You have three (3) choices if you have a Mortgage that you cannot afford.

1. Loan Modification - One choice is to talk to the lender and see if they can lower your payments. Typically, you will ask if they can lower the interest rate so you can afford the lower payment. A loan modification works for you if together with all your other payments each month; you are spending no more than half your income. And if you are spending more than half on monthly payments, even after the loan modification, it won't be approved by the lender most likely and isn't a good option. With the falling home prices most people owe more than what their house is worth, a loan modification will not decrease what you owe or increase the value of your home. It will just decrease your payment by a small amount.

2. Foreclosure - The inevitable result of a foreclosure is the lender taking your house. Not only will you lose your house, but the lender can get a judgment against you for the arrearages you owe plus his costs for the foreclosure action. If that isn’t enough, your credit report will be in terminal condition for many years to come, worsening an already bad financial situation and making it very difficult to obtain any other kind of credit. There is no upside to foreclosure. It should be avoided at all costs.

3. Short Sale - You may ask yourself, why am I spending more on a monthly payment than I could walk away from my mortgage and buy the house next door and pay far less?

So in those cases, a mortgage short sale may be better. In a mortgage short sale,

you sell the house for less than the mortgages on it. The lender will let the house be sold and then release you from further debt. Or they may ask that you repay some of their loss.

Either way you will be better off. Most of the time a mortgage short sale is reported as "paid - settled" or “satisfied for less than the full balance” on your credit report. It does not count against you the way a foreclosure does. And you can negotiate with the lender which you cannot do in a foreclosure. So the second option, and the best one for many people, is a mortgage short sale. This short sale is generally kinder on your credit and may release you from future liability.

How will a short sale help?

The main benefit of a short sale is that you get out from under your mortgage without liability for the deficiency. You also avoid having a foreclosure or a bankruptcy on your credit record. Your credit won’t suffer as much as it would were you to let the foreclosure proceed or file for bankruptcy.

These are some questions you need to answer up front:

  • How much do you owe on the property?
  • How many mortgages are on the property?
  • Who are the mortgages with and how much is each one?
  • Are your mortgages current?
  • If not, how much are the arrears (late fees and other delinquent charges)?
  • Has the foreclosure process started?
  • If the mortgage is current, do you need to sell the house now?
  • Do you have a hardship like loss of a job or medical problems?
  • Are there any other surprises like judgments or tax liens against your property?
  • Does your property need major repairs or have defects?

Remember you will receive nothing from the short sale of the house. At best you

walk away from a bad situation with your credit intact.

What a short sale does to your credit

A short sale involves you negotiating with the lender. Once a buyer is found, the

buyer closes on the house, and the lender forgives you whatever shortfall there is

between the amount required to pay off the loan and the amount cleared from the

buyer at the closing. There is a lot of negotiation involved in a short sale.

Your credit and what the lender reports to the credit agencies is one such

negotiation item.

A foreclosure can damage your FICO credit score to the tune of 300 or 350

points. It’s a huge hit. A short sale will not hit your credit hard.

We will negotiate with the lender to report the mortgage “PAID – SETTLED” which is a small ding on your credit and it won’t affect your ability to get credit cards or a new mortgage. The upshot is that a short sale is FAR better than a foreclosure for your

credit. Also we will negotiate with the lender to release you from liability for the second mortgage.

The short sale process

Lenders typically take 60 days to complete a short sale, or longer. They may

take 6 months. That said, it can be done and it is being done every day.

There are two aspects to the short sale. One is getting the house sold. The other is getting the lender to approve.

  • You list the property with a real estate agent.
  • The buyer signs a purchase agreement.
  • The short sale package is assembled and sent in with the offer. The purchase is made contingent upon approval by the lender. In return for being in this limbo, the buyer gets a much better deal. Sometimes well below market value. Not a steal, but a really good deal. That lets you sell the house when most houses are just languishing on the market without any takers.
  • The lender is in on all the details. The sale has to meet the criteria that they lay out. They will issue instructions the title company.
  • The sale closes, and you walk away from the property with relatively good credit and the whole matter behind them.

A short sale is a lot like a normal sale except……

  • You don't care that much about how much you get for the property.
  • You won’t see any cash anyway. How much the lender gets isn’t really a matter you care all that much about.
  • A short sale can attract more motivated buyers because they can buy below market value.

Short sales fail for several reasons

  • The paperwork submitted to your lender is incomplete. If you know what

they need you are way ahead of most of the short sale submissions the lenders see.

  • The purchase offer is too far below market value because the Broker’s Price Opinion (BPO) is too high. We will create a BPO in your favor.

When the lender is presented with the short sale package, including the offer

from the buyer, prepared the way we suggest, you will vastly increase the chances that

they will say “yes” to you – and do so in a timely manner.

Building a short sale package

Here is what will be put together and forwarded to the lender:

  • A letter of authorization for the real estate professional to conduct a short sale for you.
  • The lender’s short sale package for the mortgage(s) on the property
  • BPO (broker provided opinion). It is a very important part of the preparation to convince the bank to accept a short sale.
  • Include any liens or judgments that you know about.
  • Up to 6 months of your bank statements
  • Your financial statement and history
  • Two years of your tax returns
  • A hardship letter
  • Pay stubs or proof of income if any
  • Copy of medical bills that may apply
  • Copy of divorce decree if applicable
  • Copies of late bills (the more the better), including auto loan, credit cards, etc.
  • Proof of things like unemployment benefits status, child support payments
  • A detailed explanation of was done to get the best price for the lender
  • Signed copy of the purchase contract
  • Repair cost estimates and documentation
  • As-is photographs

This is “a loan application in reverse”.

The lender needs everything they needed to approve your loan.

Our system generates offers along with a short sale package that will increase the chances a lender will accept the short sale. Working for you to get short sales negotiated and approved

What about the difference between the loan and the purchase price?

You will not be responsible for the deficiency to the primary lender. However, you may be responsible for the second mortgage. The second mortgage deficiency is more likely to be forgiven if it’s with the same lender as the first. Bottom line? The threat of a deficiency judgment is usually rather empty. The contract should include a clause that states: The sale of the property will be considered full satisfaction of the mortgage. The bank will not seek a deficiency judgment against seller and will report the mortgage as paid in full and satisfied.

Income Tax Liability in Short Sales

A 1099-C is the report that a lender sends to the IRS to show the amount of the loan that has been “forgiven.” So if the loan was $200,000, but the short sale only yielded $150,000 to the lender, then you have a $50,000 “tax gain” as a result of the forgiven debt and the lender may or may not file a 1099C with the IRS.

No tax liability for loans secured by your primary home. In the past, homeowners using short sales or deeds in lieu were required to pay tax on the amount of the forgiven debt. However, the new Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648) changes this for certain loans during the 2007, 2008, and 2009 tax years only. If the loan was secured by your primary residence and was used to buy or improve that house, you may generally exclude up to $2 million in forgiven debt. This means you don’t have to pay tax on the deficiency.

The insolvency exception to tax liability. If you don’t qualify for an exception under the Mortgage Forgiveness Debt Relief Act, you might still qualify for tax relief. If you can prove you were legally insolvent at the time of the short sale, you won’t be liable for paying tax on the deficiency. Legal insolvency occurs when your total debts are greater than the value of your total assets (your assets are the equity in your real estate and personal property). To use the insolvency exclusion, you’ll have to prove to the satisfaction of the IRS that your debts exceeded the value of your assets. To figure out whether or not you were insolvent, you will have to total up your assets and your debts, including the debt that was settled or written off. The IRS code says that if you are “insolvent” at the time of loan forgiveness, you don’t have a tax liability. Remember: insolvency means you owe more than you have. You can use Form 982 to calculate insolvency for IRS purposes. Form 982 is what you fill out to show that you were insolvent when the debt was forgiven. Because chances are you were insolvent when you did the short sale. So you are free from tax liability. Talk to your accountant or tax lawyer about this to get form 982 filled out and sent it in with your tax returns.

But basically, this 1099 tax liability issue is another toothless tiger because

your lenders often don’t send in a 1099C, and even if they do, since you were

insolvent, you don’t owe taxes anyway.