Short sales are becoming an option for homeowners throughout the country who may be facing foreclosure. Atlanta short sales, for all intent and purposes, have become more common place in our real estate market; whereas a year ago most of us hadn't even heard the term "short sale". Currently our listing services do not track the number of homes listed and/or sold as short sales in the Atlanta market. But what I do know..we are beginning to see more and more of them. So if you face the potential of a short sale, there are some things you will want to know.
First, what is a short sale?
A short sale is when, due to the homeowner's financial hardships, the mortgage lender and/or bank have agreed to accept a reduced amount against the mortgage balance. Or, in some instances, the homeowner finds they must sell their home and as a result of the current down turn in the real estate market the home is worth less than when they bought. However, in most instances a short sale is an attempt to prevent the home from going into foreclosure.
Why a short sale vs. foreclosure? In some instances, a short sale may not have the same impact on your credit vs. a foreclosure other than showing the short sale as "foreclosure proceeding started." Similar to a foreclosure, a short sale will remain on your credit report for seven (7) years. What you want to keep an eye on is whether or not your mortgage lender reports the zero balance and settlement option on your credit report.
If you find yourself facing a possible short sale, begin with preparing a net sales sheet. This net sheet should reflect the expected sales price, all fees associated with the sale, payoff balances of all loans including late fees, prorated taxes as well as prorated home owners association fees (if any) and commissions. If you are using a real estate agent, he/she will be able to prepare this document for you. You will want to keep this readily available because it is likely your lender will want to see it to review.
Secondly, understand your tax liability...if any. The IRS does require the filing of a FM-1099 for the amount forgiven. The forgiven amount on your loan will be considered income and may be taxed. However, there are IRS guidelines which could make you exempt from taxation. Under the Mortgage Cancellation Tax Relief Act IF the property is your primary residence the tax would be eliminated. But be sure to talk to a tax accountant before you proceed to get the most current tax guidelines.
Deciding when is the best time to talk to your lender has varying opinions. Some experts do suggest you engage in converstaion with your mortgage company from the beginning. Others recommend waiting until you have a contract on your property. What is viable to your success is finding the decision maker within the loss mitigation department. And once you find this person, get a name! Be sure to provide them with a Letter of Authorization granting them permission to talk to whomever you plan to have assist you in the short sale. Make sure the letter includes your property address, loan number, name, date as well as the name, address and contact information of the person assisting you.
- Proof of Income and Assets: W-2's or proof of unemployment, bank statements, tax returns. Other documentation may also be required.
- Hardship Letter: You will want the letter to fully outline all the reasons surrounding your financial challenges and why you are no longer able to meet your morgage payment obligations.
- Preliminary Net Sheet
- Comparative Market Analysis: This can be provided to you by your real estate agent. The Comparative Market Analysis should show the activity within your area for the past six months and include ACTIVES, PENDING SALES and SOLDS.
- Purchase and Sale Agreement & Listing Agreement: Keep in mind, even after you have come to an agreement with a Purchaser on your house, the final decision will lay with with the lender. In most instances, the lender will renegotiate some items in the agreement.
Finally, before you do anything...do your home work! Make sure you understand all the ramifications as well as possible alternatives. Be sure to employ the assistance of people you trust and who can help you through the process.
WALL STREET JOURNAL: Two Alternatives to Foreclosure
REALTOR.ORG: Loan Forgiveness After the Shortsale: Taxing What Isn't There
Sources: Wikipedia; About.com (How to Do Short Sales by Elizabeth Weintraub); Realtor.org (Sold Up Short How to Succed at Short Sales by Maryiwyn Evans)