Is Your Home Underwater? Consider a Short Sale

The term “short sale” has been used a lot in the past four years. Many clients ask me if they have to do a short sale or if they should do a short sale.

In this article, I will explain what a short sale is, when it is appropriate and some of the risks to be aware of if you agree to a short sale.

If a homeowner owes more to their mortgage company than their home is worth, then in order to sell their home, either the mortgage company will have to agree to accept less than a full payoff at the closing or the homeowner will have to pay the difference between the sales price and the amount owed.

In a short sale, the mortgage company agrees to accept the purchase price, less the closing costs, and, usually forgives the difference. When a mortgage company forgives a portion of the debt, they must do so in writing. If the debt is not forgiven in writing, the mortgage company could sue you for the unpaid balance later. The forgiven debt could result in income tax owed to the IRS. There are laws that make forgiven debt from the short sale of your principle residence not taxable. In some short sales, the debt is not forgiven, so you must read the short sale approval carefully.

The law that deals with forgiven debt is called The Mortgage Forgiveness Debt Relief act. You should ask your attorney if this has expired before you agree to do a short sale. If you have filed a Chapter 7 bankruptcy, or if you are insolvent, these circumstances may also allow you to do a short sale without owing income taxes.

If you owe a second mortgage or HELOC, you must negotiate a short sale or debt forgiveness with the second mortgage holder as well. In most short sales, you will be able to pay all closing costs including real estate commissions, attorney fees, conveyance taxes, and real estate taxes and then pay the portion of the sales price that is leftover after those closing costs (net proceeds), to the mortgage company. If the mortgage company participates in the HAFA program, you may even be paid thousands of dollars at the short sale closing.

In general, mortgage companies are more willing to accept short sales if your mortgage is delinquent. In fact, the closer you are to losing your home in foreclosure, the more likely your mortgage company will accept the short sale. You can even offer your mortgage company a short sale while you are in foreclosure.

I have represented hundreds of Connecticut residents in short sales since the mid 1990’s. Short sales have become more common since 2008, however, short sales are not appropriate in all cases. I offer clients a free consultation to help them evaluate all their options. I counsel homeowners who are facing foreclosure or other hardships NOT TO PANIC.

I find that after educating themselves about the foreclosure or short sale process, homeowners panic less and are more able to make informed decisions.

Call me at 203-502-7436 to set up a free consultation.