Six steps to take before agreeing to a short sale of a home

Source: 7Online

Although some economic indicators hint that the U.S. economy is moving toward a recovery, home values are still suffering from a serious economic hangover. Many home owners are putting off a sale until prices recover. But some owners must sell immediately, even at a loss. Selling a home for less than the debt on the loan — called a “short sale” — is not desirable, but sometimes it is necessary for those who face major financial hardship.

While things may be improving — one August report indicated that 80 percent of real estate markets increased in median home value — a separate July report found that home values are down 21 percent from their peak in the second quarter of 2006. However, July was the sixth consecutive month that the decline in national home values lessened.

Lower home values mean that many home owners are “upside down” in their mortgages, meaning they owe more on a mortgage than the home is now worth. This is especially true in the current real estate market, because low down payments and cash-out refinance deals were the norm in the past decade.

If you are facing a possible short sale, consider these points:

1) Know what qualifies for a short sale

Several factors make a home a candidate for a short sale. Typically these are a general drop in home values (such as has happened in many markets recently), a mortgage that is near default status, or a home owner who is unable to pay due to hard times.

2) Find the right real estate agent

The short-sale process is specialized. Lenders have stringent requirements and might ask agents to take a lower-than-standard commission. Look for agents with experience.

3) Talk to the lender

If your home is worth less than the mortgage amount, you will need special permission from the lender to sell the home at a loss for its current value. If the sale stems from financial hardship, you will need to prepare a hardship letter explaining why you need to sell. Remember that some lenders will be open to the possibility of a short sale to avoid the alternative of foreclosure. If you are a good borrower hit by bad times, make sure to communicate this effectively to the lender.

4) Understand tax consequences

In some cases, a lender forgives the difference between what is owed and the selling price. Lenders can classify that forgiven debt as income to you, which means that you would be required to pay income tax on the amount. However, the Mortgage Forgiveness Debt Relief Act of 2007 allows some home owners to exclude that income. This exclusion primarily applies to those whose home was foreclosed on or who had debt forgiven as part of a loan restructuring. Individuals who are truly insolvent (total liabilities are greater than total assets) also can file IRS Form 982 declaring the insolvency to have the tax waived. To learn whether you qualify, consult a licensed tax advisor.

5) Know it will impact credit

A short sale is recorded on a credit report as a pre-foreclosure proceeding. As such, it will damage credit scores. Still, it may be the best alternative for some homeowners.

6) Consider alternatives

If paying the mortgage is the problem — rather than a desire to sell — you might have options. Some lenders will consider a loan modification, which seeks a permanent change to the loan, such as lowering the payment and extending the loan’s term, or rolling delinquencies into future pay­ments. Government programs such as Hope for Homeowners also fall into this category. Another option is a “deed in lieu” of foreclosure, which essentially allows the borrower to return the title or deed of the property — giving the home back — to the mortgage holder to avoid foreclosure. The borrower forfeits equity in the property, but avoids a foreclosure on his or her credit record.

Short sales are hard facts of life following a serious real estate downturn like the one our nation has undergone. Do your homework before agreeing to a short sale. Becoming a knowledgeable seller will help make the process as painless as possible.

About Jeremy Smiley

Jeremy Smiley is a life long resident of Fresno CA. He started his real estate career in 2005 after an eight year career in marketing. After graduating at the top of his class at the London Properties School of Real Estate, he quickly earned the “Senior Sales Associate” Distinction. By his second year in business Jeremy had become a Mutil-Million Dollar Producer. At the end of 2007 Jeremy saw the pending real estate decline and decided to jump ahead of the wave of foreclosures and become a "Short Sale Specialist". Since then Jeremy has helped countless families avoid foreclosure and save their credit. Jeremy puts it best when he says "I'm saving our economy and community one family at a time."

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