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Short Sales – A Homeowner Overview
“Foreclosure Fallout - County hits record numbers. We saw 311 foreclosures in 2007. Of those 311, only 17 homeowners were either able to find new financing or were able to sell their home during the typical six-month redemption period.” - from article in The Sturgis Journal April 3, 2008
Headlines like the one above dominate the news almost daily. The number of properties going into foreclosure and the number of homeowners whose homes are at risk is staggering. In many cases, a short sale solution can save a homeowner from having a foreclosure on their credit and not having to deal with the foreclosure process. Payment of outstanding property taxes and any delinquent fees are typically paid from the proceeds of the sale.
What is a Short Sale?
A “short sale” is when all parties holding liens against a property agree to accept less than is owed to allow sale of the collateral. Basically, the lenders and any other lien holders agree to the sale of a property for less than what is owed to them. Why would a lender agree to this? Because of the decline in property values many properties do not have any equity left in them. And, due to the increase in property taxes and insurance as well as adjustable rate mortgage resets plus any unexpected hardships a homeowner may encounter, many homeowners can no longer make their monthly mortgage payment.
A short sale benefits the lenders as they do not have to take back and resell a house with all the foreclosure and holding costs that are incurred. Lenders are in the money business not the real estate business.
What are the Benefits to me?
- A short sale greatly reduces the damage done to your credit.
A short sale results in the paid-off mortgage noted on a credit report as “settled” or “satisfied in full” or something similar. It is not a negative factor, however, your credit score will fall due to the missed mortgage payments. This is not serious and your credit score can be repaired after several months of paying on time on 2-3 other credit accounts.
2. You avoid having a “Foreclosure” recorded on your credit report.
A foreclosure is a judgment recorded in the public records. It stays on the credit report for 10 years and can be renewed for an additional 10 years at the lenders request. The judgment amount will include not only the difference between what was owed on the mortgage and what was received but also all the expenses incurred such as attorney’s fees, court costs, and holding costs if the property is not sold at auction. A bankruptcy does not erase a foreclosure. It’s an event also recorded in the public records, however it is not a judgment. In terms of credit “hits” a foreclosure is the most damaging.
3. There is no cost to you.
The Realtor’s commissions and processing fee charged by Done-Deal Realty Inc. are paid by the lender at the time of the sale.
4. You will not have to go through the foreclosure process with the Foreclosure For Sale signs and public notices.
5. Past due property taxes are settled by the lender at the time of the short sale closing.
What are the Consequences to Me?
- Possible consequences might be the issuance of a “1099-C” by the lender.
If the property is your primary residence (homesteaded) then the lender cannot issue a 1099-C. On December 20, 2007, President Bush signed H.R. 3648 “The Mortgage Forgiveness Debt Relief Act of 2007”. This benefits homeowners who participate in a short sale or foreclosure of their primary residence. Under current law, if the value of a property declines and a bank or lender forgives a portion to the mortgage, the tax code treats the amount forgiven as income that can be taxed. This new bill creates a three-year window for homeowners to pay no taxes on any debt forgiveness they receive.
If the property is not your primary residence, the lender can issue a “1099-C” for the difference between what was owed to them and what they received. (This can happen with a foreclosure as well). It will be income to you from the cancellation of the debt but it is only taxable if assets exceed liabilities at the time of the sale. That generally isn’t the case or the bank would not approve the short sale anyway.
To address this issue, IRS Form 982 can be used when filing taxes to exclude the amount of discharged indebtedness from the homeowner’s income resulting from the issuance of a 1099-C. There is also an IRS publication entitled “Questions and Answers on Home Foreclosure and Debt Cancellation”. We suggest that you consult with your accountant or tax attorney and if he/she is not aware of Form 982 then give him/her a copy to review.
- Another uncommon but possible consequence is a Deficiency Judgment.
The lender has the option of issuing either a 1099-C or a Deficiency Judgment but not both. A deficiency judgment is a judgment filed in the public records for the difference between what was owed and what was received by the lender.
Am I a Candidate for a Short Sale?
Before considering a short sale, the lenders will evaluate both the homeowner and the property. They will request documents to review that will allow them to determine whether to accept, reject, or counter the short sale offer. The following outlines what the lender will be asking while reviewing the short sale package.
Borrower (Homeowner) Profile
- Does the homeowner have sufficient monthly income to make the monthly mortgage payments after reasonable living expenses?
- Does the homeowner have assets that can be used to make the mortgage payments? Do liabilities exceed assets?
- What has happened to cause the homeowner to no longer be able to afford to pay the mortgage? Remember, before being approved for the mortgage you had to prove you could afford to pay the mortgage!
- Does the homeowner understand that he/she will not receive any money at closing? If the lender is taking a loss on the property, you, the homeowner, are certainly not going to benefit monetarily.
- Does the homeowner understand there is no guarantee that the lender will accept a short sale? (However, your Realtor and Short Sale negotiator will be working diligently on your behalf.)
Property Profile
- Does the property have any equity? If yes, you can sell the property without a short sale.
- Does the property require any repairs? A short sale property is sold “as is”; the lender will pay closing costs but not repairs.
How do I get started?
- All lenders require that your property be listed with a Realtor. They want to see a history of the property being exposed to the market, and will want a current CMA. Choose a Realtor experienced with the short sale process to ensure the best chance of success.
- Sign the documents provided by your Realtor. These would be the Authorization to speak to the lender on your behalf, a listing agreement and a short sale disclosure.
- Gather together the remaining documents in the Required Documents Checklist.
- Your Realtor and short sale negotiator will do the rest.
Done-Deal Realty Inc.
We are your local experts processing short sales.
Done-Deal Realty Inc. is a small independent real estate brokerage located in Colon, Michigan. Carole Maddox is the Broker and has 25+ years experience in the real estate market and has been successfully negotiating short sales with lenders for clients for about a year. Jim Milliman Jr. is a professional Realtor for the firm. We are experienced and have a very high success rate at closing short sales. Call us today for a confidential consultation at either of the numbers below.
(269) 432-5328 or (269) 341-2227 for Jim Milliman Jr, Realtor jim@mydonedeal.com
(269) 432-5328 or (561) 262-8034 for Carole Maddox, Broker carole@mydonedeal.com
Done-Deal Realty Inc and it's agents are available to negotiate short sales for homeowners and clients of other Realtors and Brokers in Michigan.
St. Joseph County, Michigan - Sturgis, Three Rivers, Colon, Centreville, Constantine, Leonidas, Burr Oak, White Pigeon, Mendon, Nottawa and outlying township areas.
Branch County, Michigan - Coldwater, Bronson, Quincy, Sherwood, Union City, East Gilead, South Butler, West Kinderhook, Lockwood, Batavia Center and outlying areas in the townships.
Cass County, Michigan - Cassopolis, Dowagiac, Marcellus, Edwardsburg, Vandalia, Jones, Union, and others.
Calhoun County, Michigan - Albion, Battle Creek, Marshall, Tekonsha, Springfield, Athens, Homer, Burlington, Union City and surrounding areas.
Kalamazoo County, Michigan - Portage, Kalamazoo, Comstock, Galesburg, Augusta, Vicksburg, Schoolcraft, Richland, Climax and surrounding areas.
www.mydonedeal.com.
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