IF YOU are considering Short Selling your property now, the first thing your lender will ask of you is what kind of hardship are you going thru? What do you need to consider in determining whether you qualify for a short sale? Hardship comes in many forms and shapes, what lenders usually need is an explanation letter stating what kind of hardship you are experiencing. Here are some types of hardship that a lender will consider:
-The home’s market value has dropped.
Hard comparable sales must substantiate that the home is worth less than the unpaid balance due the lender. This unpaid balance may include a prepayment penalty, penalties, missed payments and interest charges on delinquent payments.
– The mortgage is in or near default status.
It used to be that lenders would not consider a short sale if the payments were current, but that is no longer the case. Realizing that other factors contribute to a potential default, many lenders are eager to head off future problems at the pass.
– The seller has fallen on hard times and turned to credit cards and personal loans for survival.
The seller must submit a letter of hardship that explains why the seller cannot pay the difference due upon sale, including why the seller has or will stop making the monthly payments.
– The seller’s bank accounts statements basically are not showing any signs of savings ability.
Your bank statement will usually have a lot of monies going out to pay for bills and expenses but not able to save.
A few examples that do NOT constitute a hardship are:
1.Bad purchase decisions. Blowing your paycheck on a home theater system with surround sound does not qualify as a hardship.
2.Unhappy with the neighbors. Even if every home on your block has turned into pot growing houses, that will not qualify as a hardship.
3.Buying another home. The lender will not care if you have decided the home is no longer suitable for you or your family.
4.Pregnancy. Increasing the size of your family or starting a family is not considered a hardship.
5.Moving into an apartment. If you decide to move out of your home, it is a lifestyle decision and not a very good reason to abandon your home.
Examples of hardship are:
1.Unemployment
2.Divorce
3.Medical emergency / sudden illness
4.Bankruptcy, excessive debts
5.Death
-The seller has no assets
The lender will probably want to see a copy of the seller’s tax returns and / or a financial statement. If the lender discovers assets, the lender may not grant the short sale because the lender will feel that the seller has the ability to pay the shorted difference. Sellers with assets may still be granted a short sale but could be required to pay back the deficiency.
Sellers absolutely cannot benefit from the short sale by any means.
– Short Sale consequences
A short sale is dependent on a buyer making an offer to purchase. If you do not receive an offer, you will not qualify for a short sale. So even if you meet all the other criteria, it is possible that no one will buy the short sale. It is also dependent on the lender accepting the buyer’s offer. If the lender rejects the offer, a short sale will not take place.
– Tax consequences
If the lender agrees to the short sale, the lender will possess the right to issue you a 1099 for the shorted difference, due to a provision in the IRS code about debt forgiveness. Many situations are exempt from debt forgiveness, according to the Mortgage Forgiveness Debt Relief Act of 2007.
You should speak to a real estate lawyer and a tax accountant to determine the amount of short sale tax consequences, and whether you can afford to pay those taxes, if any.
– Blemished credit report
While a short sale will not show up on your credit report, the loan status will. For those in default, it’s a pre-foreclosure that has been redeemed, which is often reported as Paid in Full for Less Than Agreed. Short sales affect credit ratings. While the damage to your credit report may not seem as significantly bad as a foreclosure to you, creditors may not make the distinction.
If fact the clients that have started the Short sale process over three years ago can now get home financing thru FHA with a minimum down payment of 3.5%.
The key to a short sale is to be able to mentally prepare for it. A Seller has to be completely informed and aware that this is their best option and not have second thoughts about short selling. Sellers have to discuss with the entire family that they are in hardship and by doing a short sale this will be most practical solution. An agent has to not pressure you into short selling your house; you should not be intimidated or disrespected while short selling. People should not judge you just because you are selling a property short of amount owed, if you feel that, your agent should not deal with buyers or agents being disrespectful.
Once you have learn to deal with the mental stress, you will then have to deal with the physical stress of moving and boxing everything you have ever owned the past multi years that you have stayed at your home.
By making sure you are fully aware, educated, explored all other options, then I definitely would always recommend a short sale versus a foreclosure.
* * *
Thanks so much for all your inquiries and support. Please call Ken Go of 1st Innovative Finance Group at (562)508-7048 or write to [email protected].