The article outlines the advantages of opting for a short sale, including short sale cash incentives from banks, not getting evicted from your home, and being able to rebuild your credit faster with a short sale than with a foreclosure.

We recently negotiated a large short sale cash incentive of $35,000 from Chase Bank for one of our clients for doing a short sale rather than letting their home go into foreclosure. Banks offer these incentives because it means they can close on the transaction sooner than with a foreclosure, and the home is left in better shape since the homeowner continues to live in the house until the short sale is done.

And we’ve seen that a short sale has much less of an impact on your credit than foreclosure. The biggest impact to your credit is caused by late payments and with foreclosures taking much longer than a short sale, there are more late payments for the credit bureaus to account for.

Statistics also show that you are able to purchase a home again after a short sale sooner than with a foreclosure. (see graph below)

It takes almost twice as long to buy a home again if someone chooses foreclosure rather than a short sale.

We don’t agree with Hoak’s comment that it has to take as long as 9 months to close on a short sale. We have done so many short sales and have the right industry contacts so we get short sales done much sooner than most real estate agencies.

We do agree you should contact a real estate agent that has successfully completed many short sales. We can’t emphasize this enough: Hiring the Right Agent to Do a Short Sale is imperative to getting the short sale done correctly. A short sale is often completely foreign to many agents and even the ones who have conducted some still do not know what to do if the transaction hits a road block.

If you need to sell your home and you owe more on it than it’s worth, you should consider a short sale.

For more information view our videos on The Importance of Bank Relationships to Conduct a Short Sale and Why Not Every Agent Can do a Short Sale.

A short sale allows you to sell your house for less than what you owe on your mortgage.

It is an alternative to foreclosure, where the bank takes ownership of your home to pay off what is owed.

Watch John and Anthony outline the differences between a short sale and foreclosure and discuss the basics of short sales on FOX25 Morning News

If you answer yes to both of these questions, a short sale is your best option:

• You Owe More on Your House Than It Is Worth
• You Need to Sell Your Home

Walking away and letting your home foreclose has serious consequences. The lender can come after you for the amount that is still owed. It will hurt your credit score. There is often a tax penalty.

In most cases with a short sale you have no out of pocket costs and the deficiency balance is waived by the bank. This allows you to sell your home and get on with your life debt free.

If you need to sell your home because of divorce, job relocation, can no longer afford your home, your loan modification process is going nowhere then a short sale is right for you. In most cases, the bank will forgive the difference.

How does a short sale affect your credit? It depends on how far behind on your mortgage payments are you are. We can tell you that your credit will recover sooner with a short sale because foreclosures usually take much longer and you will be able to qualify for another mortgage faster. Lenders typically will consider giving you a home loan as soon as two years after a short sale, versus up to seven years after a foreclosure.

For people who must move because of a change in life circumstance or can no longer afford the house, a short sale is still the best option.

You can qualify for a short sale even if you can afford your home but need to relocate. Many people think they need a horrible hardship in order to qualify for a short sale but that’s not always the case. We have many clients who could afford their home but needed to relocate either because of a new job or because of a growing family. We have also had clients who haven’t paid their mortgage in 1-2 years and still have done Short Sales.

Additional Resources:

Short Sale Videos

HAFA Program Benefits and Requirements

A short sale is the process through which a mortgage company agrees to settle for less than what is owed to them on a mortgage. And there are plenty of reasons why homeowners need to sell their home:

• You can’t refinance or modify your loan
• You know you’re going to face a hardship
• You must relocate because of job change
• You owe more than your home is worth

If you need to sell your home and you owe more than it’s worth, you should consider a short sale. We can give you an idea of what your home is worth.

Foreclosure is Not the Answer!

Don’t postpone your decision or walk away and allowing your home to be foreclosed.  Contact us to discuss a short sale so you can sell your home and move on with your life.

You can still do a short sale even if you have 2 mortgages. And some people want to sell their home due to a change in circumstances such as a growing family but don’t think they can short sale. The fact is you can short sale your home even if on paper it looks like you can afford it.  Most banks understand these situations and will work with you.

How Short Sales Affect Your Credit

We can never accurately predict what will happen to someone’s credit when they do a Short Sale.  But we can talk about what we have seen in the past few years monitoring credit after a Short Sale with our clients.

People who don’t pay their mortgage and other bills for months on end already have bad credit when they come to us. Every month you don’t pay your mortgage your credit takes a hit so when you do a Short Sale it actually helps because it stops the ongoing monthly hit.

We can tell you that road to credit recovery will be sooner with a short sale because foreclosures usually take much longer. Plus you can qualify for another mortgage faster. Lenders typically will consider giving you a home loan as soon as two years after a short sale, versus up to seven years after a foreclosure.

For more information about Short Sales, visit our Short Sale FAQ page.

People short selling their homes need to sell quickly and efficiently so knowing the warning signs to look out for is important.

Many people choose a realtor out of obligation. They think, “My friend is a realtor so I HAVE to hire him/her.”

But once the home is on the market and it’s not selling you find yourself wondering,

“Is this agent really the right one?”

If you’re short selling your home, it’s crucial to understand these common warning signs you’ve hired the wrong agent and how to best avoid them.

Top 4 Warning Signs You’ve Hired the Wrong Short Sale Agent:

1.       The “First Time” Agent:

If you’re in the market for a short sale agent you really need to be looking for an agent that has experience.

If your agent says they have never done a short sale before and say “how hard can it be?” then you need to keep looking.  And if you’ve already hired an agent and find out this is their first short sale and the agent promises “I can do it,” then it’s time to find a new agent.

Short sales require a thorough process so agents should be used to handling them on a regular basis. With this kind of experience comes success. Agents who do short sales even a couple of times a year do not have enough experience.

Short sale agents should be working on them daily. This enables them to become familiar with the banks and gather the right contacts to get the deals done. If you’re in a position where the bank is nonresponsive, you need an agent on your side that knows exactly who to call to get an answer fast.

Short sales are on the rise in Massachusetts as well as nationwide. You need to know when you hire someone to help that they are qualified.

There are a lot of agents out there who claim to know how to handle short sales and have done TONS of them in the past. The best thing to do is research that claim. You can find information about almost any good agent online, or if you ask enough people someone will have heard something about them. Just because an agent may have a few short sale listings doesn’t mean their track record is good on getting them closed.

2.       The “What Do You Think” Agent:

When setting a list price for your home it is never a good sign if your agent asks YOU what you think you should list it for.

Any home for sale, whether it is a short sale or not, should be determined by the market. All list prices should be set in comparison to other homes that have sold in the area (a comparable market analysis report).

With a short sale you want to make sure the list price is as aggressive as possible to be able to move the property, while keeping in mind that the bank has to agree to it.

If your agent shows up at your home to sign up your listing and says, “I’m not really sure what price we should list at. Do you have any ideas?”  Then your answer to that agent should be, “Yes my idea is I need a new agent!”

If you have already hired an agent and the property has no activity or has activity but is just not selling, your agent is making no recommendations on how to get things moving, and you find yourself suddenly thinking back to the listing appointment when your agent said “what do you think,” then it’s time to hire a short sale agent who knows what they are doing.

3.       The “Ghostly” Agent:

You’ve met your agent once, maybe even received an email here or there, there may even be a sign on your front lawn, but that’s it!

You leave messages for this agent yet never get a call back. Your friends are starting to think you made them up. These are not good signs.

A good agent will keep you in the loop and always be reachable. Selling your home can be stressful and confusing, you need to be able to contact your agent and receive answers in a timely manner. If you can’t get in touch with your agent easily, imagine how hard it’s going to be for the bank to communicate with them. Remember, the banks aren’t nearly as patient as you are.

4.    The “Lost With the Bank” Agent:

A good short sale agent above everything else knows how to deal with the banks involved. The lien holders are the key to getting any short sale approved and if the agent representing you has no contacts with anyone at the bank or doesn’t know anyone who does, then your deal will not go through.

Good communication with the banks is an absolute must. The only way an agent is going to have this type of communication is if they do short sales on a daily basis. There is no way around this. We hear more often than not about sellers dealing with agents that can’t seem to get through to the bank.

This is when things for the homeowners trying to sell go south, but this happens only if you are dealing with an agent that doesn’t do shorts sales all the time!

Bank of America has sent letters out to many of their current mortgage customers informing them of the change, but they haven’t been given a lot of notice of the transfer, in some cases just a couple of weeks.

See an example of this Bank of America mortgage transfer letter here.

Many customers are wondering why their loan is getting transferred, or if the terms of the loans will be different from their original loan terms. According to the letters, the terms and conditions of the loans are not being changed. But customers will no longer have access to their loans through the Bank of America website and won’t be able to make payments at any of the Bank of America banking centers.

This is bound to cause confusion as many customers unaware of the change may still send payments to Bank of America rather than their new named servicer. Keep in mind that according to the Real Estate Settlement Procedures Act outlined in the letter, during the 60 day period following the effective date of the transfer, a loan payment received by Bank of America before its due date may not be treated by the new loan servicer as late.

How Does This Affect Short Sales

For Bank of America customers who are in the process of a short sale, the letter states that any documentation they’ve submitted will be transferred to the new servicer named in the letter. However, this is not happening. We are already realizing that the paperwork is not getting transferred. For those borrowers who were waiting for a decision regarding this process, the decision will now be made by the new servicer, but if they don’t have the documentation, there will be serious delays. So it’s imperative that when you receive this letter you contact the new servicer immediately.

If you’re in the process of negotiating the short sale with Bank of America, but it’s not approved yet, you will most likely be forced to redo the whole process with the new servicer. This means you will have to resubmit all the paperwork all over again. We’ve already seen cases where someone was approved for a short sale, and then it got transferred, but it would only be honored for up to two weeks.

Another concern is with Bank of America customers who have optional insurance products such as mortgage insurance, life, or disability insurance through Bank of America. According to the letter, coverage will be canceled so customers will have to contact the new servicer for information about those options.

Be on the Lookout for This Letter

If your mortgage loan is with Bank of America you may receive a letter from them concerning a transfer of your mortgage loan. We’ve heard from some of our clients who’ve received this letter, and know that a couple of the new mortgage servicers named are Seterus and Homeward, who we’ve worked with and are both very responsive and professional. We’ve heard that Select Portfolio Servicing (SPS) is one of the new servicers as well, but they have been very difficult to work with. Regardless of the servicer that now has your mortgage contact them immediately with any questions. They will also reach out to you in a separate letter.

This is all the more reason to hire the right Realtor when doing a short sale since not every Realtor can do a short sale.

In order to successfully conduct a short sale, cooperation amongst both parties is essential. The problem is when people are getting divorced they’re sometimes unwilling to cooperate and can actually be at odds.  This makes conducting a short sale impossible for us.  This is why many people getting a divorce end up getting foreclosed on. That does not help anyone and is not good for either of the borrowers long term since they’re both responsible for the mortgage and can be pursued for the deficiency balance by the bank.

As hard as it may be to work together to sell the home through a short sale it’s worth it. The credit effect of a short sale is usually not as bad when compared to a foreclosure.  You can buy a home again in 2-3 years instead of 5-7 years and the best part is the debt is usually forgiven with a short sale.

The good news is even if the mortgage is being paid on time you are still eligible for a short sale due to the fact that Fannie Mae, Freddie Mac and almost all major banks do consider a divorce to be a reason for “Imminent Default.”

Many times borrowers just have to provide the bank with their divorce decree to prove there is a divorce and to show the terms of who is responsible for what.  Often times a Separation Agreement can be enough.

Just to reiterate, the key is for both parties to work together to sell the home.  Blaming things on each other will not sell the home.  Both husband and wife need to remember that the short sale will be better for both of them long term.

Questions about short sales? Contact us: info@shortsalene.com or Call 1-800-924-6563

Up until now, the FHFA would only allow short sales for homeowners at risk of “imminent default,” (what they consider death of a borrower, divorce, or sudden disability) or had to be delinquent in their payments. As long as a homeowner can document a legitimate hardship, as shown in the list of requirements below, they can be eligible for a short sale even if they have been paying their mortgage on time.

One eligibility requirement that’s been added allows underwater borrowers to do a short sale if they need to relocate more than 50 miles for a job. Another significant change is that they will now include increased home expenses as an eligibility requirement. This is important for homeowners who have to pay more each month because of day care costs, medical expenses, or unexpected home repairs.

Updated Short Sale Eligibility Requirements

• Death of a borrower or death of the primary or secondary wage earner in the household
• Unemployment
• Divorce
• Long-term disability
• Distant employment transfer/relocation (more than 50 miles one way)
• Increased housing expenses
• Disaster (natural or man-made)
• Business failure
• Borrowers that need to relocate more than 50 miles one way for a job, including service members with Permanent Change of Station Orders, can be current or delinquent on their mortgage to apply for a short sale.

One new guideline may cause some confusion. It states that Fannie Mae and Freddie Mac “will waive the right to pursue deficiency judgments in exchange for a financial contribution when a borrower has sufficient income or assets to make cash contributions or sign promissory notes.”

This does not mean you have to bring cash in order to do a short sale. Most distressed homeowners who need to do a short sale can usually have their deficiency balance waived without having to provide money up front. This guideline is only for borrowers who have the financial capacity to contribute something.

We applaud the FHFA decision to clarify and streamline short sale eligibility requirements. So many homeowners are struggling to pay their mortgage, and many can no longer afford to stay in their home. But up until now, borrowers had to be delinquent in order for them to be considered for a short sale if they didn’t fall under the imminent default rules. This meant these homeowners had to stop paying their mortgage just to be able to sell their home!

With these updated guidelines many more homeowners can now be proactive and do a short sale and avoid foreclosure, as long as they can prove that they cannot afford the home.

Since around March of this year, Fannie Mae and Freddie Mac had tightened their short sale qualification rules, and insisted that borrowers had to either stop paying their mortgages (and become delinquent) or had to be in imminent default in order to be considered for a short sale. But now that has changed.

Short Sale Process Showing Improvement

In June, the FHFA announced shorter timelines for short sales to help expedite the short sale process. Under the new guidelines loan servicers are required to review and respond to requests for short sales within 30 calendar days from receipt of a short sale. They must also communicate final decisions to the borrower within 60 days of the offer. In cases where they can’t offer a decision within 30 days following receipt of a complete borrower response package, they must notify the borrower within the 30 day time limit that it’s still under review.

In June, DeMarco announced a change to short sale policies for military homeowners whose mortgages are owned by either Fannie Mae or Freddie Mac. Under the new guidelines for military homeowners, an order to transfer bases, known as a Permanent Change of Station (PCS), would now be considered a hardship that qualifies for a short-sale approval.

Then in July, DeMarco announced his decision that he would not allow mortgage principal reduction on homes whose values are less than the amount owed. Principal reduction would not be considered, in part, because DeMarco said principal forgiveness is already available through doing short sales and greater efforts were being made to streamline the short sale process, making it an option that respects as he said, “the interests of borrowers, neighbors, and lenders alike.”

This latest announcement is a welcome update to the short sale guidelines and will allow more struggling homeowners avoid foreclosure.

If you are having trouble paying your mortgage, or have been paying your mortgage but find it increasingly difficult to make the payments, thanks to these new guidelines to streamline the short sale process, doing a short sale will be easier than it has ever been.

The guidelines went into effect November 1, 2012.

Sources:

FHFA Announces New Standard Short Sale Guidelines

Fannie Mae Updated Guidelines

Freddie Mac Updated Short Sale Guidelines

Under the federal tax code*, most types of forgiven debt are treated as taxable income until 12/31/2013. The Mortgage Forgiveness Debt Relief Act and Debt Cancellation, which was just extended until that date, allows homeowners who get their mortgage debt forgiven through a short sale to exclude the amount forgiven from their federal taxable income up to $2 million (married and filing jointly).

However, not every homeowner is eligible for the Mortgage Relief Act. The debt forgiveness allowed by the Mortgage Relief Act does not apply when you short sell an investment property or a vacation home.

Sometimes there is a way around this. Homeowners may still be able to get tax relief by declaring insolvency at the time of the debt cancellation. If you can prove you were legally insolvent at the time of the short sale, you won’t be liable for paying federal tax on the deficiency.

Legal insolvency occurs when your total debts—including your mortgage—are greater than the fair market value (FMV) of your total assets. To use the insolvency exclusion, you’ll have to prove to the IRS that your debts exceeded the FMV of your assets.

Insolvency is not the same as bankruptcy. Bankruptcy is a legal judgment of insolvency, which gives orders to both you and your debtors for repayment and dissolution of debt. Insolvency is simply a declaration that you don’t have the assets necessary to cover your debts.

How to Prove You Were Insolvent at the Time of the Short Sale

When you did a short sale on your home and the debt was forgiven, you should receive a 1099-C from your mortgage company. The IRS considers debt write-offs to be a form of income, and requires lenders to send 1099-Cs to borrowers for all of their canceled debts.

You can exclude the entire amount listed on the 1099-C from your income if you can prove you were insolvent immediately before the debt cancellation. In order to do this you will have to file IRS Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, with your tax return.

You can use the Insolvency Worksheet on page 6 of the IRS Publication 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals) to help calculate the extent that you were insolvent immediately before the cancellation. In the worksheet, list your assets in one column. This would be items such as your life insurance policies, retirement accounts, and also your car, jewelry, or other valuables that can be sold for cash. You should have some documentation to verify the value of these items.

In the liabilities section of the worksheet, you list all of your outstanding debt including credit cards or personal loans. Have bill statements ready to verify these amounts.

You will then subtract your assets from your liabilities to determine the extent of your insolvency.

The IRS considers the forgiven debt income (from the 1099-C), so if you are still insolvent even including the forgiven debt, then you may not have to pay taxes on it.

Example of Claiming Insolvency to Get Tax Relief

For example, let’s say you owe $300,000 on your mortgage, and you short sell the home for $210,000 and the bank forgives the remaining balance of $90,000. Then you calculate your debts and assets right before the debt was forgiven on your short sale:

When the bank forgave the debt forgiven and your total debt was $352,500 and the FMV of assets was $230,600, it means you were insolvent by $121,900. The forgiven debt ($90,000 in this example) is less than the amount of insolvency, so the forgiveness would not be taxable.

For homeowners who owe more than their rental property or vacation home is worth, facing the tax liability after a short sale can be devastating. The insolvency exclusion is a way they can still do a short sale and avoid paying taxes on the forgiven debt.

We recommend you seek the assistance of a professional tax preparer when claiming insolvency after a short sale. The above is an example and is not meant to take the place of advice from a qualified tax professional.

* IRS.gov: The Mortgage Forgiveness Debt Relief Act and Debt Cancellation

Back in April of 2012 we reported Fannie Mae and Freddie Mac changed their short sale qualification rules. In most cases they would not consider a homeowner for a short sale unless they are delinquent or in danger of what they call “imminent default,” i.e., death (of a borrower) divorce, or sudden disability. Orders to relocate for homeowners in the military will now be considered a qualification for short sale approval.

In a press conference in June of 2012, FHFA acting director, Edward J. DeMarco, announced changes to short sale policies for military homeowners whose mortgages are owned by either Fannie Mae or Freddie Mac. In October of 2011, the FHFA introduced updates to servicing guidelines to include PCS orders as a hardship in order to qualify for a loan modification or forbearance.

Under the new guidelines for military homeowners, an order to transfer bases, known as a Permanent Change of Station (PCS), would now be considered a hardship that qualifies for a short-sale approval.

This change means Fannie Mae and Freddie Mac will not pursue a deficiency judgment, cash contribution, or promissory note from members of the military with a change in duty station for any property purchased on or before June 30, 2012. Service members must have a Fannie Mae or Freddie Mac loan to be eligible.

“These Fannie Mae and Freddie Mac policy changes, in combination with related guidance last fall, should now provide military homeowners with access to the immediate and automatic full range of foreclosure alternatives,” DeMarco said in the release.

Orders to Relocate Can Lead to Financial Hardship

When members of the military receive PCS orders, they have to sell their home quickly. But in a difficult housing market, this isn’t always easy. Their home may have lost value and even if they can sell it they often don’t have the cash to pay the remainder they owe of the mortgage, known as the deficiency balance.

If they can’t sell the home, they must continue paying the mortgage in addition to whatever monthly rent they must pay for an apartment in their new location. Financially this can be devastating to a family.

Prior to this policy change, many service members felt their only option was either to pay the mortgage plus the rent on two different residences or to default on their mortgage.

In order to prevent service members from defaulting on their mortgage and creating financial and legal hardship for themselves, the regulators of Fannie Mae and Freddie Mac called for PCS orders to qualify as a hardship in order for military homeowners to do a short sale of their home.

What the New Guidelines Mean for Homeowners in the Military

These guidelines address concerns about practices that may mislead homeowners who have received PCS orders. For instance, when servicers advise homeowners to intentionally skip mortgage payments in order to qualify for foreclosure prevention programs such as a short sale, or fail to provide homeowners with clear information about available assistance programs.

The new guidelines will require mortgage servicers to provide accurate, readily understandable information about the options available for homeowners in the military in a timely manner.

Homeowners in the military who receive PCS orders will now automatically be approved to do a short sale on their home even if they are current on their mortgage, and they will not have to pay the balance owed on the mortgage.

To find out if your mortgage loan is owned by Fannie Mae or Freddie Mac, visit Fannie Mae LoanLookup or Freddie Mac Loan Lookup, or call hotlines for military homeowners at 1-877-MIL-4566 or 1-800-FREDDIE.

Bank of America Sells Off 2 Million Mortgages

As we reported back in October, in an effort to streamline the company and become more profitable, Bank of America is selling off many of its mortgages to servicers like Seterus, Greentree, Resurgent, SPS, and RCS. In January of this year, Bank of America announced that it signed agreements to sell the servicing rights on 2 million residential mortgage loans totaling approximately $306 billion, a percentage of which are already in the process of a short sale. The transfers of servicing rights are scheduled to occur in stages over the course of 2013.

Bank of America is required to send out letters to borrowers 15 days prior to the loan release informing them of the sale of their loan to a different servicer.  But some borrowers aren’t receiving notice about this change until the 15th and 30th of the month and some borrowers report they haven’t received the letter at all.

Many customers are wondering why their loan is getting transferred, or if the terms of the loans will be different from their original loan terms. According to the letters, the terms and conditions of the loans are not being changed. But customers will no longer have access to their loans through the Bank of America website and won’t be able to make payments at any of the Bank of America banking centers.

If you’re already in the process of negotiating the short sale with Bank of America, but it’s not approved yet, you will most likely be forced to redo the whole process when they sell your loan to the new servicer. This means you will have to resubmit all the paperwork all over again. We’ve already seen cases where someone was approved for a short sale, and then it got transferred, but it would only be honored for up to two weeks.

Bank of America No Longer Reviewing Short Sale Applications In-House

Bank of America is now looking to outside vendors to process their short sale applications. Bank of America’s plan is to move all new short sale packages to outside vendors and transition the volume of short sales in stages.

Many of the short sale packages submitted to Bank of America are being assigned to third party agencies such as Loan Resolution Corp. (LRC), ServiceLink, REDC Default Solutions (REDC), or Dignified Transition Solutions (DTS). These companies specialize in helping mortgage lenders like Bank of America mitigate risk and lower operating costs.

For Bank of America customers who are in the process of a short sale, the decision will now be made by the third party agency, but if they don’t have the required documentation, there will be serious delays.

Borrowers who are considering doing a short sale or are in the process should not worry as the short sale will still get done, but there may be delays during both the transfer of loans and the third party vendors reviewing the short sale documentation. With these changes it’s more important than ever to hire the right broker to conduct your short sale.