. Bad investments in themselves do not count. If you have the ability to pay your mortgage, it is your obligation. Buyer remorse is not a legitimate excuse. However, due to the current economic condition, most people facing foreclosure generally are facing at least one, if not multiple items from the above list.
Items that could be mentioned in such a letter could include:
Unemployment
Reduced Income
Divorce
Separation
Medical Bills
Debt
Death Payment Increase
Business Failure
Job Relocation
Illness
Military Service
Please note that market shift is not included in this list. Bad investments in themselves do not count. If you have the ability to pay your mortgage, it is your obligation. Buyer remorse is not a legitimate excuse. However, due to the current economic condition, most people facing foreclosure generally are facing at least one, if not multiple items from the above list.
Wednesday, November 19, 2008
IRS Form 982
Before I write one word in this blog, I want to again reiterate, I am not a CPA, nor a tax attorney. What is being written here is just some basic information passed down to us that can be used for informational purposes as a starting point to see what potential tax savings there can be. This IN NO WAY, replaces speaking with these licensed professionals, and we highly advise doing so as it could save you thousands of dollars.
As we mentioned in another blog, there is potential for a large tax bill if you utilize a short sale, foreclosure, or deed in lieu of foreclosure. The amount of debt that is “forgiven” by your lender may be viewed as income for that tax year by the IRS.
The example that was given in that blog was very simplistic and most cases are more complex and have many, many more variable. However, you do need to be aware of the potential tax liabilities involved in a short sale.
Is there a way to avoid paying that tax? Possibly. Again, only a consultation with the appropriate, trained professionals can determine this for sure. However, IRS form 982 says, “Generally, the amount by which you benefit from the discharge of indebtedness is included in your gross income. However, under certain circumstances described in section 108, you may exclude the amount of discharged indebtedness from your gross income”.
The specific instructions are contained in section 108 of the Internal Revenue Code, and you will need to discuss these with your CPA or tax attorney. (Side note: Have you noticed that I keep referring to CPAs and Tax Attorneys? Just as all Real Estate agents are not equal, the same is true for accountants. In this very delicate situation, please make sure to either speak with a CPA or a tax attorney. Make sure you are protected.)
In this code, one of the “circumstances” they are referring to is that if you are insolvent then you may be able to “exclude” the forgiven indebtedness (the amount the lender forgave on the loan) from being added to your gross income for that year.
With that we get to the point of this blog. Here are some questions you will need to ask your CPA:
Can I avoid paying taxes on the forgiven debt if I was insolvent at the time of the short sale?
Do I have to file bankruptcy to be considered insolvent?
If you already used a short sale and paid taxes can you file an amended return and get a refund?
Do you have to surrender your property in bankruptcy to be eligible for relief?
Does a form 982 have to be filed in order to be eligible for tax relief?
Again, this is just a starting point, but hopefully you now understand how important it is to work with these professionals as well.
As we mentioned in another blog, there is potential for a large tax bill if you utilize a short sale, foreclosure, or deed in lieu of foreclosure. The amount of debt that is “forgiven” by your lender may be viewed as income for that tax year by the IRS.
The example that was given in that blog was very simplistic and most cases are more complex and have many, many more variable. However, you do need to be aware of the potential tax liabilities involved in a short sale.
Is there a way to avoid paying that tax? Possibly. Again, only a consultation with the appropriate, trained professionals can determine this for sure. However, IRS form 982 says, “Generally, the amount by which you benefit from the discharge of indebtedness is included in your gross income. However, under certain circumstances described in section 108, you may exclude the amount of discharged indebtedness from your gross income”.
The specific instructions are contained in section 108 of the Internal Revenue Code, and you will need to discuss these with your CPA or tax attorney. (Side note: Have you noticed that I keep referring to CPAs and Tax Attorneys? Just as all Real Estate agents are not equal, the same is true for accountants. In this very delicate situation, please make sure to either speak with a CPA or a tax attorney. Make sure you are protected.)
In this code, one of the “circumstances” they are referring to is that if you are insolvent then you may be able to “exclude” the forgiven indebtedness (the amount the lender forgave on the loan) from being added to your gross income for that year.
With that we get to the point of this blog. Here are some questions you will need to ask your CPA:
Can I avoid paying taxes on the forgiven debt if I was insolvent at the time of the short sale?
Do I have to file bankruptcy to be considered insolvent?
If you already used a short sale and paid taxes can you file an amended return and get a refund?
Do you have to surrender your property in bankruptcy to be eligible for relief?
Does a form 982 have to be filed in order to be eligible for tax relief?
Again, this is just a starting point, but hopefully you now understand how important it is to work with these professionals as well.
Monday, November 17, 2008
The IRS is Involved, How?? What??
Many owners (particularly investors) do not realize that they may face tax consequences from the IRS after the short sale of their home. Unfortunately, if you face these, you face them regardless of foreclosure or short sale. Every situation is different and you absolutely must work with a CPA or tax attorney. This could mean thousands in saved dollars. Also, because of these tax consequences, some feel the need to run into bankruptcy. Again, only consultation with an attorney will aid you in this, but please, make sure to discuss this matter with a CPA, especially if tax liability is your primary concern. We will be happy to recommend local CPAs who specialize in short sales if you need assistance.
Just one example of why you need a CPA. Suppose you pursue a short sale and are being forgiven $100,000. The IRS now considers that $100,000 that was "forgiven" by the lender as "debt relief" income. Thus, there is a good chance that your lender will send you a 1099 in the amount of $100,000. Even if they do not, by law, you need to claim this as income.
Well, now I am sure you are saying, I do not want to pay, nor have the money to pay, income tax on $100,000. Again, this is why meeting with a CPA is indispensable. There are many forgiveness laws and other scenarios that exist in the tax world that I am not even going to touch because I am not a CPA. However, please be aware that they do exist and thus, talk to the right professionals to see which ones apply to you and how.
Is that "Short Sale Package" Really Needed?
Yes, there is a lot of documentation required to start a short sale. Lenders simply now refer to this as a "Short Sale Package". Below is a list of the items generally required by the lender. Some do actually require more, but, once again, hiring the right Real Estate Agent is essential, as this person will already have this package ready for you and ease you preparation of it.
Sample Short Sale Package:
- Authorization Letter
- Hardship Letter
- 2 years Tax Information
- The 2 most recent pay stubs
- The 2 most recent months bank statements
- Listing Agreement
- Contract
- HUD-1 Financial Sheet
- Financial Statement Sheets
Again, these things may seem overwhelming, even foreign to you, so speak with your agent, who is experienced in short sales, and much time, effort, and possibly even money will be saved on your side.
Wednesday, November 12, 2008
What Happens in a Short Sale?
Short sales can be very complicated, which is the reason that many owners shy away from them. Well they do require some work on your part, hiring a knowledgeable agent will limit your work and make the changes of success increase dramatically.
The first step is determining the "true market value" of the property. A good real estate agent can provide a market analysis and give you a realistic idea of what the home can sell for under current conditions. Many mistakenly use use zillow.com or other real estate related sites to determine the value of your home. While these are useful tools, generally, their prices are quite inflated over market. Also, as has been the case recently, if the market is continuing to move down, the value of your home may also be declining and the estimated valuations on these sites may be very high.
The lender is also going to need a calculation of estimated closing costs. We always use an attorney to figure out such figures, especially since, in a short sale situation, the lender is the one that pays all of these items. These include a title report, BPO or appraisal, attorney fees, real estate commission, unpaid liens such as HOA fees or property taxes and other items. All of this may add up to a substantial amount of money, so it is very important that this report to the lender be accurate, once again, demonstrating the reason to use a qualified real estate attorney.
The lender will need to be notified of your current situation. Generally, a qualified real estate agent will have you fill out all the necessary paperwork to send to the loss mitigation department at the lending office. However, it is beneficial for sellers to request a short sale package from the lender. The reason for this is that the real estate agent cannot, in many cases, send this information to the lender until an offer is placed on the property. However, the homeowner can request and sent in this paperwork immediately, thus reducing the total time needed for a short sale. It is important that if you decided to fill in and submit this paperwork yourself, that you talk to someone who has the authority to make the required decisions. Remember, lenders are under no obligation to accept a short sale but, again, generally, it is in their best interests to do so. Some lenders will not consider a short sale until you have missed a payment or two. Others are very open from day one. It is good to know where your lender stands with regard to short sales, and again, a qualified real estate agent working in mitigation can help with this.
It is very imperative to consider your tax obligations! Do not underestimate this! Many times there can be a substantial tax obligation after a short sale has occurred. The same is true with a foreclosure, in fact, generally even more so. DO NOT RELY ON A REAL ESTATE AGENT TO HELP YOU WITH THIS INFORMATION. If a real estate agent tries to give you this advice, they could be costing you thousands of dollars and are breaking the law. Be sure to talk with a CPA or a tax attorney to explore all your options.
The last step is finding a buyer for the property. At this time, the offer and comps will be submitted to the lender for approval. If they approve the price, a closing can be set. If not, an agent should continue to work with the lender to either accept the price, counter at a reasonable price, or work to find another buyer at the price accepted by the lender.
Those are the basic steps to a short sale. Obviously, there is much more work involved that a qualified real estate agent can fill you in about as you progress in the process, but do not be afraid. If you are using the right personnel, the procedure should not be difficult for your and the hired professionals can combat the work and the issues as they come.
The first step is determining the "true market value" of the property. A good real estate agent can provide a market analysis and give you a realistic idea of what the home can sell for under current conditions. Many mistakenly use use zillow.com or other real estate related sites to determine the value of your home. While these are useful tools, generally, their prices are quite inflated over market. Also, as has been the case recently, if the market is continuing to move down, the value of your home may also be declining and the estimated valuations on these sites may be very high.
The lender is also going to need a calculation of estimated closing costs. We always use an attorney to figure out such figures, especially since, in a short sale situation, the lender is the one that pays all of these items. These include a title report, BPO or appraisal, attorney fees, real estate commission, unpaid liens such as HOA fees or property taxes and other items. All of this may add up to a substantial amount of money, so it is very important that this report to the lender be accurate, once again, demonstrating the reason to use a qualified real estate attorney.
The lender will need to be notified of your current situation. Generally, a qualified real estate agent will have you fill out all the necessary paperwork to send to the loss mitigation department at the lending office. However, it is beneficial for sellers to request a short sale package from the lender. The reason for this is that the real estate agent cannot, in many cases, send this information to the lender until an offer is placed on the property. However, the homeowner can request and sent in this paperwork immediately, thus reducing the total time needed for a short sale. It is important that if you decided to fill in and submit this paperwork yourself, that you talk to someone who has the authority to make the required decisions. Remember, lenders are under no obligation to accept a short sale but, again, generally, it is in their best interests to do so. Some lenders will not consider a short sale until you have missed a payment or two. Others are very open from day one. It is good to know where your lender stands with regard to short sales, and again, a qualified real estate agent working in mitigation can help with this.
It is very imperative to consider your tax obligations! Do not underestimate this! Many times there can be a substantial tax obligation after a short sale has occurred. The same is true with a foreclosure, in fact, generally even more so. DO NOT RELY ON A REAL ESTATE AGENT TO HELP YOU WITH THIS INFORMATION. If a real estate agent tries to give you this advice, they could be costing you thousands of dollars and are breaking the law. Be sure to talk with a CPA or a tax attorney to explore all your options.
The last step is finding a buyer for the property. At this time, the offer and comps will be submitted to the lender for approval. If they approve the price, a closing can be set. If not, an agent should continue to work with the lender to either accept the price, counter at a reasonable price, or work to find another buyer at the price accepted by the lender.
Those are the basic steps to a short sale. Obviously, there is much more work involved that a qualified real estate agent can fill you in about as you progress in the process, but do not be afraid. If you are using the right personnel, the procedure should not be difficult for your and the hired professionals can combat the work and the issues as they come.
Tuesday, November 11, 2008
Will a Lender Accept a Short Sale??
It is 100% accurate to state that lenders are not going to be jumping up and down thrilled to be processing a short sale. How could they be? They are taking a loss. However, they are also aware that a foreclosure is usually a far more time consuming and costly option, and is generally right around the corner. Simply put, lenders are in business to make money. In today's real estate market, where homes are worth substancially less than they were just a few years ago, the lenders realize it is in their best interest to liquidate the problem and to do so as quickly as possible.
By pursuing a short sale, generally a property can be sold and the loan taken off their books fairly quickly, whereas, if they pursue a foreclosure they run the risk of the process taking a much more substantial amount of time and at a much greater cost. The property will also be left vacant which can result in vandalism and deterioration. And often time, owners will even "damage" or "destroy" the house just before the foreclosure sale as form of retribution to the lender. In this situation, the lender does not have control of the situation, and, because of this, usually take large financial hits.
Simply put, these are some of the major reasons why lenders drastically prefer a short sale route instead of foreclosure. They still get the loan off of their books, but at a much cheaper rate and with much less hassle.
By pursuing a short sale, generally a property can be sold and the loan taken off their books fairly quickly, whereas, if they pursue a foreclosure they run the risk of the process taking a much more substantial amount of time and at a much greater cost. The property will also be left vacant which can result in vandalism and deterioration. And often time, owners will even "damage" or "destroy" the house just before the foreclosure sale as form of retribution to the lender. In this situation, the lender does not have control of the situation, and, because of this, usually take large financial hits.
Simply put, these are some of the major reasons why lenders drastically prefer a short sale route instead of foreclosure. They still get the loan off of their books, but at a much cheaper rate and with much less hassle.
New Information from National Association of Realtors: Realtors help buyers, sellers, with short sales
The following information was released by the National Association of Realtors (NAR) on November 11, 2008:
When families lose their homes to foreclosure, communities, the housing market and the economy all suffer. Short sales are one way that some troubled homeowners can avoid foreclosure, a topic discussed by Realtors at the Short Sales Solutions session, part of the National Association of Realtors® (NAR) 2008 Conference & Expo in Orlando.“Homeowners who are struggling to make their mortgage payments must have more options available to them to avoid foreclosure,” said NAR President Richard Gaylord. “Short sales can benefit not only the homeowner in question, but also buyers, lenders and the surrounding community. With their established lender relationships and insights into complicated real estate transactions, Realtors can add real value for both sellers and buyers interested in short sales.”A short sale is a transaction in which the seller’s mortgage lender agrees to accept a payoff of less than the balance due on the loan. The lender often receives a higher amount of the remaining loan balance than it would from the sale of the property after a foreclosure. This helps support home values in the surrounding community. Short sales also help homeowners maintain some level of credit.According to Freddie Mac, 50 percent of homeowners entering the foreclosure process did not have any contact with the lender first. One of the most valuable services Realtors can provide to clients who may be facing a foreclosure is guiding them through the lender’s short sale process and facilitating communication, according to session panelists Michael and Stacey Spikes of America’s Home Rescue.“The process for short selling an FHA loan is different than the process for shorting a Veterans Administration or conventional loan,” said Stacey Spikes. “Knowing the type of loan the seller has, and understanding the proper steps for short selling that loan and the order of those steps, is critical.”Homeowners who are having difficulty making their mortgage payments and who may be considering a short sale must generally meet three qualifying criteria: they must be behind on their payments, be able to prove a legitimate hardship, and have little or no equity in their home.While a typical real estate transaction involves two real estate professionals, a seller, a buyer, and the buyer’s lender, a short sale can include all of these parties in addition to the seller’s loan servicer, housing counselor, junior lien holders, mortgage investors and mortgage insurers. In addition to the number of parties involved, Realtors say that other challenges can make short sales difficult. These include burdensome paperwork, appraisals that do not consider the sellers’ duress or the number of foreclosures in a community, over-burdened loss mitigation departments, and complications created by second mortgages.NAR has created a working group to examine the problems and difficulties surrounding short sales and to educate its members on how to best work with their clients through this process. NAR is also reaching out to its partners in the housing and mortgage industry to encourage adoption of principles and practices to streamline the short sale process.“Short sales give many families in financial difficulties the possibility of salvaging their credit and avoiding the embarrassment of a foreclosure,” said Gaylord. “Realtors across the country stand ready to help.”
When families lose their homes to foreclosure, communities, the housing market and the economy all suffer. Short sales are one way that some troubled homeowners can avoid foreclosure, a topic discussed by Realtors at the Short Sales Solutions session, part of the National Association of Realtors® (NAR) 2008 Conference & Expo in Orlando.“Homeowners who are struggling to make their mortgage payments must have more options available to them to avoid foreclosure,” said NAR President Richard Gaylord. “Short sales can benefit not only the homeowner in question, but also buyers, lenders and the surrounding community. With their established lender relationships and insights into complicated real estate transactions, Realtors can add real value for both sellers and buyers interested in short sales.”A short sale is a transaction in which the seller’s mortgage lender agrees to accept a payoff of less than the balance due on the loan. The lender often receives a higher amount of the remaining loan balance than it would from the sale of the property after a foreclosure. This helps support home values in the surrounding community. Short sales also help homeowners maintain some level of credit.According to Freddie Mac, 50 percent of homeowners entering the foreclosure process did not have any contact with the lender first. One of the most valuable services Realtors can provide to clients who may be facing a foreclosure is guiding them through the lender’s short sale process and facilitating communication, according to session panelists Michael and Stacey Spikes of America’s Home Rescue.“The process for short selling an FHA loan is different than the process for shorting a Veterans Administration or conventional loan,” said Stacey Spikes. “Knowing the type of loan the seller has, and understanding the proper steps for short selling that loan and the order of those steps, is critical.”Homeowners who are having difficulty making their mortgage payments and who may be considering a short sale must generally meet three qualifying criteria: they must be behind on their payments, be able to prove a legitimate hardship, and have little or no equity in their home.While a typical real estate transaction involves two real estate professionals, a seller, a buyer, and the buyer’s lender, a short sale can include all of these parties in addition to the seller’s loan servicer, housing counselor, junior lien holders, mortgage investors and mortgage insurers. In addition to the number of parties involved, Realtors say that other challenges can make short sales difficult. These include burdensome paperwork, appraisals that do not consider the sellers’ duress or the number of foreclosures in a community, over-burdened loss mitigation departments, and complications created by second mortgages.NAR has created a working group to examine the problems and difficulties surrounding short sales and to educate its members on how to best work with their clients through this process. NAR is also reaching out to its partners in the housing and mortgage industry to encourage adoption of principles and practices to streamline the short sale process.“Short sales give many families in financial difficulties the possibility of salvaging their credit and avoiding the embarrassment of a foreclosure,” said Gaylord. “Realtors across the country stand ready to help.”
What Exactly is a Short Sale?
A homeowner should consider a Short Sale when the value of their home is less than the amount of their outstanding loans. For example, if your home is worth $150,000 but you have a loan of $250,000 then a short sale is a consideration. This would only be used when necessary. If you do not have a pressing need to sell your home, you would want to wait on the market and for future equity buildup.
However, if you no option but to sell, for whatever the reason may be, from having to move to not being able to afford your payments, and you have no equity, you simply have three options.
First, you can bring cash to the table. If you owe $150,000 and your house is worth $145,000, this might work for you. In this case, you would just need to bring $5000 to closing plus the real estate commission. However, if you are in a situation like the one mentioned above, you would sell your home for $150,000 and still be liable for another $100,000 to the lender plus the other fees.
Second, you could let the home go by not making payments. It in turn would go into foreclosure. The lender will take the time to go through the foreclosure process, then force you and your family on to the street and then sell the house off, usually by first listing it with a real estate agent, and if that does not work, then by auctioning it off.
The third, and most viable option to most, is to pursue a short sale. You work with a knowledgeable team that lists your home on the open market and then aggressively works to make sure it gets an offer at current market value. They approach the lender, explain the circumstances and show them why it is in their best interest to less than full amount that is actually owed them.
Again, using the above example, we show them that we have a buyer that has come forward and made an offer at the $150,000 price, and because this is current market value, it is highly unlikely that anyone will offer a higher price. After much negotiating, we once again show them why they are financially better off to accept $150,000 for their $250,000 loan. After approval, we then proceed with a short sale.
The short sale option works many times, however, it is imperative to work with professionals who understand what they are doing and how this current market works, or the short sale will be unsuccessful, and foreclosure will come looming upon you once again.
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