Hiring an agent that is familiar with the short sale process in a market like the Atlanta metro area can be vital, particularly when time and knowledge is a factor, which plays a significant role when it comes to a successful short sale. In addition to time and knowledge, the mortgage lender and your personal situation is also an important aspect of a short sale.
Executing a short sale requires an agent who is willing to put forth the effort it takes to get your property sold. Prior to listing a property, we assess each situation to determine if a short sale is the best option for the homeowner. Sometimes alternative solutions may be a better strategy depending on the circumstances.
A short sale is the process by which a mortgage lender discounts the amount owed on a property by the owner and agrees to release their lien on the property and accept less than the amount owed on the debt to facilitate a sale. Homeowners attempt to short sale their property when the value is lower than the loan amount. A short sale is similar to normal real estate sales transaction in which you will work with a real estate agent to market and sell your home, (when short selling a home you are required to list it with an agent). The main difference is the mortgage company will also be working with the owner and their real estate agent during the process. The lender is typically involved with deciding on approving the short sale, determining the sale price, (based on the current market value), negotiating other liens on the property (if applicable), reviewing offers and working with the real estate agents to finalize the sale. To view our chart of the step-by-step process, click here.
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Each lender has different requirements for approving a short sale. Although the short sale process has changed and is more streamlined the timeframes for processing a short sale depends on the lender. The required documents also vary by lender and depends on why a homeowner is requesting a short sale. Most people are in a financial dilemma or facing foreclosure while others just need to sale their property.
The following is a basic list of what type of paperwork lenders may request.
• A Copy of the listing agreement (provided by your real estate agent)
• A written hardship letter explaining your financial situation
• A financial worksheet of your expenses and income
• Tax returns for the last 2 years
• 2 recent bank statements
• 2 months of recent pay stubs, if unemployed documentation or letter explaining the situation
• Authorization letter to release information to your real estate agent
• A copy of your most recent mortgage statement(s)
• Paperwork regarding any other liens or judgments (if applicable)
• HOA information (if applicable)
Once a decision has been made to short sale a property, the lender should be contacted to request a short sale package. The package usually contains a checklist of all the required documents. Some lenders have their requirements, instructions and short sale package available on their website. Prior to contacting the lender, homeowners should discuss their situation with a knowledgeable real estate agent familiar with short sales.
Before getting into the tax information it is important to point out that during the short sale approval process homeowners (or the agent) should make sure they ask the lender to waive its right to seek a deficiency judgment If the lender agrees, this provision must be included in the short sale agreement. The agreement must expressly state that the transaction is in full satisfaction of the debt and/or that the lender waives its right to the deficiency. The real estate agent listing the property should make sure this is not overlooked.
When a lender allows a homeowner to sell their property for less than the loan this creates a deficiency amount. The lender must report this amount to the IRS and you may (or may not) receive a 1099-c form. This form will have the amount of that difference ( the deficiency). When a lender forgives a portion of a debt this is considered a "canceled debt", which generally is considered taxable income, other than if it is a gift or bequeathed (gave in a will). However, according to the IRS you do not have to include canceled debt into your gross income under certain circumstances. For the purpose of this subject we will only list a few of the scenarios that apply to canceled debt.
Georgia State Taxes
In most cases, Georgia conforms to the federal tax treatment of debt forgiveness. Therefore, any federal taxable income that includes or excludes debt cancellation income usually does not require an adjustment on the individual’s Georgia income tax return.
You do not have to include a canceled debt in your gross income in the following situations:
-The debt is canceled in a bankruptcy case under Title 11 of the U.S. Code. See Publication 908, Bankruptcy Tax Guide.
-The debt is canceled when you are insolvent. To be considered insolvent, a person's liabilities must exceed the fair market value of their assets. The insolvency exclusion is particularly relevant
for borrowers who's properties have dropped in value and those with home equity loans or mortgages on second homes and rental properties.
-The debt is "Qualified Principal Residence Indebtedness" (QPRI) - this is a mortgage secured by your principal residence that you obtained to buy, build, or substantially improve your principal residence. QPRI cannot be more than the cost of your principal residence plus improvements. You must reduce the basis of your principal residence by the amount excluded from the gross income. To claim the exclusion, you must file Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, with your tax return. To view instructions, information and form 982, read
To find out more on these provisions regarding taxable and nontaxable income, read IRS
Publication 525 (once there, go to the Miscellaneous Income section and click on canceled debts.)
Deciding to short sale, file bankruptcy or walk away from your property and let it go into foreclosure depends on your income, debts and current credit status as well as your future plans as it relates to buying another home. This is a common dilemma for many homeowners and requires careful consideration in addition to taking a realistic look at how soon your situation will improve. Financial issues cause a tremendous amount of stress for most people and therefore it can be difficult to look at the overall picture especially when it comes to future planning.
There are a number of factors to think about when you file bankruptcy or decide to let your property go into foreclosure. Obviously, you will always need a place to live so this should be a top priority when it comes to thinking about the future. The consequences of foreclosure and bankruptcy can have a long-term effect on the overall quality of your life and obtaining a new mortgage, while a short sale can mitigate your ability to purchase another home in the near future. From a credit standpoint, a foreclosure and chapter 13 bankruptcy will remain on your credit for 7 years and chapter 7 bankruptcies will stay on your credit for 10 years. Before the real estate crash, people who filed chapter 7 had a chance of getting another mortgage after a few years because their debt was wiped out. Unfortunately, these types of loans had higher interest rates with less than desirable terms. These loans were also originated and/or sold to predatory lenders, which caused many owners to go into foreclosure and contributed to the real estate crisis. Today these types of loans are almost nonexistent (but there are some) and the requirements to get a traditional mortgage have stricter guidelines.
If you are planning on letting your home go into foreclosure or filing bankruptcy you should quickly think about where you will live and try to find a place prior to these events happening. Online services including credit bureaus now offer landlords a number of services to screen tenants making it difficult to rent with a foreclosure or bankruptcy. However, there are some landlords who do not rent based solely on credit but income. There is also apartment complexes who have 2nd chance programs but many require no bankruptcies (and some look for foreclosures) but almost all of them will not rent to people with evictions. Like credit bureaus there are databases for evictions so if you are planning on letting your primary residence go into foreclosure you should avoid staying past the foreclosure process. Some owners stay in their homes after the foreclosure to buy time by making the mortgage company evict them, this is not a good idea. If you at least attempt to get approved for a short sale it can sometimes buy you time to make other arrangements.
The bottom line is when you are faced with financial issues they must be met head on. Ignoring the problem and doing nothing will not better your situation. Getting sound advice, doing your homework and exploring all of your options is your best course of action. Ultimately, you have to decide what your decision will be regarding these matters. We are very familiar with these types of issues and can help answer all of your real estate questions in addition to discussing alternative solutions that may be the answer to some of your dilemmas. We understand and can empathize with your situation. Don’t get discouraged, take action and contact us today.
Most people facing foreclosure or contemplating bankruptcy have other debts to consider in addition to their mortgage. Since your credit dictates obtaining another mortgage in addition to other types of loans and credit lines it stands to reason why it is important to try to salvage your credit. Even if you currently have late payments, they are easier to overcome because it only factors into your credit score for a few years unlike foreclosures and bankruptcies. Charge offs are also a problem and they do stay on your credit for 7 years from the date of default but they are not as bad as a foreclosure or bankruptcy. Charge offs can still be negotiated, explained and taken off your credit after it is reported whereas a bankruptcy and foreclosure cannot. There are various strategies to satisfy and change most charge offs if you are familiar with the laws that govern credit bureaus and collection agencies. Landlords and property management businesses are not the only entities that ask about bankruptcies. When applying for certain types of jobs and credit you will be asked if you have ever filed for bankruptcy, which without question can affect the outcome of these scenarios and nowadays it is very easy to find out this type of information. Unfortunately, for some people credit is not the only issue to consider, if you are being sued or certain creditors are threatening to garnish your wages, a different strategy must be implemented and tough decisions like bankruptcy may need to be considered. It really depends on your financial situation. Before taking this route, you should make sure there are no alternative solutions to resolving your financial problems.