Often times I deal with sellers who know of others that are going through the short sale or foreclosure process. My clients find themselves taking advice from those other short sellers and start to formulate ideas or conditions to their own short sale approval. For example, I went on listing appointment to meet with a short sale candidate. The sellers had been attempting to negotiate a loan modification for the last 8 months with Citi Mortgage. The terms of their loan had been modified without any written documentation for them to sign off on or to inform them of the change. When they received the bill they paid it using their retirement funds and later contacted the mortgage company to ask that they send them written confirmation of the modification for their records. Citi Mortgage declined and said they were not under any obligation to send them anything confirming the changes.  The next month's statement came in and the payment had readjusted to what it was prior to such modification. They quickly contacted Citi Mortgage to discuss their bill and found that the previous "modified" bill was issued by mistake and that they had been declined for a loan modification. By the time I met with them I discussed what they can expect of the short sale process and the possible conditions that may be presented by the mortgage company for approval. Before I could finish my thought, they interrupted and said that under no circumstance will they agree to sign a promissory note. Friends of theirs had been issued a $12,000 promissory note and now they have to make payments on something they don't actually own. They said they would rather foreclose or file for bankruptcy than agree to a promissory note.

Let's look at another family facing the same difficulties. The other day I received short sale approval from US Bank where the PMI Company issued a condition to approval not uncommon when a PMI company is involved.  After pulling the borrower's credit report and identifying that they are not delinquent in any obligation other than their mortgage payment, the PMI Company issued a $6,000 promissory note payable over 60 months at $100 per month. The borrowers quickly declined and threatened bankruptcy instead as a logical solution to their problems. I quickly advised that they consult with a bankruptcy attorney to see if they even qualified for chapter 7 bankruptcy because if they didn't, they'll have to pay the amounts back anyway under chapter 13 bankruptcy. Not to mention that the average cost of filing for bankruptcy is approximately $2,500. So in reality, he's only looking at a $3,500 difference in payments. Plus, to file for bankruptcy, the borrower would need to pay the $2,500 in full up front rather than over a 25 month period at $100 per month. And let's not forget the adverse effects that bankruptcy has on their credit that will remain on their credit report for 7 to 10 years completely killing their credit worthiness.

Agreeing to a promissory note is a financial commitment that although it may not sound like the best option at the time, it actually is a fantastic option to avoid further damages to your credit. If you make your payments on time, it will actually help rebuild your credit over time. Best of all, a promissory note is unsecured and interest free so all payments made will be towards the principal balance.

Wondering how to write an effective and compelling hardship letter?

A hardship letter is your opportunity to appeal to the mortgage company to give you another chance. This should NOT be used to complain about what they have or have not done to make your situation worse. This letter must be honest and represent the facts clearly. If you are pursuing a short sale, the goal is to prove to them that the situation that caused you to fall behind is not temporary and you are not in a position to continue making your payments. However, if you are applying for a loan modification, your hardship letter must prove just the opposite; the situation that caused you to fall behind on your payments was temporary and you are now in the position to make payments and maintain them up to date. You must also have a legitimate excuse for falling behind. Financial problems in itself would not be an adequate excuse. Loss of job, death in the family or an illness would be an acceptable reason to fall behind on your mortgage.

Remember, the hardship letter is just one piece of the workout puzzle. You must meet other criteria for your mortgage company to approve your short sale. If you do not know where to star, visit your local loss mitigation short sale specialist.

Here's an example format of an appropriate hardship letter.

Part of my business plan includes purchasing a mailing list of those that are currently 30-90 days late on their mortgage payment. My goal is to reach homeowners that are possibly facing foreclosure before it's too late. My theory is that when you find yourself in a situation where you may lose your home to foreclosure, it is best to react & consider all possible solutions to this problem.

 I often receive phone calls from those intrigued about our mortgage debt relief program. By the end of our conversation, these homeowners have a better understanding of the steps that need to be taken to resolve their problem. I may not have the answers they were hoping to hear; "Will Obama pay my mortgage?" Sorry, that is not an option. The REAL options include loan modification, a short sale, loan forbearance or bringing your mortgage payments current. While I am only trained in processing short sales, I know that loan modifications or payment plans do take quite a bit of persistence with the lien holders - if you're a homeowner attempting to modify your loan, as frustrating as it may be, don't give up!

The most frequently asked question I get is "how will you relieve me of ALL my mortgage debt?" Have you heard of the Mortgage Debt Relief Act of 2007?

The Mortgage Debt Relief Act of 2007 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 qualifies for the relief.

This provision applies to debt forgiven in 2007 through 2012. Up to $2 Million of forgiven debt is eligible for this exclusion ($1 Million if married filing separately). The exclusion does not apply for any reason not directly related to a decline in the home's value or the taxpayer's financial condition.

Normally, when an obligation is forgiven, the amount you received as loan proceeds is normally reported as income because you no longer have the obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on Form 1099-C, Cancellation of Debt. Under the Mortgage Debt Relief Act, exceptions include but are not limited to; Qualified Principal Residence Indebtedness- in the event of a short sale, loan modification or foreclosure of a PRINCIPAL RESIDENCE.

Generally, the Act allows exclusion of income realized as a result of modification of the terms of the mortgage, a short sale or foreclosure on your principal residence.

Once your short sale, loan modification or foreclosure is successfully completed, you will receive a Form 1099-C from your lender when they cancel any debt of $600 or more. The amount cancelled will be in box 2 on the form. Contact your CPA for detailed explanation of how cancellation of debt will affect you and the preparation of your taxes.

On the flip side, I received a call from a recipient of my mailings who left a series of 5 consecutive  voicemail messages & concluded with "I hope you have a very short life". He said this after stating that I was giving homeowners in unfortunate situations "False Hope". I ask you, is it really false hope? I beg to differ! This is a legitimate way to relive homeowner's of their mortgage debt & prevent foreclosure. Do I think this particular caller has had a bad experience with others promising a resolution? Absolutely! This is why he cannot believe that there is help out there. I have heard of scams and nightmare situations that homeowners have been involved in so be wary of the programs that offer help for a fee up front. In typical short sales which is my area of expertise, the lender will pay for the seller's closing costs to include broker commissions. A good short sale negotiator should be confident enough in their abilities to #1) Sell the House #2) Negotiate a short sale to procure the best possible outcome for the homeowner facing foreclosure.

Have you fallen behind on your mortgage payments? Were you successful in negotiating a loan modification with your lender and find that you are still struggling to make that monthly payment? If the answer to any of these questions is YES then you are probably realizing that the best option you have to avoid foreclosure is a short sale.

How do you prepare for a short sale?

The first step in negotiating a short sale is to list the property for sale. Your lender requires that the property be listed with a Real Estate Brokerage as a condition to short sale approval. Why? Because they want to make sure the property was marketed properly to qualified buyers at the appropriate market value.

Next you'll need to gather all the necessary documents required for review. The documents needed are;

•·       Last 2 year's income tax returns

•·       Bank Statements showing activity for the last 60 days

•·       Pay Stubs from the last 60 days

•·       Financial Information Form

Lastly, you will need to compose a hardship letter where you will need to explain why you have fallen behind on your payment (job loss, medical issues, adjustable rate mortgages, market decline etc). Here's a tip; always conclude the letter with "please consider my request for a short sale as it is my last option to avoid foreclosure".

Follow these steps and you will be on your way to a successful short sale approval!

By the way,have you signed up to receive our Monthly Newsletter? Many people facing foreclosure have found it very useful in the past and hopefully you will too. Best of all, its Free and takes only a minute to register.