Do you or some one you know, owe more on their home than their home is currently worth! Most likely the home was purchased at the height of the market; 2004, 2005 or 2006 and now the mortgage is upside down, not current, or maybe both.
First things first!
What caused this unfortunate situation; illness, divorce, job loss, accident? Has the situation been corrected? In other words, if you lost your job did you find another? Are you capable of making the monthly payments now?
Please carefully review and write down the answers to these questions before you read any further.
What are your options?
1.You can work out an agreement with your lender or forbearance. In essence you are asking the lender to work out a payment plan that you can afford and that allows you to bring your mortgage current. This is a good option if the situation has been corrected and you now can afford to make the monthly payments. This arrangement may include; no payments for a predetermined number of months, reduced payments for a predetermined number of months, interest rate reduction, taking the past due payments and adding them to the end of the loan, or taking the delinquent payments and spreading them out through a predetermined number of months and adding them to your monthly payment (this last option will make your payments temporarily higher). Before this is approved, the lender will usually require that a financial statement be submitted and that you provide financial records including: W2's, current paystubs, and bank statements.
2.Many people file for bankruptcy as a delay tactic to the foreclosure process and/or to give them more time to sell their home. Bankruptcy should only be considered as a last resort. This decision should only be made with the guidance from an attorney.
There are two types of bankruptcy; Chapter 13 or Chapter 7!
A Chapter 13 bankruptcy is when you consolidate all your debt into one single payment and you make payments until your debt is paid in full. Typically for three years. Most people find that making payments is difficult and never complete the process.
Chapter 7 allows you to wipe off all debt and start from scratch and for most people this is their best option as it provides them with a fresh start. Once again, Bankruptcy should only be considered after consulting with an attorney that specializes in bankruptcy law.
3.If the problem that caused you to fall behind has been corrected you may borrow the money from a family member or friend and bring your mortgage current. However, this is only an option if you have the ability to stay current on your monthly payments and pay back the money you borrowed. Think this very carefully as a hasty decision here can cause you not only to go further in debt but to put a strain in your relationship with the person who lends you the money if you are unable to pay back the money you borrowed.
4.You can list your home and sell it as a "Short Sale". A Short Sale is when you, your attorney or your real estate agent negotiates on your behalf with your lender or lenders to allow you to sell short. In other words, the lender accepts to take a discount on the mortgage note instead of going through the often lengthy and expensive process of foreclosing on the home.
The average foreclosure process can be an expensive and lengthy proposition for the lender. A contested foreclosure can add months to an already lengthy process and it includes expenses such as; attorney fees, court fees, lost interest, sales expenses, closing costs, repairs, insurance, title insurance, taxes, damage from vandalism and/or storm damage, etc.
In addition, an REO (real estate owned), adds to the amount the Federal Government requires the bank to keep in reserves, affecting the money they have available to lend. Banks are not in the business of foreclosing on homes they make money from lending money. They are better off taking the "Short Sale" today, close on it and get it off their books.
5.How does this benefit you; the seller? By getting your property sold today you are relieved of a very stressful situation allowing you to concentrate on getting your life back on track. Especially, if you can not afford to make the monthly payments.
A good real estate agent, who is knowledgeable on short sales may help the seller by explaining the pros and cons of the "Short Sale", help the seller prepare the lenders package, help find an able and willing buyer and negotiate with the lender on behalf of the seller to accept a discount on the mortgage.
A "Short Sale" may help the seller find a solution that may help them avoid bankruptcy and/or foreclosure. However, every situation is different and you should always seek professional assistance.
6.There are many risks to the seller associated with the short sale, including; possible tax liabilities, the lender may still go after the seller for the money they lost, the lender may require the seller to sign a note, the lender may file a deficiency judgment against the seller or the short sale may never go through resulting in foreclosure.
Many sellers fear the "Short Sale" because of these risks. Truth is whether they "Sell Short" or the lender forecloses on the home they will have a deficiency. The further the foreclosure process goes through the higher the costs associated with the lender and the less likely they are to negotiate with you.
The lender can only take one of three actions at a time against you; have you sign a note agreeing to pay back the remainder of the loan (all or part), chase you by filing a deficiency judgment, or write it off and send you a 1099 at the end of the year. The later may produce a tax liability.
Once an offer has been received on your home and approved by the lien holder(s), you should proceed with the short sale only if: (a)Lien holder(s) has prepared a note and payment plan for the deficiency that is satisfactory to you or (b) Lien holder agrees to forgive the debt and waive their right to have you sign a note and/or file a deficiency judgment against you
The later is your best option and may be written as a contingency in your contract and may be negotiated as part of the lien holder's written approval of the short sale.
Just remember; the lien holder does not have to approve the "Short Sale" and does not have to forgive your debt or waive their right to a deficiency judgment. This is something that may be negotiated as part of the "Short Sale" process.
In the event that the negotiations have been successful and the lien holder has agreed to forgive a portion of your note, you may receive a 1099 at the end of the year showing the forgiveness of debt as earned income. A good tax advisor with knowledge of The Mortgage Forgiveness Debt Relief Act can help you minimize or prevent any tax liability resulting form a "Short Sale".
Please consult with your Tax Advisor, CPA and/or Tax Attorney for possible tax ramifications and/or go to www.irs.gov and review The Mortgage Forgiveness Debt Relief Act and Debt Cancellation before listing your home for sale.
No Real Estate Agent, Attorney or Mitigation Company can guarantee any results when it comes to a "short sale". Never pay any advance fees for these services and always seek the advice of an attorney in all legal matters and/or tax advisor or CPA in all tax matters.
These blog is not intended as legal or tax advice and Oswaldo "Wally" Torres, Future Home Realty and their affiliates are not attorneys or tax advisors. No part of this Blog is intended as legal or tax advice and shall not be interpreted as providing legal or tax advice to anyone reading this Blog.
© Oswaldo "Wally" Torres - 2009
