Short Sales

What is a Short Sale?
What is the process for getting a Short Sale approved?

How long will foreclosure affect my FICOÂ® score?

The Mortgage Forgiveness Debt Relief Act and Debt Cancellation

A short sale takes place when a home is sold with the proceeds being insufficient to pay the mortgage balance and any other liens on the property. When this situation occurs there seller can:

bring money to closing to pay the balance; or,
your lender(s) must agree to forgive all or a portion of the amounts you are 'short.?

The second option is commonly known as a ?Short Sale.?

It is important to seek the advice of a professionals prior to performing a short sale. There are many legal implications that need understanding and resolution prior accepting a banks letter of short sale approval.

WHAT IS THE PROCESS FOR GETTING A SHORT SALE APPROVED?

The short sale approval is different in every circumstance. Every bank has a loss mitigation department with a slightly different way of managing the process. The general steps in the Short Sale process after listing the property for sale are:

Proving Financial Hardship: You must typically prove to your lender(s) that you are experiencing financial hardship and will be unable to continue making loan payments. In some, but not all cases, you may already be in default of your payment obligations. Most lenders will require you to provide specific information such as a financial affidavit, tax returns, bank statements, and pay stubs in order to prove financial hardship.
Determining Property Value: Once you have proven a financial hardship, you must be able to demonstrate that the property is worth less than the total amount owed to your lender and any other lien holders. Frequently, your lender will require a Broker's Price Opinion (BPO) or Comparative Market Analysis (CMA) from a Realtor, and it may also order an appraisal of the property from a licensed appraiser of their choosing. In come cases you may be responsible for this expense.
Finding a Buyer: A qualified buyer must submit an offer to purchase the property, which is then submitted to the lender for approval. Each lender with a mortgage or lien against the property must approve the potential purchase to the extent that their loans will not be paid in full at closing. Many lenders will not even consider a Short Sale, review the property's value, or evaluate your hardship until a bona fide offer to purchase is received.
Final Approval: Once your lender acknowledges your inability to continue satisfying your payment obligations and the fact that the property is not worth as much as the loan(s) secured by the property, you or your representative must convince the appropriate decision makers at each lender that it is in their best interest to approve the Short Sale. Most lenders have a specific department that handles these requests which is commonly referred to as either the Loss Mitigation, Pre-foreclosure, or Loan Workout department.

A foreclosure remains on your credit report for 7 years, but its impact to your FICOÂ® score will lessen over time. While a foreclosure is considered a very negative event by your FICO score, it's a common misconception that it will ruin your score for a very long time. In fact, if you keep all of your other credit obligations in good standing, your FICO score can begin to rebound in as little as 2 years. The important thing to keep in mind is that a foreclosure is a single negative item, and if you keep this item isolated, it will be much less damaging to your FICO score than if you had a foreclosure in addition to defaulting on other credit obligations. FORECLOSURES AND SHORT SALES WILL IMPACT YOUR CREDIT SCORE!

How many points will my credit score drop from a foreclosure? There is no correct answer here, and anyone who tries to give you an exact point drop is guessing. There are many factors that go into your FICO score that can react differently depending on your situation.

The length of time your credit score needs to recover? Again, it depends, over a year in most cases. A foreclosure is not quite as damaging as a bankruptcy and a bankruptcy can take 18 months or longer to improve your credit score. Your score is not likely to reach the 800s until the foreclosure drops off your credit file and that will take 7 years. Remember, a bankruptcy takes 10 years to fall off your report.

Because of the credit crunch, Fannie Mae has stated new requirements before you can be approved again for a home loan:

Foreclosure: 5 years from completion date; additionally between 5 and 7 years you can only purchase a personal residence, and must have a minimum of 10% down and 680 credit score. Also you can only do limited cash-out; no regular cash-outs are permitted. After 7 years you're back at square one.
Deed in lieu: 4 years from completion date; also 10% down payment required between years 4 and 7.
Short sale: 2 years from completion date.
Chapter 13 bankruptcy: 2 years from discharge date or 4 years from dismissal date
All other bankruptcies: 4 years from either the discharge or dismissal date

The Mortgage Forgiveness Debt Relief Act and Debt Cancellation

If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable, as it can be viewed as income.

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 calendar years 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 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.

More information, including detailed examples can be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. Also see IRS news release IR-2008-17.

The following are the most commonly asked questions and answers about The Mortgage Forgiveness Debt Relief Act and debt cancellation:

What is Cancellation of Debt?
If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.

Here's a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.

Is Cancellation of Debt income always taxable?
Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:

Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.
Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.
Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income.
Non-recourse loans: A non-recourse loan is a loan for which the lender's only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences.