THE PROCESS:
Short Sales & Foreclosures
Know the difference: A short sale is not a foreclosure it is a way to sell your property before it is foreclosed on
I have been told that a Deed in Lieu (owner walks away from property voluntarily signing it back to the lender) is worse than a short sale. A short sale shows not paid in full whereas a Deed in Lieu shows as a foreclosure.
In a short sale situation the bank will look closely at cash out refi’s in the last 18 months and will probably ask tougher questions about that.
The bank may ask for an unsecured promissory note for the portion of the money you do not repay. These typically carry no interest and you are suppose to be able to negotiate the due dates for these payments. If it is your primary residence it is probably a "non-recourse" loan and you do not have to agree to this though the bank may still ask.
Banks typically do not offer a workout package in advance, though some banks are slowly stariting to change this procedure and let you get some of the work out of the way upfront. You must list the property for sale and get an offer before they will discuss what they will or won't take for a property. This may be changing and there are some test markets where a few of the banks are trying a pre-negotiated price for short sales.
Once an offer is received we will need to prepare a package to send with the offer. This package must include: (The first four items are things you must provide)
1) A Hardship letter – You write this. Short and sweet with the main reasons you can no longer pay the note as agreed. Best answers are health, job relocation, job loss etc.
2) Pay stubs and/or a couple months Bank statements – if you are self employed these need to be business and personal
3) A list of all monthly expenses you have on the property with the name and address as well as account number of who you pay. Include all utilities/ service people you use to keep the property running.
4) Authorization Letter for Title/Escrow and Realtor to talk to the bank directly
5) The Estimated Closing Statement from Escrow (HUD1)
6) A Copy Of the listing and purchase agreements.
Time Frame for acceptance of a Short Sale offer:
up to 30 Business days to be assigned to a negotiator
up to 60 days total for acceptance or counter offer
Other considerations:
If there is a second loan on the property a release letter from the junior lien holder must be received before the first lender can close the deal. Usually the first lien holder will give them a token payment of $3000 to release their lien. Most junior lien holders will cooperate but you must know that some will not.
If the property is part of a bankruptcy proceeding the lenders cannot do anything. If you file Bankruptcy while a short sale is going on everything will come to a halt.
A lender may issue a 1099 for the portion of the money that they did not get repaid after the sale of the property. This is considered debt forgiveness by the IRS. It may be a good idea to specifically ask the lender not to issue a 1099 against you for their loss. If it is your primary home and you did not refi the home since you bought it you probably will not have this issue. If you refinanced the home multiple times or have lines of credit against the home this will probbaly mean that you could be subject to a deficiency lien. I was informed by a CPA that the primary home exclusion does not included investment property or second homes. Please check with your tax professional to see how this affects your personal tax situation.
Most importantly ask for help from your lender. Faced with many cases these days lenders are offering to adjust terms, put you in new loan programs or delay payments if you need temporary relief. If there is no chance in sight that you will be able to pay these obligations a short sale is probably your best alternative to make the most of the situation.
As always, everyone has different circumstances. It is vitally important that you discuss your options with your tax and legal advisors. This document is a general overview of the process and does not substitute for the advice of your attorney or tax preparer.
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