In some areas of the country, and from time to time, real estate values decline. In such situations it sometimes happens that owners need to move but the value of the mortgage is greater than the value of the property. The owner is said to be financially "upside down."
If the property is sold at a loss, the owner is still responsible for repaying the entire mortgage. But, sometimes owners do not have enough cash to re-pay the loan and so they try to work out a deal with the lender to pay less than is owed -- a short sale.
The lender, of course, wants back every dime loaned to the borrower. That was the deal. And lenders point out, properly, that if the value of the property rose the borrower would not turn around and offer some of that profit to the mortgage company.
Lenders will sometimes allow a short sale if it is a better alternative than a foreclosure sale in a down market. However, before making such a decision, a lender will want to see how such a deal can be structured. Perhaps the borrower has other assets, or perhaps the short-fall can be made up with a note to the lender.
If the lender takes a loss, that loss may be reported to the IRS as income to the borrower -- money not actually received by the borrower, but money that is taxable. There are exceptions to the discharged debt from being taxable income!
Please Google Internal Revenue Code Section 108. In addition to Section 108 of the Internal Revenue Code, the Government passed H.R. 1876: Mortgage Cancellation Relief Act of 2007.
See a tax professional for details before making any decisions.
In the event that a borrower faces a short sale situation, if you would like to keep your home, one approach is to have an attorney contact the lender on your behalf. It may be possible to work out a different monthly payment, an interest rate lowered to current levels, a long extension, etc.
Another alternative is to rent the property.
If the property is rented, it may then be possible to write off any losses. In contrast, with a primary principle place of residence property, it is not possible to write off losses at this time.
If you must move, a short sale is usually the best alternative for all parties involved.
BE VERY CAREFUL OF THE AGENT YOU SELECT! The choice of listing agent will be the
SINGLE MOST IMPORTANT decision if a short sale is completed, or you end up with a foreclosure on your record for the next
Every agent is an independent contractor, no matter the “company” or franchise of affiliation. How the listing agent handles the short sale listing, will mean the difference between a closed short sale transaction, and a foreclosure for the seller!
I have met many agents in my Real Estate career, most hate short sales, most do not really know what to do, and not a one has the ratio of closed short sales that I personally have closed. I have closed short sales with
FIVE, and up to EIGHT liens of record! All lien holders of record
MUST release their interest, or the sale will not close. My personal closing ratio of short sale listing is over 90%.
Real Estate is a practice, like law and medicine. Market conditions, availability of funds, qualifying criteria of borrowers, FHA, FANNIE MAE loan limits change, everything changes. What may have worked in the past, may not work today. Be sure the Real Estate Agent you hire is looking out for
YOUR best interest, not THEIR income! If the agent only list properties, or has a “staff” of people that work under him/her, chances are very good
YOU are not their priority, only their income is a priority!
There is no guarantee a short sale transaction will close. Every short sale is evaluated on a case-by-case basis. With the seasoned agent, that knows the route to a successful approval from each lender of record, you can have a successful sale and closed sale too.
Remember this; The value of an agent, is in their ability to negotiate.