A short sale is when the lender will accept less than the full amount due on a mortgage when a property is sold. Usually, the lender will accept the short sale to avoid the time and expense of a foreclosure.
How does it work?
The first thing the borrower should do when they can no longer afford a property is to contact the lender immediately. The last thing a lender wants to do is foreclose on the property. Lenders typically have departments that work with people who are behind on their payments to resolve the situation. If you cannot resolve the default with the lender, and you want to see if they will accept a short sale, they will direct you to the department that handles short sales.
The lender will usually require the borrower to submit a lot of information to the lender in order to consider the short sale. The information required may include:
• Income documentation such as W-2s and pay check stubs to verify the borrowers' income.
• Bank statements to verify the borrowers' assets
• Hardship letter – this letter will describe for the lender the reasons the borrowers are in the financial position they are in and will ask the lender to accept the short sale. Borrowers should make this letter sound as sad as possible and back up the story with any documentation you may have such as medical bills, etc.
• Fair market value for the property – depending on the lender they may require an appraisal or may accept an opinion from a local Realtor know as a Comparative Market Analysis (CMA).
• Preliminary proceeds sheet from the sale of the property. This will show the proceeds of the sale of the property after the mortgage is paid off and all other closing costs and fees are paid. This will be negative in the case of the short sale and this negative amount is the amount of the shortage.
• Listing agreement and purchase agreement when they are available.
When the lender reviews all of this they may or may not approve the short sale. If they do not approve the short sale they will proceed with the foreclosure. If they do agree to the short sale you will close on the sale of your property and the lender will take the loss.
The Mortgage Debt Relief Act
The Mortgage Debt Relief Act was enacted in 2007, and granted tax relief to those with discharged mortgage debt. This act generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, and/or a Short Sale, may qualify them for relief.
At this point, the provision applies to debt forgiven in the calendar years of 2007 through 2012.
Up to $2 million dollars of debt may be forgiven, as long as a borrower is eligible according to this exclusion, or $1 million dollars if married filing separately. The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home's value or the taxpayer's financial condition.
Conformity Act of 2010
California enacted the Conformity Act of 2010 which allows taxpayers who had all or part of the loan balance on their principal residence forgiven by their lender to exclude the forgiven debt from California gross in comes. This law, at this point, applies to discharges of qualified principal residence indebtedness from 2009 through 2012.
California law conforms, with modifications, to the Federal Mortgage Debt Relief Act. The amount of qualifying indebtedness is less than the federal amount and differs by taxable years.
Senate Bill 931
The introduction of Senate Bill 931 was a huge break for California potential short sale sellers. SB 931 exempts all first mortgages, hard money or purchase money, from a deficiency judgment after a short sale. It prohibits deficiency judgments on a property secured by a first trust deed for a dwelling of one to four units, either non-owner or owner-occupied.
A deficiency refers to the difference between the principal balance due and the amount received, providing the amount received is less than the amount owed. SB 931 means no judgment can be filed against this deficiency for qualified short sellers – that means no collections notices, no lawsuits, etc.
Making Home Affordable
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