The Home Buyer's Korner

Information presented should be used for educational purposes only.

July 8th, 2015

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The Home Buyer’s Korner

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Short Sales ~ What Sellers & Buyers Need To Know

short sale image Short Sale : Writing A Letter Of HardshipA short sale is when a property is sold for less than its remaining mortgage principal balance, and executed as a way for both the existing home owner and mortgage lender to reduce their respective losses by avoiding a foreclosure.

Typically, short sales are reserved for situations of extreme financial hardship; just prior a bank beginning foreclosure proceedings.

Short sales are not automatic, however. Home owners must often prove the merits a short sale to their lender, which often involves documenting that selling the home for less than its worth is the best and most viable option for all parties involved.

The short sale process starts with a letter of hardship from the current homeowner.

To prove the short sale worthiness to the bank, the listing agent should have already started the process for your seller with their lender and got the ball rolling by submitting a cover letter which explains their hardship, as well as providing a full financial disclosure. They’ll also need the original purchase contract; a balance sheet of the sellers’s income and expenses; assets sheet and two years of federal tax returns.

Lenders prefer compelling letters explaining the need for the short sale and are more apt to agree to it when home owners have lost jobs or encountered significant medical bills, as opposed to those who engaged poor spending.

In addition, note that the following traits can help speed short sale approval:

  1. The home is marketable
  2. A second lien holder, if one exists, is amenable to short sale proceedings
  3. A foreclosure is not scheduled within the next four months

Choosing to purchase a short sale isn’t something a home buyer or seller should pursue alone. The process of selling a home is significantly different from selling a non-distressed home. Both the Home Buyers and Home Sellers in a short sale should seek the advice and counsel of experienced short sale listing agent.

Short Sales & The Seller’s Perspective

Avoid Foreclosure & Tax Implications

Know When You Can Get This Chapter Behind You

For sellers that are in financial stress with the possibility of losing their homes a “short sale” is a possible solution.

Perhaps you have been told that the house should have the carpet replaced or that the interior needs painting or worse that the roof looks like it should have been replaced years ago. If you’re caught in a Catch-22 situation of needing to sell and don’t have the money to put into the house, there’s a possible solution called the FHA-203k Streamline Home Mortgage Loan.

If this is your situation, contact one of the real estate professionals in our network to learn how to start the short sale process with your lender and get your home sold, so you can start a new day.

Once you have the lender’s approval to market you home, your agent can do the following to get it sold:

  1. Market your house as being eligible for FHA-203K financing;
  2. Locate a licensed contractor in our network that’s experienced with the FHA-203K program and get a written repair estimate;
  3. Have your real estate agent provide the repair estimate along with this information to the lender an their intent to market your home as an eligible FHA 203K property with your listing MLS information;
  4. Have copies of the estimate inside the house for would-be home buyers and their real estate agents to take with them;
  5. Have your real estate agent list experienced FHA 203K lenders in our network and refer interested home buyers to learn more about this great home renovation loan program.

Bad Things Happen to Good People

FHA RECENTLY REMOVED ITS MINIMUM TIMELINES

TO PURCHASE A HOME IF YOUR HAD A RECENT FINANCIAL HARDSHIP

BACK TO WORK ~ EXTENUATION CIRCUMSTANCE

Once you’ve settle on your short sale, home ownership is still within your reach with an FHA insured mortgage after just 12 months if:

  1. As of the date you make application for you new home, all installment debt payments were made within the month due for the twelve months preceding the short sale.

  2. If you were in default at the time of the short sale (or pre-foreclosure sale) you’ll be eligible for and FHA insured mortgage after three years from the date of the short sale. (THE THREE YEAR REQUIREMENT HAS RECENTLY BEEN REMOVED BY HUD).

  3. If you sold your property under the FHA pre-foreclosure sale program you are eligible (REMOVED) three years from the date that FHA paid the claim associated with the pre-foreclosure sale. Make sure to keep a copy of your Note. This document will have an FHA Case number and your lender can check with HUD to determine when the claim was paid.

  4. Lenders may make exceptions for borrowers in default at the time of short sale if the default was due to circumstances beyond the borrower’s control (such as death of a primary wage earner, long term uninsured illness, etc.); and your credit report reflects satisfactory credit prior to the circumstances that caused the default. Make sure you keep good records so you can document all your actions during this time!

  5. Applicants who pursued a short sale agreement on their principal residence to take advantage of declining market conditions and purchase a similar or superior property within a reasonable commuting distance will not be eligible for a new FHA insured mortgage under the reduced timelines.
  6. Income Tax Implication may currently exist for all short sales after Dec 31, 2013. With the change in IRS rules it’s important to know where you stand in the event of a short sale after Dec. 31, 2013. Here’s what Turbo Tax tells us.

    Since a deficiency judgement is popular again, especially now that the original tax break has expired, short sellers face the possibility of lenders chasing them for the deficiency. Make sure your current lender clearly states in writing they won’t be seeking a deficiency. If you can dodge that bullet, short sellers may have to deal with the Feds coming for taxes on that deficiency unless you meet the new IRS rules. If that happens you won’t be eligible for the shorter timelines to get a new mortgage and your tax lien is satisfied. While it seems obvious that any distressed owner considering a short sale should seek legal counsel, many don’t. DON’T BE ONE OF THEM!

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