Orange County Short Sale FAQ
What is a short sale?
A Short Sale, also known as a Short Payoff or Pre-Foreclosure Workout, is an agreement with a lender to accept less than the amount owed by a borrower via the sale of the property to a third party. With this agreement, the lender releases the borrower from the mortgage, thereby preventing foreclosure. When a borrower and a lender agree to a short sale, the lender, who might be owed $500,000, agrees to accept $350,000 instead. The borrower must be careful to give an accurate estimate of the amount of money the real property can be sold for realistically. This sales price must factor in any real estate commissions, recording fees, title search fees, and other charges.
Why do lenders agree to a short sale?
Lenders are not in the business of managing and owning property and Short Sales are less expensive than completing the foreclosure process. Lenders agree to a short sale simply because it is cheaper to accept a lesser payoff amount than to incur expenses related to a foreclosure proceeding and subsequent real estate auction. This is generally done when the real property is in pre-foreclosure and there is little chance of the borrower finding the funds required to cure the default. This is similar in nature when creditors agree to settle credit card debts.
How does a borrower qualify for a short sale?
In order to be eligible for a Short Sale, a homeowner must be able to prove to the lender that they are a victim to a “hardship” and as a result are therefore unable to continue making payments on their mortgage. There are several common factors a lender will consider when approving a Short Sale. Again, each situation is different and must be evaluated on an individual basis. Ask yourself the following:
Owe more on your property than the current value?
Not enough money to cover the difference of what you could sell your property for and what you owe the bank?
No money to cover real estate commissions, closing costs, late payments, etc.?
Having difficult covering your monthly expenses?
Property in foreclosure or default? Sale Date Approaching?
What about assets?
When the borrower has little or nothing in the way of assets, lenders are quick to agree to a short sale. As proof, lenders may request copies of tax returns and financial statements. If the borrower does own some assets – such as cash on hand, a savings account, real estate, stocks, bonds, or a retirement savings account – there is a chance that the lender may ask the borrower to cover a portion of the difference in selling price and mortgage payoff from these funds.
Short Sale FAQ
What happens after the short sale?
Even though an approval for a short sale does not actually guarantee that the borrower will be able to unload the real property he can no longer afford, oftentimes the sale does go through. In the aftermath of such a sale, there are still some other consequences to consider. For example, the amount of money forgiven by the lender is typically considered income to the borrower and at the discetion of the lender may or may not be required to be declared on your taxes.
What Are the Tax Ramifications Of A Short Sale?
When a lender agrees to a Short Sale and sells a property for less than the outstanding mortgage debt, the amount of the debt that the lender writes off is treated as ordinary income. Despite the fact the owner is in default or facing foreclosure, this amount is treated as forgiveness of debt, and the taxpayer will typically receive a 1099 for the amount of the cancellation of debt.
The amount of the debt or the ordinary income may or may not be subject to taxation depending upon different circumstances.
Under the Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648) signed by the President in 2007, IRS code § 108(a)(1)E), provides that a taxpayer will not be taxed upon cancellation of debt income if certain conditions are met.
How Do I Get Started On A Short Sale?
Contact County Realty today for a FREE no cost short sale evaluation. Or you can complete the form below for your FREE Over-The-Net Short Sale evaluation.
Short Sale Evaluation Form