What is a Short Sale?

In real estate, the definition of a short sale is the process by which the lender allows the homeowner to sell the property for less than the mortgage balance owed. The lender can either absorb the shortage or require the homeowner to promise to pay back the shortage over time in the form of promissory note.

Currently about 1 in 5 homes on the market in the Phoenix Area is a Short Sale.

Who Qualifies for a Short Sale?

There are three main things the lender considers when evaluating and approving a Short Sale:

• Borrowers Inability to Pay (Must be documented and Involuntary)
• Current Real Estate Market Condition
• Reason for Sale or Move

If a borrower cannot demonstrate an involuntary hardship that has caused an inability to pay the debt, it is unlikely the lender will approve a Short Sale even if your home value has fallen.

If you have the ability to pay your mortgage but MUST move due to a job transfer or another documented hardship, then the lender may agree to allow a short sale even if you currently can afford your mortgage. Each lender and borrowers situation is different so you should contact your lender to discuss your options.

Do I qualify for a Short Sale if I am still making my mortgage payment?

Perhaps. TiptonGroup has clients who qualified for a short sale while they were current on their mortgage. While each lender is different, many have changed their policy on Short Sales over the past year. Previously, many lenders required the borrower to be in pre-foreclosure and thus delinquent on the mortgage before they would approve a Short Sale. Many lenders have changed this policy as they realized they were forcing people who would otherwise continue to pay while their Short Sale was being approved, to stop paying just to get the lender to consider their Short Sale.

Can I do a Short Sale on my investment property?

Maybe. The lender is going to thoroughly evaluate the borrower's financials to determine if there is an involuntary inability to pay. If the borrower still has the financial ability to pay the mortgage, the lender may not be eager to approve a Short Sale. The lender will not be inclined to approve a Short Sale solely because the value of the asset declined.

Someone said that I should allow my property to foreclose rrather than doing a Short Sale because in a forclosure I wouldn't have to pay tax on the debt forgiveness. Is this true?

According to the IRS, debt forgiveness is a taxable event whether the forgiveness occurred as part of a foreclosure, short sale or loan modification. Please refer to the IRS website for more information and consult a tax attorney or Certified Public Accountant to discuss your particular situation.

Doesn't the Mortgage Forgiveness Debt Relief Act of 2007 protect me from the taxes owed?

Not necessarily! Read the below information taken directly from IRS website:

• What is the Mortgage Forgiveness Debt Relief Act of 2007?
• The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007 (see News Release IR-2008-17). Generally, the Act allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on your principal residence.

• What does exclusion of income mean?
• Normally, debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable. But the Mortgage Forgiveness Debt Relief Act allows you to exclude certain cancelled debt on your principal residence from income. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

• Does the Mortgage Forgiveness Debt Relief Act apply to all forgiven or cancelled debts?
• No. The Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes. In addition, the debt must be secured by the home. This is known as qualified principal residence indebtedness. The maximum amount you can treat as qualified principal residence indebtedness is $2 million or $1 million if married filing separately.

• Does the Mortgage Forgiveness Debt Relief Act apply to debt incurred to refinance a home?
• Debt used to refinance your home qualifies for this exclusion, but only to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified. For more information, including an example, see Publication 4681.

• How long is this special relief in effect?
• It applies to qualified principal residence indebtedness forgiven in calendar years 2007 through 2012.

• Is there a limit on the amount of forgiven qualified principal residence indebtedness that can be excluded from income?
• There is no dollar limit if the principal balance of the loan was less than $2 million ($1 million if married filing separately for the tax year) at the time the loan was forgiven. If the balance was greater, see the instructions to Form 982 and the detailed example in Publication 4681.

• If the forgiven debt is excluded from income, do I have to report it on my tax return?
• Yes. The amount of debt forgiven must be reported on Form 982 and this form must be attached to your tax return.

We are not attorneys and recommend you speak with both an attorney and tax professional before considering a short sale.

We bought our home for $300,000 and we owe $275,000. Our home is now worth $200,000. We lost money so we want to do a Short Sale. Can we?

Your lender is not likely to grant you a short sale solely because the value of your home went down. Real Estate values, like the stock market, do fluctuate and a real estate purchase does not come with any guarantee that your value will ONLY go up. Your home is intended to be primarily a place for you to live and secondly, a longer term investment. If your sole reason for selling is because your home value went down then you will not qualify for a short sale.

Can I still do a Short Sale if my home is already in foreclosure and scheduled for a trustee sale?

Yes. Until the Trustee Sale (commonly called the foreclosure auction) occurs, you are still the own the home. If you qualify for a Short Sale the lender will usually work with you and your Real Estate Agent and will generally postpone the Trustee Sale if you have a Buyer for the property. Lenders can postpone the Trustee Sale as late as a day or two before the sale.

I'm thinking about doing a Short Sale, What is my first step?

Before deciding to do a short sale, you should:

1. Contact their lender to discuss all possible options for keeping your home including: loan modification, forbearance, repayment plans and mortgage insurance claims advance.
2. Contact the Arizona Foreclosure Help Line 1877-448-1211
3. Consult with a CPA and Attorney to Discuss the Potential for Tax Ramifications and Deficiency Judgments

If you determine that a Short Sale is your best solution, then consult with a Real Estate Agent who is experienced in Short Sales.

How does a Short Sale differe from a "regular" transaction?

The Short Sale is much more complicated than a traditional sale. The Short Sale Listing Agent must manage and negotiate with many more entities that are a party to the Short Sale.

The Short Sale approval process typically takes 30-60 days and sometime longer. Often, Buyers don't want to wait for the bank approvals and avoid looking at Short Sales. Careful handling of your Short Sale by an agent skilled in Short Sales can help increase your chances of getting your home sold!

I need to do a Short Sale but don't have the money to pay the Realtor fees or closing costs...

In a Short Sale, all the costs associated with the sale including Realtor fees, title and escrow closing costs, HOA liens, and delinquent property taxes, are calculated into the lender shortage and sent to the lender for approval.

My friend did a Short Sale and had to bring money to closing. Why is that?

Each lender and borrower's situation is different. In some cases, the lender will agree to the Short Sale under the condition that the Seller contribute something towards the loss. Whether the lender will require the Borrower to contribute towards the Short Sale depends on a variety of factors including the Borrower's financial situation.

How will a Short Sale impact my credit score?

Here is a response from Maxine Sweet, Experian's Vice President of Public Education

• www.experian.com/ask_max/max051408a.html

"Short sale" has become a popular term in the wake of the mortgage meltdown. Generally, it means you sell your house for less than you owe on the mortgage. The term "short sale" does not actually appear in a credit report. So, the important concept to understand before you agree to your lender's terms is how the mortgage loan will be closed and reported in your credit history. When you pay less than originally agreed on any loan, the impact on your credit report almost always will be negative. It would be rare for a lender to report the mortgage as "paid" and forgive the remaining amount. In that instance, assuming all your payments had been made on time, there would be no negative impact on your credit scores.

In the vast majority of instances, however, a short sale is reported as "settled," which means that you reached an agreement to repay only a portion of the total amount. The remainder is written off as a loss by the creditor.

In prior years, any remaining balance was considered income for which you would owe taxes. Because of the number of mortgage crises this year, the tax code was temporarily amended to waive the tax. You should verify that is still true for your 2008 taxes.

Settled accounts, like charged off accounts, are very negative, particularly because a mortgage is involved.

Foreclosure and "deed in lieu" of foreclosure are other options to close out a mortgage loan, both of which also would negatively impact credit scores.

It is difficult to hear from so many people facing these tough choices, all of which have a negative impact on your credit risk. If you must make a choice, please be sure to understand exactly how any remaining balance will be reported to the credit reporting companies and if the lender will sell the remaining debt to a collection agency.

Your goal is to end the pain, accept the consequences in terms of negative impact on your credit, and move on to start rebuilding your credit through positive account management. Thanks for asking.

What documents are needed for a Short Sale?

Typically, the lender will require the following documents to consider a Short Sale:

1. Financial Worksheet or Disclosure
2. Hardship Letter
3. Last two pay stubs from all working borrowers
4. Last two years' tax returns
5. Last two bank statements from all accounts
6. Last six months' profit and loss statement (if self employed)
7. Purchase contract from a non-related person
8. Estimated HUD-1 Settlement Statement
9. Authorization to discuss the Loan/Short Sale with your Real Estate Agent

ADDITIONAL INFORMATION

Avoiding Foreclosure: When a Lender Won't Work with You

List of HUD Approved Arizona Housing Counseling Agencies

IRS Frequently Asked Questions Section-Mortgage Forgiveness Debt Relief Act

Foreclosure and Housing Resources

Arizona Department of Houseing:
provides referrals to homeownership counselors
www.housingaz.com
602-771-1000

Arizona Department of Financial Instituions:
provide help to victims of a foreclosure rescue scams
www.azdfi.gov
1-800-544-0706

Arizona Foreclosure Prevention Taskforce:
provides informaton to homeowners about the prevention of foreclosure in Arizona
www.arizonaforeclosuretaskforce.com

Arizona Hotline:
Toll-free helpline to reach local Arizona Foreclosure Counselors
1-877-448-1211

HOPE NOW:
non-profit that provides HUD-approved counselors dedicated to helping homeowners
www.HOPENOW.org
1-888-995-HOPE

US Department of Housing & Urban Development(HUD):
provides tips and steps to avoid foreclosures
www.hud.gov
1-800-CALL-FHA

Accounting Resources

Arizona Society of Certified Public Accountants:
a great place to search for Certified Public Accountants
www.ascpa.com

Legal Resources

Community Legal Services - East Valley Office:
provides high quality civil legal services to applicants based on income using the Volenteer Lawyers Program.
Address: 20 W. First St., Ste. 101 Mesa, AZ 85201
Phone: (480) 833-1442
Toll Free: (800) 896-3631

Lawyer Referral Service of the Maricopa County Bar Association
can receive a half hour consultaion with a private attorney for $35. Pre-paid via credit card. (can ask to specifically meet with an attorney who does TAX LAW).
Click here to visit the website
602-257-4434

Lawyers Helping Homeowners:
a program that uses the help of volunteer lawyers to assist homeowners in working with their lenders to fund appropriate financial arragements to avoid foreclosure.
www.azlawhelp.org

Search for an Arizona Certified Law Specialist, click here to visit the website.