What You Do When Your Home is Worth Less than You Owe?

A short sale is a home sale where the net proceeds from the sale will not cover your total mortgage obligation and are not able to cover this debt because of some sort of financial hardship. Unemployment, divorce, sickness, among other things are considered legitimate financial hardships. Simply, the bank just wants to make sure you don't have other sources of money to cover the deficiency.

A short sale is different from a foreclosure, which is when your lender takes title of your home through a lengthy legal process and then sells it.

Steps to take when you have or are about to begin to miss mortgage payments:

1. Consider a loan modification first. Before considering a short sale, first contact your lender to see if it has any programs to help you stay in your home. Your lender may agree to a modification such as:

·         Refinancing your loan at a lower interest rate

·         Providing a different payment plan to help you get caught up

·         Providing a forbearance period if your situation is temporary

When a loan modification still isn’t enough to relieve your financial problems, a short sale could be your best option if

·         Your property is worth less than the total amount you owe on it.

·         You have a financial hardship, such as a job loss or major medical bills.

·         You have contacted your lender and it is willing to entertain a short sale.

2. Hire a qualified Real Estate Professional. The first step to a short sale is to hire a qualified real estate professional who can properly handle the short sale process. You want to work with those who demonstrate a thorough working knowledge of the short-sale process and who won't try to take advantage of your situation or pressure you to do something that isn't in your best interest.

The RICO TEAM can:

·         Provide you with a free market evaluation to assess current market value of your home with a comparative market analysis (CMA) or broker price opinion (BPO).

·         Develop a proper marketing strategy for your home to help you attract the best offers to help increase your chances at a successful short sale.

·         Negotiate the contract with the buyers.

·         Directly negotiate with the lender to ease the process of working with your lender or lenders. Negotiating with the loss mitigation departments of these lenders is the most difficult, time consuming, and yet most important part of ensuring a successful short sale.

·         Help put together the short-sale package to send to your lender for approval. A short sale will not be approved unless your primary lender and any other lien holders agree to the sale and release the lien so that the buyers can get clear title.

3. Start to Gather the Necessary Documents for Your Lender. The short-sale packet that accompanies any offer will typically include:

·         A hardship letter detailing your financial situation and why you need the short sale

·         A copy of the purchase contract and listing agreement

·         Proof of your income and assets 

·         Copies of your federal income tax returns for the past two years

The RICO TEAM will help you prepare these documents, particularly the hardship letter, which can be a vital peace in getting the lender to approve the short sale.

4. Prepare buyers (and yourself) for a potentially LONG process. There is no set time frame for how long the short sale process will take, and is dependent on a number of factors (including how many liens there are on the property, who your lenders are, your financial hardship, etc.).

While some lenders are notoriously bad with short sales, one particular lender, Wachovia, has been an industry leader in expediting the short sale process. If you have a mortgage with Wachovia, understand that they are ready and willing to work with you during the short sale process.

Typically, the more liens on the property, the longer the process, as each lien holder must be negotiated with before approval is possible.

When the bank does respond, it can approve the short sale, make a counteroffer, or deny the short sale. The last two actions can lengthen the process further.

Other things to keep in mind after the short sale process: Even if your lender does approve the short sale, there are other potential financial worries to keep in mind and prepare for.

·         Promissory Note: You may be asked by your lender to sign a promissory note agreeing to pay back the amount of your loan not paid off by the short sale. If your financial hardship is permanent and you can’t pay back the balance, talk with your real estate attorney about your options.

·         Tax Implications: Any amount of your mortgage that is forgiven by your lender is typically considered income, and you may have to pay taxes on that amount. Under a temporary measure passed in 2007, the Mortgage Forgiveness Debt Relief Act and Debt Cancellation Act, homeowners can exclude debt forgiveness on their federal tax returns from income for loans discharged in calendar years 2007 through 2012. Be sure to consult your real estate attorney and your accountant to see whether you qualify.

·         Credit Score: Having a portion of your debt forgiven may have an adverse effect on your credit score. However, a short sale will impact your credit score less than foreclosure or bankruptcy.