Melvin Burrell explains, How to Avoid Foreclosure or Trustee Sale with a Short Sale
Robert Smith and Associates
January 15, 2008
Melvin Burrell explains, How to Avoid Foreclosure or Trustee Sale with a Short Sale
What Is Short Sale?
A short sale occurs when a lender accepts a reduced or lowered loan pay-off to accommodate the sale of a property. There are many other terms used to describe a short sale. The most common terms in the industry include:
Short Pay Sale
Compromise Sale
Write Down Sale
Negotiable Sale
Pre-foreclosure Sale
Loss-prevention Sale
Pre-Sale
All of these terms describe the same principle, selling a home for less than the amount owed on the mortgage. The term varies from lender to lender, however the most common name is "Short Sale".
Why Would A Lender Accept A Short Sale?
Lenders must manage and mitigate their losses. The short sale option is usually a prelude and/or alternative to foreclosure. Because banks are required to maintain reserves on all properties in foreclosure, it can be financially advantageous to accept a pay-off for less than the loan amount. In fact, the lender may receive more from a short sale than from a foreclosure sale. This is one of the reasons lenders are willing to negotiate this type of arrangement. To obtain approval for a short sale the seller must discuss the situation
with the lender and provide evidence of financial hardship.
The key decision makers in the short sale process include the lender/investor, and the mortgage insurer (MI/PMI). The lender/investor typically gathers all the information required to consider and approve a short sale package. If the loan is insured the final decision maker is the mortgage insurer. MI/PMI will only approve a package that has been signed off by the investor and requires the most comprehensive support information.
What Situation Qualifies For A Short Sale?
There is mainly one requirement for qualification and that is proof of hardship. Hardships are not necessarily just financial. The most common hardship situations are as follows:
Impending Divorce - A situation where both spouses were able to meet the payment before the divorce, neither party alone can afford payments afterwards.
Illness - Illnesses where the person is unable to work and cannot continue making the loan payments.
Unemployment - A situation where an individual has inadequate income to meet his/her loan obligation.
Hardball - For lack of any other term, hardball refers to anyone who no longer wants the property for whatever reason and will accept the consequences whatever they may be.
What Are The Consequences Of A Short Sale?
1. Increase tax liability. IRS law requires the issuance of a 1099C for the difference between the amount paid and the balance owed. For example, a loan amount of $100,000 short sells for $80,000. The lender issues the seller a 1099C for $20,000 to the IRS. This must be included as income on the seller´s tax return thus increasing the tax liability.
2. Expect derogatory credit. In the vast majority of short sale situations, the seller maintains a satisfactory credit rating; however, derogatory credit is a possibility.
Advantages Of A Short Sale
There are several advantages to the short sale. The seller can reduce his/her debt, avoid foreclosure, maintain credit worthiness and most importantly, get out from under the mortgage.
Disadvantages Of A Short Sale
The key disadvantages of a short sale are income tax liability and adverse credit. In addition, the short sale of a VA loan impacts other VA benefits as the VA requires payment in full (for full loan amount) the seller loses all veteran benefits including death, educational and medical until the balance is paid.
For more information on short sales and ways to stop foreclosure contact Melvin Burrell at 800-208-8121 or email at melvinb@caploanrealty.com or visit www.capitalloanspecialist.com and www.capitalexecutiverealty.com
What Is Short Sale?
A short sale occurs when a lender accepts a reduced or lowered loan pay-off to accommodate the sale of a property. There are many other terms used to describe a short sale. The most common terms in the industry include:
Short Pay Sale
Compromise Sale
Write Down Sale
Negotiable Sale
Pre-foreclosure Sale
Loss-prevention Sale
Pre-Sale
All of these terms describe the same principle, selling a home for less than the amount owed on the mortgage. The term varies from lender to lender, however the most common name is "Short Sale".
Why Would A Lender Accept A Short Sale?
Lenders must manage and mitigate their losses. The short sale option is usually a prelude and/or alternative to foreclosure. Because banks are required to maintain reserves on all properties in foreclosure, it can be financially advantageous to accept a pay-off for less than the loan amount. In fact, the lender may receive more from a short sale than from a foreclosure sale. This is one of the reasons lenders are willing to negotiate this type of arrangement. To obtain approval for a short sale the seller must discuss the situation
with the lender and provide evidence of financial hardship.
The key decision makers in the short sale process include the lender/investor, and the mortgage insurer (MI/PMI). The lender/investor typically gathers all the information required to consider and approve a short sale package. If the loan is insured the final decision maker is the mortgage insurer. MI/PMI will only approve a package that has been signed off by the investor and requires the most comprehensive support information.
What Situation Qualifies For A Short Sale?
There is mainly one requirement for qualification and that is proof of hardship. Hardships are not necessarily just financial. The most common hardship situations are as follows:
Impending Divorce - A situation where both spouses were able to meet the payment before the divorce, neither party alone can afford payments afterwards.
Illness - Illnesses where the person is unable to work and cannot continue making the loan payments.
Unemployment - A situation where an individual has inadequate income to meet his/her loan obligation.
Hardball - For lack of any other term, hardball refers to anyone who no longer wants the property for whatever reason and will accept the consequences whatever they may be.
What Are The Consequences Of A Short Sale?
1. Increase tax liability. IRS law requires the issuance of a 1099C for the difference between the amount paid and the balance owed. For example, a loan amount of $100,000 short sells for $80,000. The lender issues the seller a 1099C for $20,000 to the IRS. This must be included as income on the seller´s tax return thus increasing the tax liability.
2. Expect derogatory credit. In the vast majority of short sale situations, the seller maintains a satisfactory credit rating; however, derogatory credit is a possibility.
Advantages Of A Short Sale
There are several advantages to the short sale. The seller can reduce his/her debt, avoid foreclosure, maintain credit worthiness and most importantly, get out from under the mortgage.
Disadvantages Of A Short Sale
The key disadvantages of a short sale are income tax liability and adverse credit. In addition, the short sale of a VA loan impacts other VA benefits as the VA requires payment in full (for full loan amount) the seller loses all veteran benefits including death, educational and medical until the balance is paid.
For more information on short sales and ways to stop foreclosure contact Melvin Burrell at 800-208-8121 or email at melvinb@caploanrealty.com or visit www.capitalloanspecialist.com and www.capitalexecutiverealty.com
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