Sometimes in life we may face situations where it is best to cut your losses and run. If the loss is your home, it is likely that the decision to do this is understandably made almost too late. If you are in the unenviable position of having to sell up and downsize because of escalating costs, an efficient real estate agent can be your best friend.
If your home is now worth less than you owe on it, he/she will be familiar with procedures and will be able to guide you through the differing aspects of negotiating a short sale. The term ‘short sale’ simply refers to the fact that the current market value of your property is short of the actual figure that you owe on it. Unfortunately, because of past financial practices that have largely been rectified by now, many thousands of home owners find themselves in this untenable situation.
Three quarters of known housing markets in USA have suffered continuing price decreases. These figures are released by Global Insight, who quote that single family house prices have dropped for the third consecutive period in 262 out of 330 markets. When mortgage rates increase in the same time frame that housing values decrease and world food and gas prices increase, it makes it impossible to live on the originally planned budget. If the only answer is to sell your home, you should be aware that a short sale is different to selling your home under normal conditions.
Usually, the lender may not even know that your home is on the market until your lawyer pays off the mortgage. However, with a short sale, the lender must be in on it from the beginning. There is also more paperwork for you to take care of with a short sale. For instance, you must give permission, in writing, for the lender/bank to communicate with your real estate agent. An even more complex task is to document all the reasons why you cannot pay the amount that you owe. This is called ‘proving hardship’ and attached to your letter of explanation will be bank statements, credit card bills, W-2s and any other proofs of inability to pay.
This hardship statement does not absolve a home owner from responsibility for the debt owing – but it may. The attorney or title company that will be handling the paperwork for you can make the approach to your lender for ‘forgiveness’. Lenders do not wish to accumulate a mass of homes; they are in the money business. If the short sale route is accepted by your lender, it will save him time and money over the other alternative he has: a foreclosure on the loan.
Foreclosures are very expensive and time consuming for the lender; too many foreclosures on the books can also jeopardize the lender’s future loans from being insured. In short: a lender will prefer a short sale and if you are co-operating by offering one – what’s in it for you? A short sale may still affect your credit rating, but if you could come out of it with the debt cleared (or ‘forgiven’), you could have a fresh start.
If your lender ‘forgives’ you then a 1099 must be issued so that the amount of the excused debt is documented for you, the seller, to declare to the IRS at tax time. All liens on the home will have to be released before it can be sold; this includes the lender’s lien. If you can work to keep your lender’s good will, or at least co-operation, a transaction may run more smoothly. As in most walks of life, compromise and patience are also invaluable commodities in short sales.