How to Sell Short
According to data compiled by Equifax, one of the three credit reporting bureaus, and Moody’s Economy.com, a financially-based website, one out of four homeowners is upside down in their mortgages. That means they owe more than the home is worth on the open market.
Like driving a new car off the lot, homes don’t immediately reward home buyers with equity that they can cash out at resale. In fact, it can take a new homeowner between two and four years simply to accumulate enough equity to pay back the closing costs of buying and selling – about 8% total.
That said, many homeowners who want to sell find themselves unable to because home values have sunk in their areas - over 32% nationwide for the last two years, according to the National Association of REALTORS. They’re in the position to sell or let their homes go into foreclosure. Some are even facing bankruptcy.
For that reason, the housing stimulus includes some incentive money for lenders to accept short sales.
A short sale allows your mortgage lender to accept a sales contract on your home for less than what you owe on your mortgage. The stimulus pays them the difference between what you owe and the remainder of the mortgage. If the stimulus doesn’t pay in full, it at least allows the lender to take less of a loss on the transaction.
But this miracle cure hinges on being able to provide a willing buyer and getting the lender to allow a short sale.
Why would lenders be willing to help you?
Distressed home sales accounted for 36% of transactions in the second quarter, according to the National Association of REALTORS®. Lenders are already inundated with inventory that is expensive for them to maintain and dispose of. Lenders don’t want to be in the real estate sales and home maintenance business - they want to be in the loan business.
Before your lender will consider a short sale, you have to meet certain criteria:
1. Has the home’s market value dropped below what you currently owe on your mortgage, according to comparable sales?
2. Are the payments current? Current payments may not rule out a short sale if other factors are leading to foreclosure.
3. Have hard times hit the seller-mortgagee? Unemployment, bankruptcy, death or divorce are all hardships the lender will consider.
4. Are there other assets? If so, the lender may discount the amount of loan to be paid back rather than a full short sale.
5. Prepare a Net Sheet that shows the sale price you will receive, costs of the sale, unpaid loan balances, outstanding payments and late fees.
6. Do you qualify for the Making Home Affordable government refinancing or loan modification program? If you have a Fannie Mae or Freddie Mac-guaranteed loan, and are having trouble making your payments, you could be eligible for a refinancing program. If you purchased your home before January 1, 2009, and are having trouble making your payments, you could be eligible for modification of your loan’s terms.
Once you have determined that short sale is your option, there are several steps that lead to the short sale.
* Contact your lender and ask to speak to a decision maker who is authorized to approve your short sale.
* Give a letter of authorization to the lender to discuss your situation with interested parties.
* Provide a statement letter detailing your circumstances such as loss of job, hospitalization and medical complications or whatever has caused your financial distress.
* Supply proof of assets, recent bank statements, savings accounts, money market accounts, and anything else of tangible value. The lender may want to go back six months or a year to see your credit history.
* Supply a Comparative Market Analysis provided by your real estate professional that will show current active prices, recent sale prices, and pending sales comparable to your home.
* Supply a copy of your buyer’s purchase offer and your listing agreement.
Be aware that some financial problems may persist after you sell your home short.
Short selling may be less destructive than bankruptcy to your credit scores, but your lender may report the short sale which can affect your scores and slow your financial recovery.
In addition, you may have some tax complications. You may be subject to taxes even if you sold your home at a loss. According to the IRS, if a debt is canceled or forgiven, the canceled amount may be taxable. See: http://www.irs.gov/individuals/article/O,,id=179414,00.html.
However, The Mortgage Debt Relief Act of 2007 may provide tax relief to owners who must short sell or foreclose their principal residence up until 2012 by not counting your income against the short sale for a principal residence.
If you meet the criteria for a short sale, you should also contact a real estate attorney and a tax attorney or accountant to discuss short sale ramifications.
The key to a successful short sale is to get started on a solution early, before you get behind on your mortgage payments. Contact your real estate professional for advice. He or she may have further recommendations for you.
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