With economic uncertainty, job loss and general fear regarding the state of the world’s economy, millions of people are facing foreclosure. Most people believe foreclosure is the only option if they stop paying their mortgage(s).
Another option is to short sale their property. There are many myths about short sales that I’d like to clear up. First of all, I’ve assisted hundreds of clients with the disposition of their upside-down properties. These clients come from all walks of life. It doesn’t matter if you are a construction worker making $35,000 per year or a doctor making $1,000,000 per year. With a 100% short sale approval record, I’ve put the myths of qualifying for a short sale to rest.
Another short sale myth many owners believe is that if they owe too much on their mortgage they won’t qualify. Wrong! The banks don’t care how much you owe. They don’t want to foreclose because it costs them much more to foreclose than to short sale a property.
So, that leads us to the real scoop. The process is quite simple and can (if strategically planned) have minimal effect on your credit. If you are current on your mortgage and HOA/Condo association dues, you are in the best position to minimally impact your credit. In fact, if you are current, the impact of a short sale on your credit can be as little as 40 points to 75 points…which can be recovered within about 6-8 months by paying all your normal revolving credit accounts (car payments, credit cards, etc.).
Your bank will require the following to approve you for a short sale:
Your property should be listed on the MLS. Your bank will most likely require it.
You will have to have a contract (a buyer) on your property. Many Realtors already work with cash investors. Make sure you inquire (prior to listing your property) as to whether your Realtor has ready, willing and able buyer(s) so they can quickly get an executed offer on your property.
You’ll need a savvy negotiator to work with your bank/lender to get your short sale approved and in your favor. While using an attorney is probably the best way to negotiate your short sale (typical cost in Orlando is around $500.00 and the rest of their fees are typically paid for by your bank), there are excellent title company’s and negotiators that work for them that can effectively negotiate your short sale as well. A title company charges a negotiation fee as well and all or some of their negotiation fee is paid for by your bank. They will also get their standard closing fees.
Your bank will require some standard documents such as your latest couple of pay-stubs, last 2 years of tax returns, a couple bank statements and other general information. Now we wait for the bank’s response. Despite the name “Short Sale”, it’s not a short process. In most cases we can get a short sale started and closed in 4 months. That’s pretty quick compared to nearly 9 months just a year ago!
So, now we get a response from the bank. In many cases, they agree to the short sale and completely waive the deficiency (your mortgage balance minus the purchase price). In other cases, they will ask you to bring a sum of money to the closing table (I’ve seen requests from up to $5,000) and waive the rest of the deficiency. Another option I’ve seen banks ask for is a larger sum of money (I’ve seen up to $30,000) paid over 5 to 30 years, interest free. That’s a pretty good scenario for many.
No matter what the bank comes back with, it is still a negotiation and you can still counter the banks offer. At the end of the day, you can even say “no thanks” and walk away (although we highly suggest you don’t).
Once you close , you will get a 1099 for the deficiency amount (amount you owed on your mortgage minus the sale price). That 1099 is considered “ghost income” on your income taxes. So, if your deficiency amount was $100,000, then add that to your actual income for that year and that amount is what your income taxes will be based on. But wait! There is good news. If the property was your primary residence, the law protects you against that ghost income…meaning your income won’t be taxed the additional ghost income. If your property was an investment property, then the ghost income will be added to your actual income and taxed. But, even with an investment property, you can still be exempt from paying the additional taxes on the ghost income. Read more about Hawaii short sale specialist
The “ghost income” will be based on the 1099 reported by the lender. Whatever debt forgiveness the lender reports on the 1099 is potential income to the seller. But, there is an exemption if the seller is technically insolvent on the day of the short sale. Technical insolvency is not the same thing as Bankruptcy insolvency. It is a simple comparison of taxpayer assets to liabilities. With so many inv