If you need to sell your home in today's market, you may be in for a big shock if you discover that the current market value of your home is in the toilet, and you now owe more than your home is worth. If there is any possible way you can postpone selling right now until the market begins to turn around, that would be your best bet. However, if you find yourself facing a certain financial hardship that you know you can't recover from or you're facing a divorce or you're relocating to a new job and have no choice but to sell, here is some information to help guide you through the process.
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Will Your Lender Object To A Short Sale?
Most lenders are only interested in 2 things:
1. How much do you owe?
2. How much can you sell your home for?
The reason you are considering a short sale is not of primary concern to your lender. If you're currently making your payments on time and your loan is current, more than likely your lender isn't going to be all that cooperative. They want your money and they're getting it....what's the problem?
Now if you've lost your job, your mortgage payment has adjusted upward to an amount you can no longer afford and you can't qualify for a loan modification, you're facing a divorce or your tenant is no longer paying you rent for an investment property resulting in late mortgage payments or complete non-payment of your loan, then you just might entice their cooperation in a short sale. Your lender would much rather get "something" of what you owe versus becoming the new owner of your home.
Complete a Short Sale Package
All lenders will require you to submit to them a Short Sale Package. Usually included in this package is:
o 3rd Party Authorization (to deal with your realtor directly)
o Listing Agreement
o Purchase Contract
o Hardship Letter
o Estimated HUD Settlement Statement
o Current Financial Statement
o 3 Months Bank Statements
o Previous Year's W-2's & 3 Consecutive Paystubs (if employed)
o Previous Year Tax Returns, Year End P&L & Current P&L (if Self Employed)
If you are considering a short sale, contact your lender's Loss Mitigation Department immediately to see if you can send in all items required, with the exception of the Purchase Contract and Est. HUD Settlement Statement, in order to be "pre-approved" for the short sale. For some lenders, approval of a short sale can take up to 3 months or more and if you can get the process going before you even receive an offer on your home, can cut back this timeframe considerably.
You may want to submit this information by fax, mail and email just to make sure the lender has received it. Immediately follow up with the lender to be sure they have it in their hands and get an approximate date on when you can expect a response. Make sure you document every conversation and get contact names and phone numbers.
Find an Experienced Short-Sale Realtor
Agreeing to accept a "Short-Sale Listing" is no picnic for a Realtor. You need to find one that is experienced in short-sales. Often this process can be long and drawn out and requires constant follow-up with the lender....this is one instance where "stalking" is considered okay.
When interviewing realtors, make sure they have short-sale experience. You should ask them what is their short sale closing ratio and if they charge for their service. Find another agent if they want to charge you anything. A seller should never incur any costs associated with a short sale.
How Much Should I Sell My Home For?
This is not a question you as the seller should be answering. Current market value is determined by the most recent sales in your neighborhood that are similar to your home. Yes, this data will include short-sales and foreclosure sales unfortunately, but these sales must be used if they are the most recent, relevant sales. Your realtor will complete a market analysis of your home and discuss with you what these homes are selling for. Whatever you do, do not try to list your home with a sales price higher than what it can actually sell for in your current market. You want to attract an offer immediately, so get input from your realtor as to what the asking price should be.
Keep in mind that the selling price of your home is not the end price to the lender. There will be closing costs, property taxes, liens and realtor commissions that will also have to be paid. These costs must come from the sales proceeds, so the lender will end up with even less than the selling price.
Okay, I've Got an Offer....Now What Do I Do?
If haven't already sent in your short sale package, now is the time to do so. Make sure you include EVERY single item the lender is requesting or your file will be marked incomplete, and you'll probably end up on the bottom of a very high stack of files.
If you have already sent in the package, you'll now need to send them the signed purchase contract with an addendum that clearly states that the "Sale is entirely conditioned upon current mortgage holder(s) acceptance of the contract and agreement to pay all agreed costs of sale including commissions, closing costs and costs of Notice of Default." (If applicable)
You'll also need to have an Est. HUD Settlement Statement prepared by the title company. This is a breakdown of all costs that will be incurred and how much the lender can expect to "net" from the sale after everything has been deducted.
After you've submitted all the paperwork required, start stalking them baby! Some lenders can take 30 days or more to respond or even acknowledge that they've received your package. Follow up constantly and make sure you document every phone call and every person that you've talked to.
Once your short sale offer is approved, you will receive a Release of Lien. This is the document that states what the lender will accept as the net payoff.
Will the Lender Come After Me For The Difference?
Most banks will not come after you unless you have excellent credit, significant assets or are not delinquent on their loan.
At the end of a short sale transaction, a lender will send you a release. There are two types of releases:
1. Release without Prejudice: The lender releases all liability of the seller.
2. Release with Prejudice: The lender will reserve the right to attempt collection of the deficiency balance.
If your approval is subject to prejudice, try to negotiate a promissory note with the lender for a lesser balance. If you owe $50,000, offer them a promissory note for $10,000 instead as "payment in full". Whatever terms you end up with, make sure you get it in writing before you ever pay a dime. This way you'll have a record of your arrangement in case any disputes arise down the road. Make sure to keep copies of all paperwork and payments made.
You'll want to negotiate terms that you can financially live up to. Some lenders will agree to zero interest and up to a ten year term. You'll also want to be sure that this agreement eliminates any negative hit on your credit for the deficiency balance. Because you are willing to give the lender a promissory note, this will placate most lenders enough to accept your short sale offer. Just remember to get every term you negotiated on with the lender IN WRITING first.
Once you receive the release, you can forward this to the title company handling the short sale transaction and this should be all they need to close the sale.
Will the IRS 1099 me for the Amount of Debt Forgiven?
If the short sale is on your primary residence, you could be protected by the 2008 Mortgage Relief Debt Act. Under this new law, there is no federal income tax due on debt forgiven on a loan that is secured by the seller's principal residence, provided that the loan was made to acquire, construct, or substantially improve the principal residence. However, if you just pulled money out of your house to pay for a vacation and got debt relief on that loan, you would be subject to income tax. The exemption applies to any portion of loan debt forgiven beginning January 1, 2007 through December 31, 2009. Therefore, it doesn't matter when the loan was made; what matters is when a portion of the debt is forgiven.
IRS Income Taxes on debt relief due to foreclosure is NOT automatic though...
You have to file IRS Form 982 "Reduction of Tax Attributes Due to Discharge of Indebtedness," and the form has to be attached to the federal tax return.
Do I Get Any Money From The Sale?
Come on....what do you think? You're asking the lender to eat some of the balance that's owed to them, along with paying the closing costs, taxes, liens and realtor commission. Do you really think you're going to get any money after that? I don't think so!
Is My Credit In The Toilet Now Too?
Well, maybe yes, maybe no...it depends. If you had late payments on your mortgage or stopped paying it entirely prior to the short sale, then you've already done damage to your credit and depending upon how late you were will determine how damaged it is.
If the lender has filed a Notice of Default which tells that "foreclosure proceedings were started", this will further damage your credit.
Unfortunately, there is nothing you can do about this issue but wait it out. After two years, it will no longer have much of an impact on your credit scores, although the late payments and other derogatory remarks will remain on your credit for 7 years.
Most mortgage trade lines will report your credit as "mortgage paid" after a short sale. An actual "foreclosure" will not report. If you've received a Release with Prejudice from the lender, hopefully you negotiated with the lender from reporting the mortgage as a loss, therefore preventing further damage to your credit.
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